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HOW TO CHOOSE A COUNTRY FOR RETIREMENT OR INVESTMENT
At some point in your life you may want to move overseas for retirement or to start a business or buy real estate. How do most people decide on which country to move to? The average person would probably weigh factors like weather, cost of living, proximity to the U.S., the experiences they had while a tourist in that country, and how they generally felt while visiting that country. In other words, they had a good tourist experience in a particular country, so they want to live there as a long term resident.
While this approach has its advantages – you really have to like a place if you are going to move there – it also has some drawbacks. What about the health care system? How about corruption – say you open a small business and your local competitors complain to the local corrupt officials, who fine and harass you? Or worse, maybe your landlord likes your restaurant and decides to get rid of you and keep your restaurant. This kind of thing happens all the time.
While there is no guarantee that you can avoid every problem you might run in to, at least you can try to educate yourself, to have a clear idea of what you are getting in to. There are a variety of sources available for you to gather information about any country you might consider moving to – information on corruption, development, health, crime, education, human rights, etc. It is also true that statistics cannot completely portray the full nature of a country, but at least you can get a relative idea of a place. If a country is rated as having a low level of corruption, chances are that you will have an easier time getting things done without having to bribe anyone than in a country with a high level of corruption.
Information Sources
One of the most interesting web sites for research is Nationmaster.com. On this site are hundreds of statistics about most countries – crime, education, health, economy, with countries ranked first to last in every category. One of the more enlightening statistics is the list of “firsts” – which categories a country ranks first in. For example, recently Uruguay ranked first for democratic transformation. It would pay someone to wander through this web site. You might find a country that you previously would not have considered.
An organization called Transparency International publishes a number of statistics and surveys pertaining to corruption in various countries. The UN Development Index (PDF) is a statistic that rates the level of development in a country, based on factors such as life expectancy, economy, availability and quality of health care, and education. The FinFacts financial web site provides an annual survey of cost of living in cities worldwide. This survey relates mostly to the cost of living of executives living in these cities, so your actual cost of living there may vary.
Moving overseas is not something to be done on a lark, or because you are a little bored or have a vague idea that you might like life better somewhere else. It is a lot of work. It could literally save your life, take you from a dull monochrome life of routine and boredom, to a life of vitality and excitement. It is just that you should look at things objectively and with facts in your hand. It be a drag to sell everything, move to a country you thought you loved, only to find out after a few months that the crime rate is off the charts. Or that the local government is made up mostly of kleptocrats. Or that to get decent health care you have to go to a neighboring country. By the way, the U.S. health care system is rated #37 in the world – just after Costa Rica. The U.S. has the most expensive health care in the world, by far, so it will cost you less everywhere else. No exceptions. Imagine not having to freak out about insurance, deductibles, co-pays.
If your heart is set on owning a house or condo in your new home, be smart and do not buy immediately. Take a little time, get to know the market, and learn the local real estate laws. Of course, before you do anything, find out the rules about foreigners owning real estate. You may be surprised to find that foreigners are restricted to buying real estate only in certain areas (like in Thailand). Remember that it is easy to buy a house overseas, but often hard to sell.
Many countries have various sort of residency-work programs. Work visa, retiree visa, investor visa, banana boat operator visa, etc. You will probably lose some rights in any country – voting rights, rights to a local pension, etc. But you will gain other rights – the right not to be spied on by your government, the right to health care you can actually afford, etc.
If you have not decided on a country yet ...
If you would like to move overseas but have not made up your mind as to where, there are some things that might help you make up your mind. Let us say you wanted temperate climate, low level of corruption, low cost of living, easy-going lifestyle, First World amenities, Spanish language, and a decent standard of human rights. Based on the above factors I would consider Uruguay, which does have expensive gasoline, some crime (burglary mostly), and is distant from the U.S., but satisfies the other factors.
Or, say you wanted a tropical climate, English language, low cost of living, proximity to other countries with tourist attractions, First World amenities in the cities, tropical islands nearby, decent health care system, and great food. Based on these requirements, I might choose Malaysia, or possibly Belize. Malaysia is cheaper and the level of development is a lot higher, but it is a long way from the states. Decide what is most important and research which countries offer the best fit.
I hope I have given you an idea of how to make your choice of country more methodical and a little bit less emotional. You might choose to overlook a lot of what you find out in your research if you really love a place, but at least get the facts. The worst thing would be to leave your job and home, move to a country you have fallen in love with, and over a period of time come to hate the place because you did not do your homework.
Link here.FOR A CUTTING-EDGE CURRENCY INDICATOR ... TRY A SHANGHAI STREET VENDOR
I recently had chat with a friend of mine just back from a trip to China. My friend is a currency trader for a hedge fund based out of New York. He spent some time talking and haggling with the street vendors in China – looking for deals of course. In the process, he learned something surprising. Almost every vendor he haggled with wanted to be paid in U.S. dollars instead of their own currency, the yuan. That is a bit odd because everybody knows the Chinese yuan is going higher against the dollar. It makes one question whether the black market in China knows something the rest of the world’s currency traders do not.
My currency trader friend also told me that the Chinese vendors wanted 10 yuan for items priced at a single U.S. dollar. That is about a 25% premium above the official rate. The rate on the street, to exchange dollars for yuan is substantially higher than the official exchange rate. Apparently local citizens do not value their currency as highly as their own government does.
The Chinese are happy to let the money come into the country. This massive wave of assets is arriving just in time for the 2008 Olympics in Beijing. Not to mention, this wave of investment capital puts China in the perfect position for a slam-dunk revaluation of the currency. But when a particular region is sailing along with that kind of capital, you always have to be mindful of hidden risks. Anything could happen. China could have a little stock market crash that needs to be cleaned up. Investors could ditch the Chinese markets, if they decide the risk is too great. International investors could decide to bolt back out of the country just as fast as they came in.
Maybe these are some reasons why the Chinese government will not let the average citizen invest money offshore. (They have to go through a qualified intermediary, like an insurance company or bank.) Just think of the implications if hundreds of millions of loyal Chinese serfs started draining local bank accounts to send yuan to distant lands. Such a scenario could lead to a massive disruption to the Chinese economy.
Although the People’s Bank moved recently to loosen their draconian currency controls on citizens, China is still a long way from having a truly open financial system. But for now at least, “disruption” is not a word your average Chinese communist block captain uses in his everyday language. This seemingly risk-free existence must continue or hundreds of millions of migrant workers, and another billion or so in the countryside eking out a meager existence, might expect more.
I know it sounds odd to suggest the yuan is overvalued. But when it comes to real-life economics, I would take a street vendor’s opinion any day over the average economist sitting in his air-conditioned office at the International Monetary Fund. I am using my friend’s firsthand experience as a warning to keep my eyes glued to Chinese policy for any sign that these vendors might indeed know more than your average currency trader.
Link here.SIX WAYS TO SHIELD YOURSELF FROM FRIVOLOUS LAWSUITS
“There is no such thing as a frivolous lawsuit.” I heard a classmate say this at my last high school reunion. This particular classmate had spent his adult years as a trial lawyer. He made his very comfortable multi-million dollar living suing physicians. Ever since, I have made a hobby out of collecting the most insane, outrageous, or simply silly lawsuits I can find – just to prove this statement wrong. And, despite the “tort reform” efforts in many states, I add to my collection of stupid lawsuits almost daily.
One recent study estimates that 50,000 new lawsuits are filed every day in U.S. state and federal courts. At that rate, the odds are that every one of the more than 300 million residents of the U.S. will be sued sometime in the next 16 1/2 years! A study published in March 2007, entitled “Jackpot Justice”, estimates that lawsuits cost the U.S. economy $865 billion annually. This figure represents a yearly “lawsuit tax” of $9,827 for a family of four. To put this figure in perspective, the average American household pays more annually in “lawsuit taxes” than in federal income taxes!
Unlike most other countries, U.S. lawyers can take cases on contingency. That means attorneys receive no fees unless money is recovered from the defendant. As a result, there is very little to prevent individuals with a chip on their shoulder from suing you – even if they do not have the money to hire an attorney. For an attorney to take a case, he or she just has to believe there is a good chance that the case will be settled in their favor. And most importantly, the attorney must ensure you are “worth” suing – meaning you have sufficient assets to collect.
To encourage still more lawsuits, companies have now been formed to invest in selected personal injury lawsuits by buying a share of the settlement. A recent search on Google revealed a total of 1.6 million hits under the term “lawsuit funding”. A few of my favorite frivolous lawsuit stories are:
These examples are just the tip of the iceberg. You have surely heard of the woman who sued McDonald’s for serving her hot coffee, which she spilled on herself. So, could you be the target of such a jackass lawsuit? It is hard to say. But I can tell you high income individuals are prime targets. Those who display their wealth openly are often subject to unwanted litigation. Also, professionals – doctors, lawyers, engineers, etc. – are frequent targets. Disputes among relatives also often lead to unwanted litigation, particularly after the death of a wealthy family member.
