I’m from the Government and I’m Here to Help

“I’m from the Government and I’m Here to Help.”

By Fitzroy McLean

Without Borders – Casey Research

Ronald Reagan once said those are the nine scariest words in the English language. And he’s starting to be proven right.

World markets have been watching with bated breath lately as the dynamic duo of Paulson-Bernanke has mounted the Hill (or has been mounted, as it were), on several occasions recently, soothing the markets, politicians, and public with calming words about liquidity, regulation, and “bottoms.” Even the POTUS (that’s President of the United States) has made a few well-rehearsed remarks about the economy, energy, and our friends Fannie and Freddie. And in response, politicians have wasted no time in jumping in front of anything with a lens to demonstrate their commitment to “fixing” things.

Unsurprisingly, most of our esteemed congressmen and senators have left no doubt that they collectively lack any understanding of financial markets or basic economics. And quite frankly, we find it insulting (despite the fact that Wal-Mart reported a surge in plasma screen television sales post-stimulus check and further data indicate that online pornography sales were up sharply); people aren’t as dumb as Washington hopes. Even without an academic understanding of economics, the lowest common denominator in society is noticing fewer Miller Lites for his dollar at the checkout line, and that reality cannot be hidden with political rhetoric. At this point, it’s safe to assume that, with a few notable exceptions like Cheerleader-in-Chief Larry Kudlow, most people know the largest economy and most widely-held currency in the world are in trouble.

The following points are likely subject to question and interpretation: 1) What’s causing this, 2) How bad can it get, and 3) What can be done to limit its effects? It seems clear to us that the political and media establishment have jumped immediately to question 3 without really stopping to consider the first two. This reminds us of Army doctors who robotically prescribe a strong dose of Motrin to treat pretty much every symptom under the sun without ever devoting a token amount of time to determining the root cause.

The proposed remedies have been far-reaching: from banning speculation and short-selling altogether; to providing yet another round of fiscal stimulus (hey, the digital TV switch is only a few months away); to creating the new New Deal whereby Mother Government will employ large swaths of workers to rebuild our deteriorating infrastructure. So what are you waiting for, comrades? Pick up a shovel, there are dams to build!

From a social perspective, we know we’re at a turning point when friends who once decried our misadventures in seeking faraway contrarian fortunes are sending us emails saying, “Hey, uh, can you tell me again about Panama?” They are realizing that, as we explored last month in our Dispatch from Dubai, personal liberty is not always best protected in a democracy. How much freedom does one truly have in a government controlled by herd mentality? People are smart enough to realize that they have absolutely zero power to affect change in a country with hundreds of millions of different perspectives. At this point, the idealists usually say something about starting a grassroots campaign to “raise awareness” and — as utopian as this sounds — who has time for such things when everyone is struggling to pay for the skyrocketing costs of daycare, healthcare, education, food, and transportation?

At the end of the day, whether we live in totalitarian Zimbabwe or the United States of the North American Union, we are left with the freedom to choose between “take it” or “leave it.” The former is a resignation to accept the things we cannot change, complain prodigiously, and make the best of it. The latter implies a rewarding adventure in seeking a new breeding ground for personal liberty. Chances are, if you are a subscriber to this humble publication, you are at least sitting on the fence and probably leaning towards the “leave it.” Don’t feel guilty; you are not alone. A recent study from US News & World Report indicates that a growing number of North Americans are joining the ranks of the new “lost generation,” except that the group seems to be truly pan-generational; young and old, we come across a surprising number of expats scattered across the globe, ranging in age from 18 to 80. Some are seeking entrepreneurial fortunes; others are seeking to stretch their retirement savings; others are escaping the rat race; yet the commonality seems to be a clear distaste for the direction that things are headed — and absolutely no one thinks that it’s getting any better. This new generation finds the concept of swearing blood-oaths of allegiance to gerrymandered figments of Winston Churchill’s alcohol-induced imagination to be a bit antiquated… god save the queen and all that.

For everyone else, the Social Contract experiment has worked well, and people around the world see governments not only as an inextricable part of their lives, but also, in many cases, as a means of support and comfort.

Take Pakistan, for example. Last month a small army of individual investors looted the stock exchange in Karachi because the market had lost about 40% of its value over a few month’s time. Rather than take their lumps, they rioted, demanding that the government ‘do something!’ And something they did. Markets were calmed, albeit temporarily, based on Finance Minister Naveed Qamar’s assurance that a 20 Billion Ruppee ‘fund’ would be activated to bail out small investors and save them from their losses. Seem like complete insanity? Yet one doesn’t have to look hard to see similar instances around the world, whether it’s larger pensions in Italy; a shorter workweek in France; cheaper maize in Mexico; or soon-to-be-reproposed universal health coverage in the United States. Mother Government’s responses to declining and turbulent economic conditions also fit in this category.

The question is: Where does all this bailout/social welfare money come from?

Apparently thin air. With declining tax revenues in a down economy, governments around the world have been stepping up to recklessly spend more, usually borrowing from the haves and giving it right back to them in interest payments or proceeds from importing their wares. There’s one problem though, at least for the U.S.: The Financial Times recently reported that Arab and Asian funds are cutting their exposure to the U.S. dollar. Can’t really blame them. For years they had been buying U.S. debt and recently switched to ownership: real estate, public equities, etc. But their cash infusions from private capital injections over the last twelve months have withered as the market value of major financial stocks continues to deteriorate. At this point, there is little course of action remaining other than to continue deflating the value of the currency by printing more money.

So, many developing markets are experiencing significant inflation because of a surge in foreign investment (which normally has the effect of driving up wages and asset prices), as well as rising commodity prices. Even though commodities are generally priced in USD, many developing markets historically peg their currencies to some multiple of the dollar, so they feel the inflationary effects of rising corn, wheat, and oil as well. De-pegging would usually cause their currencies to strengthen against the dollar, mitigating the inflationary effects of rising commodities prices. Sounds great in theory, but many developing markets have been focusing on pro-growth policies, allowing inflation as a necessary evil. In our view, this trend is changing rapidly.

As we have discussed earlier, it doesn’t take too many riots for governments to give in and ‘do something.’ Unfortunately, this has historically been a far cry from actually ‘accomplishing something’ because, after all, you can always blame the other political parties. Our assessment, however, is that the great constituency is growing impatient, and as family budgets around the world are stretched thin in the face of a myriad of other challenges (real and perceived) like climate change, energy scarcity, and population growth — governments will eventually adopt freer market policies with long-term benefits. Argentina’s recent decision to eliminate export taxes for agricultural products is an indication of this trend, even in a highly leftist regime. China’s reduction of fuel subsidies is another.

The great shift in defending against inflation will likely culminate in many developing markets abandoning their dollar pegs and floating freely. Last year, Kuwait and China broke away from their strictly USD pegs in favor of a basket of currencies which includes the euro, yen, pound, ruble, South Korean won, Thai baht, Aussie dollar, Canadian dollar, and Singapore dollar. Kuwait has been the most hawkish of the GCC about the dollar, at least publicly. The country, which has the world’s most highly valued currency (its currency unit buys the most of any other currency unit), made the change in preparation to switch to the proposed GCC single currency, the Khaleeji, when it debuts in 2010 across Saudi Arabia, the UAE, Qatar, and Kuwait.

As long as the world’s energy trade balance favors the Gulf, our expectation is that the new currency will perform well against the dollar and euro, and it is likely that other members of the currency bloc will flirt with de-pegging prior to 2010.

The same analysis applies to China’s renminbi (which literally means “the people’s currency”). Prices may rise and growth may fall, but China will likely maintain its status as a worldwide manufacturing source and export-intensive economy; and turning a cold shoulder to U.S. dollar-denominated investments will put significant upward pressure on its currency.