If you are sued, any information that is revealed about you during the legal process is usually a matter of public record. That means information that was once private is now available over the Internet to private investigators, tax authorities and anyone else who is curious and has some free time on their hands. Throughout the judicial process, a plaintiff can subpoena your your books, records and other documents – including your records held by accountants, banks, brokers, etc. This process is called discovery. If you refuse to cooperate, the court can compel discovery with fines and even arrest. If you lie, and are later found out, you may be charged with perjury, a criminal offense. You may not refuse to answer the questions, unless there is a possibility of criminal prosecution.
Six remedies to protect your wealth and privacy from stupid lawsuits.
The most important element of this game plan is to make yourself look like an unattractive lawsuit target. Here are a few ideas:
BEWARE THE GORDON GECKO FLASHBACK MARKET
Last month, The New York Times reported that a sequel to the 1987 film Wall Street entitled Money Never Sleeps is in preproduction. Michael Douglas will apparently star again in his role as Gordon Gecko. Spoke Gordon Gecko in Wall Street (1987): “The point is, ladies and gentleman, that ‘greed’ – for lack of a better word – is good. Greed is right. Greed works.”
Well, greed is back and the producers of the Wall Street remake are probably comforted that they will release the sequel during a mergers and acquisition boom akin to what was last seen in the mid-1980s. Huge private equity deals, leveraged buyouts, landmark merger battles. Barclays and Royal Bank of Scotland battle for ABN Amro. Also, accounts of vast amounts of “global liquidity” paint today’s headlines.
This October will mark the 20-year anniversary of the market crash of 1987, which occurred in the face of seemingly robust market conditions. Will the current boom be derailed by a similar sequence of events as those that preceded the 1987 crash? Of course, no two periods in history are ever exactly alike, but an examination of macroeconomic conditions in the two years leading up to “Black Monday” reveals a confluence of factors that bear an uncanny resemblance to the current period. These include:
U.S. economic growth picked up dramatically following the 1985-1986 midcycle slowdown. Stock prices accelerated to the upside, and bond yields rose significantly in response to a stronger economy, dollar weakness, an M&A-fueled increase in the supply of bonds. Protectionist policies aimed against Japan added to the combustible mix. It was the combination of sharply higher equity prices and interest rates that made a correction all but inevitable, despite the fact that – to many market observers at the time – economic strength and robust earnings growth appeared to be supportive of higher stock prices.
With many investors today wondering whether the slowdown seen in the U.S. economy in recent months might be a precursor to recession, the 1987 template is an important reminder that the biggest risk to stocks may come from the opposite direction. If the economy shows unexpected strength in the coming quarters, and if the dollar continues to break down and the supply of bonds continues to increase (as a function of surging M&A and private equity activity), if trade tensions between China and the U.S. worsen – and if the bond market responds to all of these factors by pushing yields sharply higher – then a valuation problem similar to that seen immediately preceding the 1987 crash could materialize quickly.
In the context of the huge gains being seen in global stock prices, a significant rise in bond yields could quickly create a valuation problem very similar to the one that preceded the 1987 crash.
Link here.ESTONIA INTERNET SIEGE THE FIRST WAR IN CYBERSPACE?
When Estonian authorities began removing a bronze statue of a World War II-era Soviet soldier from a park in Tallinn last month, they expected violent street protests by Estonians of Russian descent. They also knew from experience that “if there are fights on the street, there are going to be fights on the Internet,” said Hillar Aarelaid, the director of Estonia’s Computer Emergency Response Team. After all, for people there the Internet is almost as vital as running water. It is used routinely to vote, file their taxes, and, with their cellphones, to shop or pay for parking.
What followed was what some describe as the first war in cyberspace, a monthlong campaign that has forced Estonian authorities to defend their pint-size Baltic nation from a data flood that they say was set off by orders from Russia or ethnic Russian sources. The Russian government has denied any involvement in the attacks, which came close to shutting down the country’s digital infrastructure, clogging the Web sites of the president, the prime minister, Parliament and other government agencies, staggering Estonia’s biggest bank and overwhelming the sites of several daily newspapers. “It turned out to be a national security situation,” Estonia’s defense minister, Jaak Aaviksoo, said in an interview.
Computer security experts from NATO, the E.U., the U.S. and Israel have since converged on Tallinn to offer help and to learn what they can about cyberwar in the digital age. “This may well turn out to be a watershed in terms of widespread awareness of the vulnerability of modern society,” said Linton Wells II, the principal deputy assistant secretary of defense for networks and information integration at the Pentagon. “It has gotten the attention of a lot of people.”
When the first digital intruders slipped into Estonian cyberspace at 10 p.m. on April 26, Mr. Aarelaid figured he was ready. He had erected firewalls around government Web sites, set up extra computer servers and put his staff on call for a busy week. By April 29, Tallinn’s streets were calm again after two nights of riots caused by the statue’s removal, but Estonia’s electronic Maginot Line was crumbling. In one of the first strikes, a flood of junk messages was thrown at the e-mail server of the Parliament, shutting it down. In another, hackers broke into the Web site of the Reform Party, posting a fake letter of apology from the prime minister, Andrus Ansip, for ordering the removal of the highly symbolic statue.
At that point, Mr. Aarelaid, gathered security experts to help him track down and block suspicious Internet addresses and halt traffic from computers as far away as Peru and China. The bulk of the cyberassaults used a technique known as a distributed denial-of-service attack. By bombarding the country’s Web sites with data, attackers can clog not only the country’s servers, but also its routers and switches, the specialized devices that direct traffic on the network. To magnify the assault, the hackers infiltrated computers around the world with software known as bots, and banded them together in networks to perform these incursions. The computers become unwitting foot soldiers, or “zombies”, in a cyberattack.
By the end of the first week, the Estonians had become reasonably adept at filtering out malicious data. Still, Mr. Aarelaid knew the worst was yet to come. May 9 was Victory Day, the Russian holiday that marks the Soviet Union’s defeat of Nazi Germany and honors fallen Red Army soldiers. Mr. Aarelaid huddled with security chiefs at the banks, urging them to keep their services running. He was also under orders to protect an important government briefing site. Other sites, like that of the Estonian president, were sacrificed as low priorities.
The attackers used a giant network of bots – perhaps as many as one million computers in places as far away as the U.S. and Vietnam – to amplify the impact of their assault. In a sign of their financial resources, there is evidence that they rented time on other so-called botnets. In the early hours of May 9, traffic spiked to thousands of times the normal flow. May 10 was heavier still, forcing Estonia’s biggest bank to shut down its online service for more than an hour. Even now, the bank, Hansabank, is under assault and continues to block access to 300 suspect Internet addresses. Finally, on the afternoon of May 10, the attackers’ time on the rented servers expired, and the botnet attacks fell off abruptly.
Estonia’s defense was not flawless. To block hostile data, it had to close off large parts of its network to people outside the country. Because of the murkiness of the Internet, where attackers can mask their identities by using the Internet addresses of others, or remotely program distant computers to send data without their owners even knowing it, several experts said that the attackers would probably never be caught. American government officials said that the nature of the attacks suggested they were initiated by “hacktivists”, technical experts who act independently from governments.
The attacks on Estonia’s systems are not over, but they have dropped in volume and intensity, and are aimed mainly at banks. The last major wave of attacks was on May 18.
Link here.WEALTH GAP GROWS AND SOLIDARITY FADES AS REBELLION OF RICH SPREADS ACROSS EU
Disputes over public money and how to spread it fairly are rife across large tracts of Europe, eroding national solidarity, feeding separatism, encouraging populism, and generating friction between Europe’s wealthy centers of excellence and their less fortunate national hinterlands.
The rich bits of Europe are revolting. And it is some of the most successful and attractive cities on the continent that are in the revolutionary vanguard. From the fashion and finance mecca of Milan to the hi-tech center of Munich, from the world’s diamond capital, Antwerp, to the vibrant coastal hub of Barcelona, Europe’s most dynamic cities and regions are increasingly rebelling against “subsidizing” the poorer parts of their countries, demanding to keep their home-grown wealth, and causing headaches for central governments. “We are in the champions’ league, and our competition is with Milan or Munich, not other Spanish cities,” says Ignasi Guardans from Barcelona, a leader of Catalonia’s strongest party, the moderately nationalist centre-left Convergencia i Unio. “[W]e feel we are subsidising the south and there is a lot of resentment about that. The young in Catalonia feel that Spain is drinking our blood.” In Barcelona, Catalans are incensed that motorways built with taxpayers’ money are all toll-paying in their region, while they are free in the south of Spain.
In Italy, the center-left government of Romano Prodi has just received a drubbing in local elections, particularly in the north, not least because the north perceives Rome as the agent pilfering its hard-earned cash only to hand it over to the “spongeing” south where the Mafia and Camorra soak up the subsidies. Lombardy in the north generates twice as much wealth as Campania in the south. Milan does not want to pay for Naples. “The northerners are saying enough is enough,” says James Walston, a professor at the American University in Rome.
In Belgium, Flemish nationalists complain that the public sector payrolls in Wallonia are twice the size of those in Flanders. “It is majority socialist in the south, the last Soviet republic in Europe,” says Filip Dewinter, the Vlaams Belang leader. “They are stealing our money with the collaboration of the government in Brussels. We are a hard-working people, very prosperous, low unemployment, and we are giving them €12 billion every year to finance their social security. We can stand alone.”