One way to profit from this trend is by buying into the currencies themselves. EverBank has a host of international currency deposit accounts, including a Chinese renminbi money market fund [Roger’s Note: It pays no interest]. Alternatively, some investors are putting money in the Chinese renminbi exchange-traded note (NYSE.CNY). Beware before buying the renminbi ETN: You are accepting counterparty risk from Morgan Stanley so do not buy CNY if you think Morgan Stanley won’t be able to pay the note.

Personally, we are much more comfortable with Barclay’s Asian and Gulf Revaluation Fund (NYSE.PGD). This fund covers five currencies that are currently pegged to the U.S. dollar, and the fund stands to gain substantially if the pegs are revalued. The currencies include Hong Kong, Singapore, China, the UAE, and Saudi Arabia, and we are comfortable betting on the trend that at least the latter three will rise substantially against the dollar.

PGD charges a 0.89% management fee and was just recently introduced in mid-June. Its volatility will likely be mild, until, that is, one of the five countries revalues its currency.

Fitzroy McLean is a co-editor of Without Borders, the spirited and highly profitable new monthly advisory service from Casey Research. A former military man turned spy, Fitz eventually came to his senses, trading in his cloak and dagger for a briefcase and a degree from Oxford, then set out to use his unique skills as a successful fund manager and full-time international entrepreneur. Fitz and co-editor Simon Black, another former intelligence operative, are on a nearly non-stop quest around the world looking for the best places to easily diversify internationally (and, in the process, enjoy the best life has to offer).

There’s no other newsletter quite like it. But don’t take our word for it: a 3-month trial subscription with 100% money-back guarantee allows you to experience Without Borders for yourself at no risk. Learn more by clicking here now.

Without Borders June Edition Highlights

dubai cityscapeThe latest edition of Casey Research’s newest newsletter Without Borders was just released yesterday and cover to cover it is fantastic.

You have probably heard about some amazing things happening in Dubai. This issue of Without Borders Fitz and Simon give us an on the ground briefing of what’s going on, what it takes to profit there and the pros and cons of moving there right now to take advantage of the explosive economy in one of the most strategic locations in the world.

If that alone isn’t enough, how about learning ins and outs of getting a second passport, why you and your family might want one and what it would cost.

As usual, this month’s edition comes with actionable intelligence on new investment opportunities, recap on past recommendations and questions from readers answered by Fitz and Simon themselves.

But that isn’t all, you’ll even get to read about the enchanting “heiress of the month” just to round out your reading pleasure (with a photo, of course!).

This is an excellent publication that can’t wait to tear into each month when it’s delivered to my inbox. The good thing is that you don’t have to take my word for it, Casey Research offers a Risk Free Trial. Try it today!

How to Safely Play China’s Growth

How to Safely Play China’s Growth

By Fitzroy McLean

Without Borders

In our constant travels for Without Borders, we look for progressive, undervalued international investment opportunities in booming economies with governments that treat capital well. To even begin to make the cut, the countries also have to possess multiple economic growth engines, open trade and business freedom.

Finding these opportunities is just half the mission. The more important, and often more difficult task, is finding safe ways to play them.

Consider China. Unless you’ve been cooped up in Guantanamo for the last few years, you’re already familiar with the miracle of China, Inc.; 11.4% GDP growth, the world’s “go to” manufacturing center, a 1 billion strong local consumer market, and some of the greatest business opportunities in the history of the world.

So far, so good. But when you drill down another level, the level where you hope to find undervalued investment opportunities, things quickly get more complicated. Thanks to that country’s emerging middle class, flush with exponential growth in purchasing power and investable funds, , the Shanghai stock exchange has become one of the hottest capital markets in the world. And one of the most dangerous.

Over the last 7-years, the Shanghai Composite Index has returned approximately 80% to investors with some serious roller coaster rides along the way, including days of such catastrophic meltdown that even the most seasoned investors make a bee-line for the nearest emergency exit.

The Price/Value Disconnect

The most disturbing thing about the Shanghai market is the often complete disconnect between the price of a given stock and the value of the underlying company. In China, soothsayers in the local newspapers predict what numbers will endow great luck… just like a fortune cookie at your favorite Chinese buffet; and as you are undoubtedly aware, stock symbols in Shanghai are numbers, not letters. So when the great sage says 0, 4, 7, and 9 are today’s lucky numbers, that spells good news for Shanghai Zenhua Port Machinery Co., symbol: 900947, and poof, the stock jumps—irrational exuberance at its most irrational. This and similar actions of an inexperienced, first generation investor class, coupled with a general overconfidence among the Chinese on the outlook for their stock market, periodically drive the Shanghai exchange to bubble territory, that is subsequently corrected in stomach churning down moves.

So, the sort of booming economy and big upside we like, but with an unpredictable and wildly irrational stock market.

What’s an investor to do?

Because we’re looking to buy into the growth, and to do it safely, stepping up to the craps table in Shanghai along with all the other speculators and soothsayers isn’t going to cut it.

Instead, we invest in undervalued Chinese companies listed on more established exchanges. Simple, but effective.

Some examples…

We are currently following a Jersey-domiciled, London-traded cement company based in the western China province of Shaanxi (not to be confused with the neighboring Shanxi province…). Shaanxi is one of the fastest growing provinces in China, and this cement company is ideally positioned to capitalize on this growth. Currently trading on London’s Alternative Investment Market (AIM) at only 6.4 times earnings and 4.6 times current assets, this stock is as undervalued as it gets, especially considering the growth prospects.

While it has already provided us with solid profits, we see it as a relatively near-term double from today’s levels. But we digress from the central point here… which is, because it trades on the London AIM, and not Shanghai, your shares have nowhere near the volatility.

Confirming that point, we looked at twelve worst performing days of the Shanghai Composite Index since January 1 2007, with single day losses ranging from 5% to over 10%. On average, during those steep drops, our Chinese cement play outperformed the index by an average of 6.85%. Viewed from another angle, on the 12 worst performing days of the Shanghai Composite Index since January 2007, our AIM-listed Chinese cement company actually posted a daily gain on eight of those twelve days, and posted a far better return than the index on all twelve.

For us as investor this means we are able to capitalize on one of the fastest growing industries in one of the world’s fastest growing economies with one of the industry’s most seasoned management teams, and doing it all safely, with far less volatility than in Shanghai.

We believe in the Asia growth story, and we believe in companies like our China cement story (the name of which we can’t share here because it wouldn’t be fair to our subscribers). But we are only willing to risk our hard earned capital in a way that makes sense to us. So in China, we look for solid, undervalued companies on established exchanges – and there are a number of these gems if you dig for them – and save the gambling for the casinos in Macau.

Fitzroy McLean is the co-editor of Without Borders from Casey Research, a monthly service dedicated to searching the world for undervalued, lower risk investments. A three month, no-risk subscription offer is available that will bring you current with all of the Without Borders recommendations… learn more now.

Without Borders April 2008 – Gorgeous Photo

Without Borders Editors Found A Cool Place to Hang Out

With all of the action in the commodities arena I haven’t been posting as much about the namesake of this blog. The current edition of Without Borders had this photo of a local that our editors Fitzroy and Simon wanted to share with us.

Care to guess where it is? Land here may be the next commodity to head for the moon. Try a risk free trial subscription to Without Borders and you won’t have to guess.

What to do with Physical Gold

Whether you own any physical gold or not, how do you store it? I have written before about discomfort many of us have with keeping it ourselves. And in case you didn’t know it, a U.S. safe deposit box is NOT a good idea.

Unless you have your own Fort Knox to store your gold, you may be looking elsewhere.

Turns out that there are excellent places in the U.S. to safely store gold, as well as foreign locales. The folks at Casey Research get asked this all the time, so it shouldn’t surprise you that the February edition of Without Borders had a special section (“the Pulse”) written to answer the very question about gold storage and transporting gold to foreign countries.