In Germany, the wealthy southern states of Bavaria and Baden-Württemberg balked at the Berlin government’s health service reforms last year because they had to pay more into the national kitty than poorer parts of Germany. In Britain, in the debate over Scottish devolution or independence, the wealthy south-east appears increasingly aggrieved over the Barnett formula that ordains higher per capita public spending in Scotland than in England.
The rich people’s rebellion engulfing the various countries has also spread to the pan-European level, affecting the way Brussels dispenses its largesse. “It is a bun fight for the money,” says a European commission official. “There is definitely much less solidarity around.” The expansion of the EU from 15 to 27 countries over the past three years has immensely widened the disparities in wealth, while putting strains on the funds available. For example, a Polish farmer gets only a fraction of the subsidies available to a French farmer.
“The EU budget is not increasing, but there is much more demand on it, and an argument about who should benefit,” says André Sapir, an expert on the European economy at the Free University of Brussels. “Many of these successful regions are making a cost-benefit analysis about staying in the larger national entity. And since their markets are no longer national, but mainly the single European market, it makes it less costly to split.”
Such calculations have already helped to redraw the map of Europe. When communism collapsed, President Vaclav Klaus in Prague concluded that Czech prosperity would be boosted by divorce from the poorer Slovaks, and colluded with Slovak nationalists to break up Czechoslovakia. Similarly, the disintegration of Yugoslavia in the 1990s was partly propelled by the secession of Slovenia, by far the richest and most productive part, which was sick of seeing its taxes propping up regimes in Belgrade.
The great unsung story of the EU over the decades has been its social democratic exercise in redistributing wealth between and within countries, narrowing the wealth gap and hugely benefiting states such as Greece, Portugal, and Ireland. In essence this meant that big, wealthy Germany kept the checkbook open. But those days are over. United Germany is a relatively poorer Germany. Having poured hundreds of billions of euros into ex-communist eastern Germany to fund unification over the past 15 years, the burghers of Munich, Cologne, or Hamburg are less keen to stump up for Bulgarians or Poles.
The result is that in an EU of 500 million people, the wealth gap is greater than ever. The richest corner, inner London, generates more than three times the wealth of the EU average, while north-eastern Romania manages barely a quarter. The rich regions are clamoring for a new dispensation, arguing that they only want a square deal. “We only want to receive back what we pay in,” says Mr. Guardans of Catalonia. He points to the Basque country with some envy, since the Spanish Basques levy and spend their own taxes, simply paying the central government in Madrid for services rendered. But he concedes that if all 17 regions of Spain had the same fiscal powers, there would be no more Spain.
“The south just takes us for granted, they truly believe in the one-way flow of our money to the south,” says a resident of Belgian Flanders. “It is not right. Of course, we need to do something to support the weaker parts of the country. But I do not want to do it personally. It would be better to split up.”
Link here.CRY FOR ARGENTINA
A beautiful country imperiled by decades of abusive government.
Drift off during an 8-hour flight from Miami and by morning you can wake up in Buenos Aires, a vibrant city of some 12 million people (when you include the metropolitan area) and one of the best travel bargains in the world. Buenos Aires is highly literate, highly Catholic, the most European city outside of Europe, and the most culturally cosmopolitan city in Latin America.
But stay here for a while – I have been here a month – and you will find some interesting contrasts and hints that things are not always as they seem. It is, for example, an energetic, bustling, harried city teeming with commerce, art galleries, high-end restaurants, and dance clubs. But for a city so alive, Buenos Aires is also obsessed with and haunted by its dead. One of the major tourist attractions is the cemetery in Recoleta, where Argentina’s rich and famous are interred in gaudy mausoleums, a kind of post-mortem affirmation of the dramatic gap between the country’s elites and its poor.
Down by the airport, vacant Navy warehouses look ominously over the city’s slums. Locals will tell you the buildings were the sites of the torture of thousands of dissidents during Argentina’s period of military rule from 1976 to 1983. Many were drugged, put on planes, and – still alive – simply pushed off into the Atlantic Ocean. It is still a sore subject in Argentina. It is spoken of in hushed tones. Mothers of “the disappeared” still protest weekly in the federal plaza, clutching posters of missing kin.
There are few indigenous South Americans in Buenos Aires. The city’s architecture, cuisine, and culture teem wih European influence, and most of the city is of European descent, predominantly Spanish and Italian, but also German, Portuguese, French, and British, with a rising immigrant population from neighboring Latin American countries. Yet despite Buenos Aires’s proud “melting pot” demographics, there is also strong sentiment to preserve Argentine culture from outside influences. You will find comparatively few multinational brands here (there is not a single Starbucks). Many companies familiar to Americans will spin off Argentine-sounding brands, in an appeal to nativist consumer sentiment.
Argentina is one of the more thoroughly Catholic countries in the world. More than 90% of the population identifies as Catholic, and the country’s constitution requires that its government support the Roman Catholic Church. But many (if not most) are non-practicing. And the church’s influence on the country’s public policy has had some interesting effects. The country’s stringent divorce laws, for example, have fostered cottage industries such as telos, rent-by-the-hour sex hotels. Low-end telos can be as seedy as you might expect, but there are cleaner, higher-end spots, too, and discreetly reserving one has become fairly common.
At the beginning of the 20th century, Argentina was one of the wealthiest countries in the world. It since has endured decades of bad government, including the rudderless reactionary populist appeal of Peronism which still dominates the county’s politics today, the military junta in the 1970s and ‘80s, and consistently bad economic policy that culminated in the country’s financial collapse in 2001. The economy is recovering, but it is clear that most Argentines do not have much faith that it will last. Many feel that the government is being dishonest about its economic data – or just making it up.
Durable goods and long-term purchases usually are made with U.S. dollars, not Argentine pesos, a good indicator that Argentines are not ready to trust their own currency. Most retail and service business will also give you a discount if you pay in cash instead of credit. Yet for all the abuse they have endured at the hands of government, Argentines still are reflexively pro-government. Socialism and Peronism (now run by political and cultural elites who win votes by denouncing elitism) still rule Argentine politics. Market liberals are few and far between.
That said, Argentina is a beautiful country and an absolute steal for American and European tourists. The 3-1 peso-dollar exchange makes it one of the better bargains in the world. A world-class meal in a city like Buenos Aires with an appetizer, desert and a premium bottle of wine will run at most $30 or so per person. Argentina is known for its beef, and particularly its steak, but its famous parilla barbecues will also serve up lamb, venison, wild boar, trout or a number of other animals raised in the vast, wild expanse of the Patagonia. (This is not a place for vegetarians.)
Buenos Aires offers culture and sophistication, but much of Argentina is pastoral, untouched wilderness and offers some amazing contrasts in geography. Sweep up the western coast on a tour bus, for example, and take in the magnificent vistas offered by the Andes and the Patagonian wilderness. The North offers desert in the west and more tropical climes in the east, including Iguazu Falls, arguably the most spectacular waterfall in the world.
Although there is strong anti-American sentiment here, it is generally limited to U.S. foreign policy, and not to individual Americans. Argentines are mostly warm, congenial, and hospitable – even to American tourists (like me) who speak little Spanish. For a country so literate and so rich in natural resources and tourist destinations, it is tragic that Argentina has fallen so far in the last century, and that so much of the country remains so poor. Its neighbor and rival to the west, Chile, is thriving and providing a model for the rest of Latin America. Unfortunately, it seems unlikely that sound economic policy will arrive in Argentina anytime soon.
Link here.PASSPORT PROBLEMS TRAP CITIZENS IN U.S.
With so much fighting going on about people who want to get into the country, we did not realize how hard it is to get out. Chaos at the U.S. Passport office has left thousands of travelers stranded stateside, many of them holding useless airplane and cruise tickets – a situation one critic calls “reverse Ellis Island”.
The irony is not lost on Tarina Oliver, who last week canceled a trip to the Dominican Republic when her passport did not arrive on time. Oliver, 43, had planned to visit her sister, who is teaching English for a year to kindergarten students on the poor island. Oliver also was going to bring her 4-year-old daughter Josephine to give her a chance to experience life in a very different place. “The opportunity to visit the Dominican Republic doesn’t come around too often,” Oliver said. Now, the opportunity appears to be gone, doomed by red tape.
Oliver applied for her passport on March 26 for a trip that was going to begin June 2. At the time, the official at the post office where she submitted her application said she would have “no problem” getting her passports in time. He recommended against paying extra for expedited treatment. Oliver spent the last month frantically trying to get word on the missing passports, and landed in a quagmire worthy of a Kafka novel.
Some applicants are storming passort offices around the country anyway – but that is not a great option for people like Oliver. There are only 13 regional passport offices that are really equipped to solve problems, and they are only in large cities. Most people like Oliver apply at “passport acceptance facilities” like local post offices. A visit to these offices will net troubled applications little more than blank stares. So for now, Oliver and her daughter are trapped inside the U.S. borders, victims of increased security procedures designed to keep dangerous people out.
The Passport Services Office at the State Department blames an avalanche of applications filed earlier this year for the mess. Because of new rules requiring passports for North American travel, applications are up about 37%, the office says. While that is a sharp increase, it was completely predictable. The passport reform was mandated by the Intelligence Reform and Terrorism Prevention Act of 2004. Soon after, the State Department announced the Western Hemisphere Travel Initiative, which requires passports for travel to places like Mexico and the Caribbean. By stranding travelers like Oliver, the State Department has shown it cannot handle the demands of increased security. If the office’s computers and personnel cannot handle a completely predictable increase in passport applications, how can it be expected to keep out terrorists?
The passport chaos raises other important questions. A 37% increase is not a 300% increase. Yet many citizens are reporting that passports are not arriving until three months or more have passed – a 3-fold increase over wait times a year ago. How did things get that bad, that fast?
Late last year, the State Department began issuing snazzy new passports that include a small computer chip loaded with personal information about the traveler. The chips are supposed to make the documents harder to forge. They can beam data through radio waves to passport readers, which should speed up immigration lines. But computer security experts warned that the chips can be hacked and that would-be imposters could lift data from them without even touching the traveler. Debate on the security of the chips is ongoing. (As is debate on enhancements to many government-issued IDs. Click to see our “Privacy Lost” special report.)
State Department spokesman Steve Royster said the changeover to new passports, called “e-Passports”, had nothing to do with the problems. So far, the agency has issued 3.7 million chip-enabled passports since August – meaning most passports issued so far this year have been the traditional kind – but now nearly every new passport is an e-Passport, Royster said. Barring some other explanation, it is hard to imagine this major change has had no impact on passport delays. And one has to wonder if the chip-enabled passports – designed to one day carry biometric information like fingerprints – can be trusted to an agency which cannot even answer the phone.
Last week, the State Department announced it would relax passport rules for North American travelers. A passport application receipt, printed from the Web, and a government-issued ID card, will be honored as travel documents. Now, there is the advanced security we have been waiting for. The relaxed rules will not help Oliver, however. She sent her child’s birth certificate in with the passport application. Without that, she has little hope of getting a state ID card from the motor vehicles department for her daughter, which she would need to satisfy the new rules. The rules change also does not help anyone hoping to travel anywhere else in the world. Without a passport, you are still trapped inside the U.S.
Link here.YOUR CASH IS TRASH, AND SO ARE MOST OF YOUR INVESTMENTS
Almost everyone, probably including yourself, gets held back by inertia at one time or another. Inertia weighs on an investor, trapping him in a state of paralysis and freezing his portfolio, almost forcing him to hold on to whatever he already owns – for no better reason than that he already owns it. He hopes that every one of his old shoes will go up, even if the reason for the purchase is long forgotten or the environment in which the investment might have prospered has vanished. People who substitute hope for cold-blooded analysis almost inevitably wind up losing money.
So, for the sake of argument, let us look at where you might best put your money for the rest of the year 2007. To keep things simple, say you start by liquidating all the cats and dogs populating your portfolio, so that you have just a pile of cash. But then you are going to start wondering which of the securities you own really are cats and dogs. You might get bogged down. And then inertia will creep back in, and you will throw your hands up and do nothing. So instead say you sell everything, in true going-out-of-business style. Now, where are the smartest places to put that money? Let’s look at the alternatives.
Bonds? A disastrous sucker bet. Bonds, at the moment, are a triple threat to your capital. First, you have a huge risk with interest rates, which are still near historic lows. As they go up, the market value of your bonds drops proportionately. Second, no matter which of the fiat currencies you choose, you have a big currency risk. While the U.S. dollar is on the fast train to zero, virtually every other currency in the world is being inflated along with it and is heading toward eventual oblivion. Third, you have credit risk. General Motors is not the only large company whose bonds may go into default.
Stocks? The general market is yielding less than 2% in dividends, less than 1/3 of what you typically see at major market bottoms. And selling for more than 18 times earnings – 25+% higher than its norm. The bull market of the century started in 1982 and, in inflation-adjusted terms, ended in 2000. Stocks are almost certainly early into a bear market that could last another 5 or 10 years. By all traditional measures, chances are much better that stocks will drop 50% from here than gain 50%.
Cash? T-bills currently yield only 5%, before taxes. Inflation (notwithstanding the highly imaginary official figures) is probably running around 6% and likely to head higher.
Real estate? At the present, at least in the U.S., this is probably the worst choice of all. The speculative boom crested last year, and the market, burdened by an immense amount of debt and overleveraged speculation, is likely to head down for years to come. Of course, there are places in the world – two of our favorites being Argentina and Uruguay, where there is not much of a mortgage market, so the properties are not overleveraged and values are still available. But unless you are looking to pick up cheap land in undeveloped, exotic countries that have avoided the credit-driven bubble, real estate should be last on your list of investments.
Mutual funds are just a way of buying one of the investments we have already dismissed. Paying all those fees and expenses that come with a mutual fund just makes the bet that much worse.
So what should you do? Since 2001, we have been in a natural resources bull market. If you were one of the few who positioned yourself in gold, silver or pretty much any of the metals or energy commodities – either directly or through the shares in smaller resource companies, which is the preferred vehicle we have been recommending to subscribers of our International Speculator – you have already made the easy money. At least to us, before the bull market kicked off, the opportunity in the sector seemed obvious, with many resource companies selling for less than the cash they had in the bank. Few people even knew the sector existed, and most of them thought it was a dead duck after the 20-year-long bear market it had suffered since 1980.
The easy-money stage of the resource bull ended in 2003, at which time we entered the second stage, where the market climbs a “wall of worry”. In even the most formidable of bull markets, this phase comes with inevitable corrections and scary downdrafts. Per its moniker, with each short-term setback in price, investors who were shrewd enough to get positioned early on into the long bull market fret that they might be wrong. Some are shaken out, but the smart ones buy even more on the dips.
But now, in my opinion, we are about to enter the third, and most important, stage of the classic bull market: the mania stage. This will resemble the tail-end of the Internet stock bull market. It will very likely be rising expectations for inflation. Fear will drive the foreigners who hold about $6 trillion to sell the greenback, and they will be joined by savvy Americans. Some will buy other paper currencies, like the euro or the yen. But those units are just backed by U.S. dollars themselves, so they really are not much in the way of an escape pod. Inevitably, much of the money now sloshing through the world will try to get into gold. While no one can say with certainty, I expect the metal to hit $1,000 within the next 12 months and go much, much higher by the end of the decade.
Is this an unreasonable prediction? No. Most casual investors mistakenly look at gold and think it has been a leader in this bull market, when it is actually a laggard compared to the industrial metals that have been bidden up to extraordinary highs by soaring demand from China, India and other emerging markets. In the last five years, copper has been up 330%, nickel 560%, uranium 1150%, zinc 460%, molybdenum 450%, and even lowly lead, the most basic of base metals, is up 425%. Gold is up only 100%. That will change. Although gold has many and growing industrial uses, its main use is as money. It will dawn on the herd that the world is drowning in a flood of increasingly worthless paper currency, and they are going to stampede into gold. The metal is not just going through the roof – it’s going to the moon.
When gold really starts to move, the mining exploration stocks are going to howl. Gold exploration stocks are not just highly leveraged plays on the price of gold. They are capable of providing you with triple-digit gains based on exploration success alone. The last mining share boom from 1993-96, which occurred at the tail-end of gold’s 20-year bear market and carried hundreds of stocks with it, was driven entirely by a handful of discoveries. Since gold prices turned up, starting in 2001, a lot of money has been spent on exploration, and that work will inevitably lead to major discoveries and market excitement. Confirmation of a major discovery could well ignite a mania in the market.
While most other investments, such as bonds, industrial stocks, real estate and broad mutual funds are likely to be serious losers over the coming years, the bull market in gold and gold exploration stocks has still barely entered the public’s consciousness. Although the easy money has been made, the big money is waiting to be picked up.
Nothing in the investing world is ever a sure thing, but today the exploration stocks look to be as close as it gets. As for the inevitable corrections during this “wall of worry” phase, remember that the time to be timid is when everyone else is bold, and the time to be bold is when everyone else is timid. Selloffs in the gold and gold mining sector are, to our way of thinking, gift-wrapped opportunities to buy.
Link here.THINK YOU HAVE NOTHING TO HIDE? WAIT UNTIL YOU ARE SUED
These days, it is impossible to keep your wealth a secret from the U.S. government. At least it is impossible to do so legally. But that is no reason to abandon the idea of financial privacy. Even if you have absolutely nothing to hide, you should still keep your wealth as private as possible for your own asset protection. And while the most private arrangements are “offshore”, you can achieve a surprising degree of financial privacy by properly configuring your domestic assets.
Apart from simply wanting to keep prying identity thieves or greedy relatives away from your money, why might you want to do this? Mainly, to avoid lawsuits. When a lawyer is sizing you up to determine whether to sue you on behalf of a prospective client, the most important thing he or she wants to know is if you have “recoverable assets”. In most cases, no recoverable assets means no lawsuit, especially if the lawyer is working on a contingency basis.
My friend Bill – not his real name – is a private investigator and asset recovery specialist. And when it comes to finding your money, experts like Bill know exactly where to look. They are the ones who rely on to collect judgments, and to size up potential lawsuit targets.
In his career, Bill has successfully collected millions of dollars for his clients. But, there are some assets that are much easier for him to research, much less recover, than others. If you are interested in keeping your financial affairs private, understanding which assets are easiest for an investigator like Bill to discover gives you an important starting point about what investments to avoid.