Take a no risk trial subscription to Without Borders and you can visit the archives to get this valuable report.
P.S. – I just attended a private briefing in Nassau, Bahamas where this very topic was discussed.

Is David Walker, Controller of the United States, Telling you to look abroad?

David Walker Comptroller of the United States
David Walker, Controller General of the United States, has been barnstorming the country, appearing on every TV show that will have him, and telling people, in no uncertain terms, exactly what is happening.

This man is America’s CFO and he places the blame right where it belongs: “The U.S. Government is on a burning platform of unsustainable policies and practices,” he says.

The U.S. either takes drastic action now or we face “dramatic tax rises, slashed government services and the long-scale dumping by foreign governments of holdings of U.S. debt.”

Walker notes the “striking similarities” between America today and Rome as it collapsed, including “declining moral values and political civility at home, an over-confident and over-extended military in foreign lands and fiscal irresponsibility by the central government.”

We’re “on a path toward an explosion of debt, with the looming retirement of the baby boomers, spiraling healthcare costs, plummeting savings rates and increasing reliance on foreign lenders, [and] we face unprecedented fiscal risk.”

When a man in this position, with nothing to personally gain by saying so, has such dramatic words for us, shouldn’t we listen?

Wouldn’t it be nice to have an out when those drastic measures happen, just in case? I would like knowing that I have another place to head to where the weather is nice and the politics and people are calm and relaxed.

Such a place can be found by reading Casey’s Without Borders.

And if you don’t have the investment nest egg to accomplish such a goal, then now is the time to be following the advice of the International Speculator or perhaps the more conservative Big Gold.

I subscribe to both of these publications and I will forever be glad I do.

What to do in this sub prime fiasco

Not a day goes by anymore without another startling revelation about this sub prime mortgage banking mess. Treasury Secretary Paulson seems to think he has answers, but what was his involvement while at Goldman Sachs? We may never know.

What we do know is that housing prices are falling, banks are taking HUGE write offs and laying people off (a nice word that means they were fired) and the financial markets are in turmoil. One lender cut its dividend to shareholders a whopping 73% and UBS, after telling shareholders just 3 weeks ago not to expect huge write downs in the 4th quarter, just wrote off $10 Billion. Maybe management doesn’t consider that big?

The question is “what do YOU do about it”. You need to know where your money is safe, and where to put it if it isn’t. You also need a place for you to be safe. Those answers you are likely to find in Casey’s Without Borders.

How about your money market funds? Are they safe? There is a lot of talk about the possibility of money market funds “breaking the buck”, meaning that their value would go below the target, not guarantee, of $1.00 per share. Are you in a money market fund that pays better than most others? Then you have to wonder what they have invested in to get that extra return. Typically, it’s something more risky – like sub prime paper!

In the crazy quilt that the financial world has become, people are asking what if anything will come of our beloved Bush administration’s proposed sub prime bailout, and whether even their money market funds are safe. Both of those questions are addressed in the upcoming issue of another Casey Research project – BIG GOLD. Check it out.

Falling Dollar – What Are You Going To Do?

How much time does the U.S. Dollar have left?

The U.S. Dollar is just now bouncing off of historic lows. This bear rally may last a bit, but Casey Research founder Doug Casey knows the dollar is ultimately doomed. In fact, all fiat currencies will ultimately reach their intrinsic value – nothing.

What are you going to do about it? Let the powers that be erode your life savings?

You need actionable intelligence on where the best places to invest are. What parts of the world are safe for your money and which parts are not.

This is the type of information that can be found in each and every issue of Casey’s Without Borders, the latest newsletter offering from Casey Research.

Try a no-risk subscription to Without Borders now with a 3-month 100% money back guarantee.

I subscribe, and I highly recommend you do too.

Colombia – Not Just for Juan Valdez Anymore

I ran into a post on Bill Myers Online forum from a guy living in North Bogota, Colombia.

He posted the following video so friends and family could see what his neighborhood looked like.

As you can see, no burrows carrying coffee beans in site.