What happens if you are sued and lose.
Say that you have a successful medical practice in Phoenix, Arizona, where I live. You are sued by a patient and lose, and suffer a judgment that exceeds your malpractice coverage by $1 million. The lawyer representing your patient has Bill on retainer.
Since you live in Phoenix, presumably, you have a bank account there. That is very easy for Bill to find, and to attach the balance to help satisfy the judgment. You probably have a safety deposit box in Phoenix as well. That is also easy for Bill to find, and obtain a court order to seize the contents to help satisfy the judgment.
Likewise, you may own a home in your own name somewhere in the Phoenix area. Again, this is very easy to find, and through a court-ordered auction, to attach the equity above Arizona’s homestead limit of $150,000. You may have a securities account with a broker in Phoenix as well. If you do, Bill can find that – and attach it to your judgment – very easily.
How to make your assets “less recoverable” domestically.
What if you do not have a bank account in Phoenix, or anywhere in Arizona, and you do not own a safety deposit box in that state? Instead, you use a bank in New York, and keep only a small account in Arizona. Bill can probably find the New York account, but it will take some digging. And some investigators are not savvy enough to find it. Likewise with your domestic investments. If you set up a securities account in another state, Bill will have a much tougher time finding it, because he will not know where to look.
Next, say that you have taken the precaution of using a legal structure to house your wealth, e.g., you set up a limited liability company (LLC) to hold your bank accounts and securities accounts, and that you keep them out of state. That makes these assets even more difficult for Bill to find, especially if you do not appoint yourself as the “managing member” of the LLC.
Even if Bill does find the LLC, in most cases, the best he can hope for is to obtain what is called a “charging order” against it once a judgment is rendered against you. That gives the judgment creditor the right to any future distributions to you from the LLC, up to the amount of the judgment, but does not obligate the LLC to make a distribution. [Ed: See this W.I.L. article on LLCs for more details.]
Take Your assets offshore, far beyond your average P.I.’s reach.
Going a step further, say that you have a bank account in your name or the name of an entity outside the U.S. In that event, Bill is looking for a needle in a haystack. While he says there are ways he can obtain information about foreign accounts, he has to have some clues about where to look – at the least, the name of the bank, and ideally, an account number as well. Moreover, Bill says it is difficult for him to get his hands on the forms submitted to the government that would have this information on them – Treasury Form TD F 90-22.1 in particular.
And if he does find your foreign accounts? It is almost impossible for a private party in the U.S. to enforce a U.S. judgment abroad. And while a creditor might be able to obtain a court order requiring you to repatriate the assets from abroad, such orders are not easy to obtain, according to Bill. And, while it is possible to enforce such an order with a contempt of court citation (including possible incarceration), such citations are very rarely granted. Moreover, if you hold those accounts through an entity such as an offshore LLC, they are even more difficult to seize.
The three levels of privacy and protection for your assets.
Suffice it to say that multiple lines of defense to protect your privacy, and your assets, are your best strategy. The first line might be to keep your bank accounts and securities accounts in another state, and to avoid having a local safety deposit box. The second line might be to keep them out of your name, preferably in an entity that provides asset protection (such as a LLC). A third line of defense could be to keep the assets offshore.
If you are truly at a high risk of being sued, you may want to make it even more difficult for private investigators to discover, much less recover, your assets. Here are a few ideas:
Whatever strategies you use to protect your assets, the time to act is before there are any clouds on the horizon. That means, act right now before your sued, or threatened with suit. Remember. If you have recoverable assets in plain sight, Bill – or one of his competitors in the P.I. business – will find them.
Link here.WHY AND HOW I BECAME AN ESCAPE ARTIST
All throughout my life, when things have gotten a little too difficult for me, when I feel the world on my shoulders, I have always been able to escape to a good place where I can find light and safety. That place is my imagination. There, I have always found safe harbor in a world of make-believe where I can imagine myself floating on the clouds, or dancing on the moon, or even talking to animals in their language. Yes, my feet may be tethered to Earth, but my spirit can soar with help from my imagination. I have come to regard myself as an escape artist.
Generally, when we think of escape artists, Harry Houdini comes to mind – he is submerged in a water tank and bound with chains he must break before he runs out of oxygen and drowns. But there are other kinds of escape artists, too – including you and me. I believe deeply that each of us is a little like Houdini, capable of freeing ourselves from the shackles we wear. Each of us has the inherent power to transport ourselves out of our straitjacketed misery into a better world. The way to do so is to sit quietly for a little while, try to shut off the world, and enter a new one of our own making.
Through our imaginations we build castles in the sky, climb tall mountains, and soar with eagles. I first discovered my imagination as a boy growing up in a family beset by many emotional and financial problems. That was also the way it was for me a few years ago when I needed to find hope in dealing with illness among several of my family members and in coping with a daily 4-hour commute to my job. These problems seemed at the time to be sucking the life out of me. As I rode to work I would look out the windows of the train and see ugly telephone poles and worn shacks whirling past me and wonder if this was all there was to life. To find a positive answer – actually to find some peace of mind – I would escape in my imagination and insist I was seeing instead a tropical paradise or flying in the sky with the birds or swimming with dolphins. I started writing these thoughts down and eventually they became notes for a book of interactive exercises to transform the things that were bothering me into something better. Tell me, name one person who has not needed to become an escape artist some time?
I began thinking about escape artists as people who refuse to give into the negative and choose instead to think positively. They insist on having hope in their lives. Writing about such escape artists became my way of finding a chink of light in a dark place and also reminding myself of all the things that make life worth living.
So, who are these escape artists? For example, I wrote, “Escape artists search for butterflies in unexpected places; they know these creatures are waiting to be discovered.” Then I went a step further, and asked myself, “This is the wish I will make next time I see a butterfly” and left some blank space to fill in with a response. I decided to place a question prompt after each example of what an escape artists does with the thought that a reader, in trying to come up with a response to the question, would free her or his own mind.
I also asked myself, “The movie scene or painting that I have always wanted to step into is: ______” (You can write your own answer). Or, “Escape Artists know they can discover the wonders of the universe in a tiny library,” and with this thought came this question prompt: “The book tht opened the world to me: ______.”
I hope you get the point by now. Try hard, very hard to think of all the things that give you pleasure in life now or which you hope will give you pleasure in the future. Make a list of them, and tuck this list into your wallet so that you can look at these good things from time to time, maybe on those days when your boss in driving you crazy with nutty deadlines or you are sitting in a doctor’s office worried about your health. Try to remember that escape artists do not sit back and allow life to hurt them. Instead, first by dreams and then by will and work, they shape their lives into something better. The best way to escape is to journey within one’s soul and heart to discover what one feels and wants.
Link here.ONLINE SALES LOSE STEAM
Has online retailing entered the Dot Calm era?
Since the inception of the Web, online commerce has enjoyed hypergrowth, with annual sales increasing more than 25% over all, and far more rapidly in many categories. But in the last year, growth has slowed sharply in major sectors like books, tickets and office supplies. Growth in online sales has also dropped dramatically in diverse categories like health and beauty products, computer peripherals and pet supplies. Analysts say it is a turning point and growth will continue to slow through the decade.
The reaction to the trend is apparent at Dell, which many had regarded as having mastered the science of selling computers online, but is now putting its PCs in Wal-Mart stores. Expedia has almost tripled the number of travel ticketing kiosks it puts in hotel lobbies and other places that attract tourists.
The slowdown is a result of several forces. Sales on the Internet are expected to reach $116 billion this year, or 5% of all retail sales, making it harder to maintain the same high growth rates. At the same time, consumers seem to be experiencing Internet fatigue and are changing their buying habits.
Internet commerce is still growing at a pace that traditional merchants would envy. But online sales are not growing as fast as they were even 18 months ago. Forrester Research, a market research company, projects that online book sales will rise 11% this year, compared with nearly 40% last year. Forrester says that sales growth is pulling back in 18 of the 24 categories it measures. Jupiter Research, another market research firm, says the growth rate has peaked. It projects that overall online sales growth will slow to 9% a year by the end of the decade from as much as 25% in 2004. Early financial results from e-commerce companies bear out the trend.
The turning point comes as most adult Americans, and many of their children, are already shopping online. Analysts project that by 2011, online sales will account for nearly 7% of overall retail sales, though categories like computer hardware and software generate more than 40% of their sales on the Internet. There are other factors at work as well, including a push by companies like Apple, Starbucks and the big shopping malls to make the in-store experience more compelling.
Nancy F. Koehn, a professor at Harvard Business School who studies retailing and consumer habits, said that the leveling off of e-commerce reflected the practical and psychological limitations of shopping online. She said that as physical stores have made the in-person buying experience more pleasurable, online stores have continued to give shoppers a blasé experience. In addition, online shopping, because it involves a computer, feels like work. “It’s not like you go onto Amazon and think: ‘I’m a little depressed. I’ll go onto this site and get transported,’ ” she said, noting that online shopping is more a chore than an escape.
Ms. Koehn and others say that online shopping is running into practical problems, too. For one, Ms. Koehn noted, online sellers have been steadily raising their shipping fees to bolster profits or make up for their low prices. In response, a so-called clicks-and-bricks hybrid model is emerging. Borders, for example, recently revamped its Web site to allow users to reserve books online and pick them up in the store. Similar services were started by companies like Best Buy and Sears. Other retailers are working to follow suit. Barnes & Noble recently upgraded its site to include online book clubs, reader forums and interviews with authors. The company hopes the changes will make the online world feel more like the offline one.
Consumers are generally not committed to one form of buying over the other. Maggie Hake, 21, a recent college graduate heading to Africa in the fall to join the Peace Corps, said that when she needs to buy something for her Macintosh computer, she prefers visiting a store. Ms. Hake does like shopping online for certain things, particularly shoes, which are hard to find in her size. “I also buy textbooks online. They’re cheaper,” she said.
John Morgan, an economics professor from the Haas School of Business at the University of California, Berkeley, said he expected online commerce to continue to increase, partly because it remains less than 1% of the overall economy. “There is still a lot of head room for people to grow,” he said.
Link here.U.S. JUDGE ALLOWS SPYING LAWSUIT AGAINST SWIFT TO PROCEED
A federal court has upheld a multi-billion dollar class action against SWIFT, the international bank clearinghouse, for secretly sharing customers’ bank records with the U.S. government in violation of bank privacy laws. Lawyers announced that Chief Judge James F. Holderman of U.S. District Court in Chicago refused this week to dismiss claims that SWIFT’s disclosure of millions of bank records to the government violated the federal Right to Financial Privacy Act and the Fourth Amendment.
In his 20-page opinion, Judge Holderman rejected SWIFT’s defense that it acted in good faith by relying on government subpoenas. Any claim to “unfettered government access to the bank records of private citizens” is “constitutionally problematic”, the court said. Judge Holderman noted reports that “SWIFT officials were aware that their disclosures were legally suspect, but they nevertheless continued to supply database information to the U.S. government.”
Plaintiffs Ian Walker and Stephen Kruse filed the massive class action last June, seeking billions in federal privacy damages, after the New York Times reported the administration had been requesting, and receiving, customer financial records from SWIFT without judicial authorization and limited Congressional oversight. The plaintiffs are represented by Chicago attorney Steven Schwarz and New Jersey attorneys Bruce Afran, and Carl Mayer. The three are also among the leaders in the pending NSA phone records suit in San Francisco.
“The SWIFT program is another example of reckless disregard for the Constitution and values that make us who we are as a nation,” Schwarz said in response to Judge Holderman’s ruling. “As Benjamin Franklin said, ‘those who would give up essential liberty to purchase a little temporary safety deserve neither liberty nor safety.’”
SWIFT, the Society for Worldwide Interbank Financial Telecommunication, based in Brussels, is the nerve center of the global banking industry and routes about $6 trillion daily between banks, brokerages, stock exchanges and other institutions. The complaint charges SWIFT with disclosing its entire database to the U.S. Government without subpoena or court authority. “SWIFT faces billions in damages after this week’s ruling,” Mayer said. “Federal bank privacy laws provide for $100 in damages for each illegal disclosure of customer records.”
SWIFT’s actions have been widely condemned overseas by privacy watchdogs in Europe and the EU, where some regulators have declared SWIFT’s conduct to be in violation of their countries’ privacy laws.
Link here.THE TEETERING DOMINO
Ukraine election is more critical than most appreciate.
The apparent revival of the Cold War by Vladimir Putin causes those of us nostalgic for the unpleasant certainties of a bipolar world to ponder whether the Domino Theory should also be revived. Indeed it should, and the domino currently wobbling most vigorously, magnificent in its precariousness, is Ukraine. Ukraine gets limited press in the West, but its fate over this long summer may well determine the geostrategic and economic outlook for the next generation.
Contrary to most Western reporting on Ukraine, the struggle there is not bipolar but tripolar. Favoring an economy dominated by publicly owned behemoths of heavy industry is the current prime minister Viktor Yanukovych, strong in the ethnically Russian eastern areas of the country and proponent of closer ties with Moscow. Putin regarded Yanukovych as the natural successor to Ukraine’s previous corrupt and economically stagnant president Leonid Kuchma, so when in 2004 his election was opposed by the “Orange Revolution” of pro-Western forces he was furious, believing that the West had no business interfering in an election so close to the Russian heartland.
“Orange Revolution” candidate Viktor Yushchenko, like so many East European leaders from Mikhail Gorbachev through the socialists currently running Hungary, believed in an a non-existent “Third Way” under which a nominally capitalist economy would avoid the disruption of rapid change and preserve existing business structures. When he won the election rerun in December 2004, the world outside the Kremlin rejoiced. It quickly became obvious that the Orange Revolution forces were far from united. Yushchenko appointed as prime minister his main ally, Julia Tymoshenko, but within a year had fallen out with her, to the extent that he dismissed her and called new elections in early 2006. These resulted in the revival of Yanukovych as leader of the largest party in parliament, with Tymoshenko second and Yushchenko’s forces reduced to third. Even though Yushchenko and Tymoshenko still had a parliamentary majority if their forces combined, Yushchenko chose to throw in his lot with Yanukovych.
Yanukovych pursued coalition in the traditional Russian fashion, by bribing Yushchenko supporters to obtain a parliamentary majority, thus removing the need for compromise. No doubt Russian gold was very helpful in this endeavor. Yushchenko responded by calling yet another election, and after competing riots in the streets of Kyiv, an election has now apparently been agreed for September 30. The stakes could hardly be higher, for Ukraine and for the world.
The EU now backs a coalition between Yushchenko and Yanukovych to govern after the election, although the last year should surely have proved that any coalition between the weak Yushchenko and the sinister Yanukovych must inevitably lead to Ukraine being effectively absorbed by the expansionist Russia. Julia Tymoshenko is the wild card. Incomparably the most glamorous major politician currently active, Tymoshenko made a large fortune in the 1990s in the oil business, doubtless by methods that would not pass close inspection but were inevitable for survival in the Ukraine of those years.
In spite of being a billionaire with proven business skills, Tymoshenko is now running as the anti-oligarch candidate. Since she is a strong enough personality to stand up to the Kremlin, and is presumably careful not to ingest any Polonium 210, she thus represents Ukraine’s best hope of breaking away into something resembling free market prosperity. While the Orange Revolution moved Ukraine for the first time in the direction of a true free market, it remains far poorer than by resources and education level it should be, with a GDP per capita (purchasing power parity basis) of $7,800 compared with Russia’s $12,200 and Poland’s $14,300.
To develop into the prosperous middle-income free market society it deserves to be, Ukraine needs small business above all, for which it needs a stable and nurtured base of middle class family savings. Western investment will be important also, to reform Ukraine’s heavy industries. Tymoshenko showed the way here as prime minister by selling the steel giant Kryvorizhstal to Mittal Steel for $4.8 billion. Just as U.S. Steel produced a world class steel company remarkably quickly in Slovakia, so Mittal can do it in Ukraine too, and should reap enormous and well deserved profits by doing so.
The current regime of high taxes (around 50% of GDP) frequent banking crises and domination by industrial behemoths has not achieved an environment of middle class security and encouragement to foreign investment and is not going to. Tymoshenko’s populist yet market-oriented approach promises to achieve this, if she is given a decent period of power in which to reform the system.
That is the stakes for Ukraine. Very high indeed. The stakes for the West may at first sight appear less. Ukraine has a GDP of only $82 billion and is not a major exporter of strategic materials. Yet with a population of 46 million, Ukraine is worth taking some trouble over. If it was able to achieve near-Western living standards it would have a GDP close to Spain’s, well within the world’s top 20 countries.
More important to the outside world than the upside of a successful Tymoshenko government is the downside of a weak Yushchenko/Yanukovych coalition or an outright Yanukovych majority. In that case, assuming that either Putin succeeds himself or his successor has similar ruthlessness and ambitions, a Ukraine that drifted back towards Russia would go far to restoring the Soviet Union in all its awful Evil Empire majesty. Other former Soviet satellites would be dragged back into compliance, whether willingly, as with Belarus, Armenia and some of the central Asian states, or desperately unwillingly, as with Georgia. They would have little choice. With Russia and Ukraine working together they would be small, mostly surrounded and far from any viable help. Only the Baltic states, tiny but absorbed into the EU, would be likely to escape. Conversely much of the Balkans, not members of the old Soviet Union, might be drawn in to the new one.
This time, however, the Soviet Union would not be held back by an idiotic and doomed economic system. It would be an economically efficient, resources-rich and strategically ruthless Nazi one, in its economic and foreign policy resembling the Third Reich more than anything we have seen since. With Europe strategically hobbled by dependence on its gas, its coffers filled by its reserves of oil, and an obvious powerful natural ally in China, it would present a huge political and economic danger to the West, even if open war could be avoided. Only its population, limited and ageing, would restrict its strength, but alliance with China and some of the high-population countries of the Middle East might well shore up that weakness. As in the 1930s, the emergence of such a powerful and ruthless bloc would devastate prosperity worldwide, causing trade to collapse and wasteful expenditures on armaments to soar.
So vote early and vote often, freedom-loving Ukrainians. The safety and prosperity of the world depends on your domino not falling!
Link here.PANAMA DURING THE RAINY SEASON
After reading many articles on moving to Panama, one item kept coming up. Rain. Living in Tucson, Arizona, one is not used to daily rain. It seemed wise then to visit during the rainiest part of the year, figuring if we liked it then, we would love it during dry season. What we did not count on was the cold. For three months prior to the trip I read all the information I could find on Panama. From my research, it seemed the Volcan area in the Chiriqui region would be ideal. Cool mountains, beautiful views and reasonable land. My daughter, son and I headed for Panama the end of September. Our trip’s purpose was to evaluate whether we would like to live in Panama, and if so, where.
We contacted the Hemingway Hideaway website and arranged with Bill to tour his listings of homes and the project started there, out of Volcan. He arranged for our pick up at the airport and our hotel stay in Panama. It was really nice to have someone meet us and take us through the traffic of the city ($20 charge). We stayed at the Sevilla Suites for $70 a night plus tax for a two bed room. We had our own refrigerator, stove, micro, dishes and sitting area. The hotel has a rooftop swimming pool, exercise room and a plentiful continental breakfast included in the rate. The first day it rained. This is what we expected. It did not rain hard like our Monsoons in Arizona. And it did not rain all day. We walked around the area, bought a bottle of Fresca for 25 cents and enjoyed watching the traffic and people along the way.
We made arrangements to be taken to the airport for our flight to David, where a rental car was waiting for us. We had written directions to the Bambito Hotel just out of Volcan. The drive up the mountain was awesome as everything was green – everywhere you looked more and more green. What a treat to Arizona folks! The farther up we drove the more flowers. Alongside roads, up hills, around streams – a visual delight. We spotted orchids growing up trees, and fence posts that sprout leaves! Pine trees were located in the same area as Banana trees. This seemed unreal. ...
We learned some valuable things on this trip. You can get too cold in the tropics. The Panama people are extremely friendly and accommodating. Prices for taxis are super low. Food that is not imported is very reasonable. Fresh fruit and vegetables can be downright cheap. Houses can be expensive or very reasonable depending on your requirements. It does rain a lot, but it is a tolerable rain. And the benefits for retirees are the best we have seen. A good trip, at a reasonable price, and we cannot wait to go again.
Link here.IMPROPERLY FROZEN BANK ACCOUNTS PLAGUE NEW YORK DEPOSITORS
Life was bad enough for Nick Nicoloff when steel beams crashed down on him four years ago. That left the 45-year-old construction superintendent permanently disabled, receiving workers’ compensation at just a fraction of his salary. It got worse last year when 30-year-old debts he thought he had paid years ago came back to haunt him. Suddenly, his bank accounts were frozen, locked up by a court order obtained by an out-of-town collections agency with a record of consumer complaints.
State and federal laws say creditors cannot seize government payments such as Social Security or workers’ compensation, but that does not stop agencies from tying up the money. That can leave the elderly, poor or disabled unable to buy food or pay rent. A bill to provide more protection passed the New York Assembly last week and is pending in the State Senate.
It might have helped Nicoloff. When he was prevented from getting at his money, he was forced to beg his parents to help him pay child support and other bills, while he fought with the collector for six months. “Everything I’ve ever saved in my life, I’ve had to sell because I had no money,” he said. He is one of many Western New Yorkers among other Americans whose bank accounts are frozen by debt collectors, even though they contain fixed-income government payments exempt from seizure. They cannot withdraw money, and their checks bounce.
With no procedure to prevent such actions, Nicoloff and others often are left penniless for weeks or even months before they can prove they are protected or the lien against them expires. They even may lose their medical coverage if, because of their income, they also owe payments to Medicaid. And it can happen more than once. Nicole R. Blackwell, staff paralegal at Legal Services for the Elderly, Disabled or Disadvantaged of Western New York, typically sees about three such cases a week. “They’re not able to buy groceries. They’re being evicted because they can’t pay their rent.”
To compound matters, banks also charge their customers legal processing fees averaging about $100, but sometimes reaching $200, when accounts are frozen or when they are released. Customers also incur bounced check fees. And while some banks will refund the legal fees if the customers eventually prove the accounts should not have been restrained, that practice is not consistent. That is a big loss for someone getting $600 a month.
Under current law, money “exempt” from seizure includes payments for Social Security retirement, Social Security disability, other disability, Supplemental Security Income, public and private pensions, alimony, child support, public assistance, veterans benefits, workers’ compensation, unemployment benefits and Railroad Retirement benefits. But the law does not prohibit freezing bank accounts containing such money. Creditors, therefore, can get a default judgment against the debtor and a court order to restrain the accounts in case they do hold money that can be used to satisfy the debt. The debtor then must prove to the creditor or court that the money is exempt.
The problem, while not new, has worsened in recent years, as more government payments are sent electronically by direct deposit. But that means the money is more susceptible to creditors’ tactics. And since the transfer of money is automatic, recipients cannot just stop it or not deposit a check in the bank once they learn their account is frozen. Adding to that is the rapid growth of the debt-buying industry, in which third-party law firms and affiliated collections agencies purchase old debt for pennies on the dollar, hoping to profit handsomely by recouping even a portion of it. If a collector can get a person to agree to make even one small payment on an old debt like Nicoloff’s – effectively “acknowledging” what they owe – the statute of limitations on the debt is restarted for another six years, and it becomes valuable again. Freezing an account can provide that leverage.
In New York State, laws empower the creditor’s lawyer as an officer of the court. That means the attorney can send electronic notices en masse to every bank to freeze any accounts belonging to a debtor. Once the banks receive a notice, they say their hands are tied. They say determining which money is exempt after it is “commingled” with other money is too difficult. Some advocates reject that argument, saying banks today can easily see if the money is exempt because electronic transfers show the money came from a government source.
Link here.GRANDDAD, DID YOU BELIEVE IN CENTRAL BANKS ONCE?
“Granddad Benny, is it true that central bankers used to believe they could steer the global economy with quarter-point twitches in overnight rates?”
Granddad looked up from his GoogleSoft iSpreadsheet, where a flashing red “health care” box was blocking 2027’s planned expenditure from matching the income cell. “Yes, Joel. For about a decade we all believed central banks could ensure people had jobs, and could afford food and housing and such. That all changed after the Gigantic Global Bubble Burst of 2008.”
Joel put down his Mandarin dictionary. “That is what my socio-economics teacher says we will learn about next week. She called it the Giglobubu. What happened in 2008, Granddad?”
“We are still not sure, Joel,” Granddad said. “At the time, some accused the New Zealand central bank, some said it was the bond market, while others blamed the aftershocks of a slump in the U.S. housing market. If she is smart, your teacher will probably spend a lot of time talking about China. ... At the start of the century, China started to engage with the global economy. We were able to buy stuff like clothes and televisions really cheaply from China’s factories, making everyone feel wealthy enough to spend and borrow instead of putting something aside for a rainy day.
“All of that borrowed money had to come from somewhere, and most of it came from Asia. When China stopped turning up at bond auctions in 2007 and started investing directly in companies instead, alarm bells should have rung. They didn’t. What everyone failed to realize was that the billions of people in China, Vietnam and other Asian countries did not want to spend the rest of their lives living in huts in the countryside and working in factories for a pittance. They started to demand and get higher wages and a better standard of living, and went on a spending spree of their own. Their governments, meantime, built roads and hospitals and schools to keep people happy.
“Even though central bankers in the West had been puzzled by low bond yields and wage increases, they still took the credit for slow inflation! So when prices started to surge at the beginning of 2008, they were surprised when raising rates turned out to be powerless in the global economy. They were even more shocked when energy costs soared and they realized China controlled most of the world’s power-producing capacity.”
Joel whispered “2008 Giglobubu Causes” into his Apple iWatch, and watched as the holographic multimedia display scrolled into life six inches above his wrist. “Granddad, it says here that the New Zealand central bank made things worse?”
Granddad rubbed his beard. “Well, that is a bit unfair. They were quick to spot that prices were rising, and tried to curb inflation by driving up borrowing costs. Their mistake was trying to stop their currency, the New Zealand dollar, from rising. After the first two attempts failed, they should have given up. When the third attempt went wrong, people panicked because they started to realize how impotent the financial authorities were.”
“Granddad, it also says here that hedge funds and the derivatives market made things worse. What are hedge funds and the derivatives market?”
“Well, they are illegal now, Joel. As the global economy started to crumble under the weight of soaring raw material costs, financial markets melted down, with prices of stocks and bonds whipsawing. Hedge funds were supposed to be clever investors. It turned out that they had all made the same bet on the global economy staying wonderful for ever.
“Companies thought they had borrowed money from their bankers. Instead, hedge funds had bought up all of the IOUs. When companies started struggling to make their debt payments, instead of having a friendly chat with their bank managers, they found themselves eyeball-to-eyeball with the hedge funds’ lawyers, who were not interested in the survival of the companies and just wanted their money back.
“Lots of the banks had sold insurance on those IOUs and on a bunch of other stuff that they bundled together into derivatives called collateralized debt obligations. When those investments started to blow up, we all realized that nobody knew who owed what to whom. And banks and hedge funds had become such a big part of the global economy that they dragged everything else down with them.”
“I’ve been meaning to ask you, Granddad: What are all those funny little rectangles of green paper in that big frame on the wall next to your desk?”
“They are called dollars. We used them to buy things in the olden days. In 2015, a group called the Single Global Currency Association convinced the Bank for International Settlements, which by then was running the world’s financial systems, that everyone should switch to one type of money.”
“And they didn’t choose the dollar, Granddad?”
“No, Joel. There was a global referendum to make the decision on which currency people wanted. Which is why we now use the yuan all around the world. Anyway, it is getting late. Back to your Mandarin homework, young Master Bernanke.”
Link here.HOW TO PROFIT FROM THE COMING ECONOMIC COLLAPSE
Crash Proof: How to Profit from the Coming Economic Collapse reviewed.
Many writers of investment books approach the topic of saving and investing without any clear economic theory. Value investors often share the sentiments of fund manager Peter Lynch, who said, “If you spend 13 minutes a year on economics, you have wasted 10 minutes.” From the other end of the methodological spectrum, MBAs trained in efficient portfolio theory look disdainfully on any suggestion that investors should at times be entirely in cash as “market timing”.
In contrast to both schools, author and investor Peter Schiff approaches the issue from a top-down macro-economic view. Schiff believe that the most important issue facing investors over the next few years is a series of macro-economic crises that will impoverish most Americans. Schiff’s book Crash Proof: How to Profit from the Coming Economic Collapse is really two books in one. The first is Peter Schiff’s analysis of the U.S. economy, incorporating both theory and historical examples. The second consists of his strategies for surviving and even prospering.
It is not possible to approach macro-economic questions without an economic theory. A sound economic theory may not yield any useful insights for investors, but a false one is almost certain to mislead. A problem with macro investment literature is the generally poor economic foundations of most of their authors. Harry Dent, for example, shares the Keynesian-macro belief that consumption, not savings, drives economic wealth. Louis-Vincent Gave, Charles Gave, and Anatole Kaletsky believe that capital accumulation is a money-losing proposition for firms. The reader of Crash Proof is fortunate that Schiff incorporates Austrian economics in his approach. The Further Reading section contains titles by Rothbard, Mises, Hayek, Hazlitt and J.B. Say. And unlike some authors who cite these thinkers without understanding them, Schiff displays a grasp of their thought and its application to investing.
This review will focus on Schiff’s economics. I will not say much about his investment advice. While his advice could be implemented through the investment firm of your choice, Schiff is the founder of a brokerage firm offering investment accounts following the book’s recommendations. Schiff believes that his firm provides advantages in executing these strategies. After reading the book, I believe that his investment recommendations follow from his economics (right or wrong) and not the other way around. And by publishing his ideas in a book, an investor could implement these strategies with or without Schiff’s help.
Schiff disputes common economic fallacies, such as that we do not need to save because our assets are going up in value and that Americans provide the “engine of growth” in the world economy by consuming what others produce. One area where Schiff may be on less firm ground is in his analysis of the U.S. trade deficit, which he sees as evidence that Americans are living beyond their means and making up the difference by borrowing from foreigners. All that a trade deficit means is that the deficit country is importing capital. If the imported capital is used to fund the development of the productive structure within the country, then the resulting financial claims are supported by production. Schiff’s view of the trade deficit could be correct but it does not follow from the mere existence of a trade deficit. To prove this, he would need to provide more evidence than he does that the imported capital is wasted.
Schiff shares the skepticism of most Austrians toward central banking and inflation. How many investment books contain a section called “Fiat Money: Why it is the Root of our Economic Plight”? His discussion “How the Government Obfuscates the Reality of Inflation” is excellent. Schiff is particularly good on the deflation issue. According to Wall Street’s way of thinking, deflation is supposedly even worse than inflation, and we should be thankful that we have the Fed to artfully charting a course between the two terrors. Schiff dismisses this nonsense. His discussion of the business cycle is clearly Austrian: “According to the classical economists ... recessions should not be resisted but embraced. Not that recessions are any fun, but they are necessary to correct conditions caused by the real problem, which is the artificial booms that precede them.”
Schiff forecasts a stock market crash, the bursting of the real estate bubble, and the collapse of the dollar. For the first two of these, his reasons are the over-valuations of these asset classes, runaway credit expansion and the moral hazard created by bailouts. His argument for the collapse of the dollar is tied very closely to his view of the trade deficit, which I have called into question above.
His investment recommendations consist largely of foreign stocks, which have higher earnings yields and pay better dividends than U.S. stocks; gold and gold mining; and cash or liquid short-term bonds to preserve purchasing power until after bubbles have burst, when the money can be put to work at much more favorable valuations. The book falls in a long line of gloom-and-doom forecasts offering advice on how to profit from them. Many of these books even have titles containing the words “How to profit from the coming ‘X’”.
While it is possible to see unsustainable trends playing out, some of them take many years to reach the breaking point, and in the meanwhile, there can be very long counter-trend movements. While bubbles burst, getting the timing right is difficult. It is possible to be right but wrong about the timing for a long period. While there were a number of bears in the late ‘90s who correctly called the stock market bubble, many of them were wrong for several years until being vindicated.
Crises do happen. In recent years, a number of countries have had their currency collapse or defaulted on foreign debt. Recall the Asian contagion, the Mexican peso crisis, the Russian ruble crisis in 1998, and the Argentine banking crisis. America is not inherently immune from such a crisis. The laws of economics so ably demonstrated by Schiff apply to America as well as to other places. And I believe that Schiff does as good a job as anyone making the case that the trends that he examines are unsustainable, excepting possibly the trade deficit.
I enjoyed the book and it is one of the better examples of economic writing among investment books. I recommend it for anyone who wants an analysis of current economic and investment trends from an Austrian viewpoint. While I am in general agreement with Schiff’s forecasts, time will tell whether the crises are imminent, or whether we are due for an extended period of grinding sideways.
Book review here.FORMER SOVIET DISSIDENT WARNS OF EU DICTATORSHIP
Calls the EU a “monster” that must be destroyed before it develops into a fullfledged totalitarian state
Vladimir Bukovksy, the 63-year old former Soviet dissident, fears that the EU is on its way to becoming another Soviet Union. In a speech he delivered in Brussels last week Mr. Bukovsky called the EU a “monster” that must be destroyed, the sooner the better, before it develops into a fullfledged totalitarian state.
Mr. Bukovsky paid a visit to the European Parliament at the invitation of Fidesz, the Hungarian Civic Forum. Fidesz, a member of the European Christian Democrat group, had invited the former Soviet dissident over from England, where he lives, on the occasion of this year’s 50th anniversary of the 1956 Hungarian Uprising. After his morning meeting with the Hungarians, Mr. Bukovsky gave an afternoon speech in a Polish restaurant opposite the European Parliament, where he spoke at the invitation of the United Kingdom Independence Party, of which he is a patron.
In his speech Mr. Bukovsky referred to confidential documents from secret Soviet files which he was allowed to read in 1992. These documents confirm the existence of a “conspiracy” to turn the EU into a socialist organization. A transcript of the speach follows. The audio fragment (approx. 15 minutes) is here. A brief interview with Mr. Bukovsky also follows ( audio download link here).
Q: You were a very famous Soviet dissident and now you are drawing a parallel between the European Union and the Soviet Union. Can you explain this?
Vladimir Bukovsky: I am referrring to structures, to certain ideologies being instilled, to the plans, the direction, the inevitable expansion, the obliteration of nations, which was the purpose of the Soviet Union. Most people do not understand this. ... [W]e do because we were raised in the Soviet Union where we had to study the Soviet ideology in school and at university. The ultimate purpose of the Soviet Union was to create a new historic entity, the Soviet people, all around the globe. The same is true in the EU today. They are trying to create a new people. They call this people “Europeans”, whatever that means.
According to Communist doctrine as well as to many forms of Socialist thinking, the state, the national state, is supposed to wither away. In Russia, however, the opposite happened. Instead of withering away the Soviet state became a very powerful state, but the nationalities were obliterated. But when the time of the Soviet collapse came these suppressed feelings of national identity came bouncing back and they nearly destroyed the country. It was so frightening.
Q: But all these countries that joined the European Union did so voluntarily.
VB: No, they did not. Look at Denmark which voted against the Maastricht treaty twice. Look at Ireland [which voted against the Nice treaty]. Look at many other countries, they are under enormous pressure. It is almost blackmail. Switzerland was forced to vote five times in a referendum. All five times they have rejected it, but who knows what will happen the sixth time, the seventh time. It is always the same thing. It is a trick for idiots. The people have to vote in referendums until the people vote the way that is wanted. Then they have to stop voting. Why stop? Let us continue voting. The European Union is what Americans would call a shotgun marriage. ...
I think that the European Union, like the Soviet Union, cannot be democratized. Gorbachev tried to democratize it and it blew up. This kind of structure cannot be democratized. ... The European Parliament is elected on the basis of proportional representation, which is not true representation. And what does it vote on? The percentage of fat in yogurt, that kind of thing. It is ridiculous. It is given the task of the Supreme Soviet. The average MP can speak for six minutes per year in the Chamber. That is not a real parliament.
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