Alan's Finance Blog

The Agricultural Stock Set to Feed China’s Demands

By Jeff D. Opdyke, Editor, The Sovereign Individual

Dear Sovereign Investor,

I stood recently on the shores of the massive Rio de la Plata that flows past Montevideo, and watched the cargo ships ply their way to soy-handling ports upriver in Uruguay and Argentina and out to sea for the long voyage to China.

In either direction, these voyages are largely about one thing … pigs.

It’s well-known that China is a pork-lover’s paradise – but that is an understatement of enormous proportions.

Just as the U.S. has its Strategic Petroleum Reserve, China has a state-mandated strategic pork reserve, because the meat source is so crucial to the Chinese diet and has proven so susceptible to big price swings.

In fact, China’s roughly 446 million pigs is a population larger than the next 43 pork-producing countries combined. The chart below will give you an idea of just how massive China’s pig populace really is…

Please click here to view larger image

My point here is this: pigs have to eat.

And China’s pigs eat roughly six billion bushels of feed a year, largely soy. That’s 70% more soy than the U.S. produces annually – and the U.S. is the world’s leading soy producer.

China must import a lot of its soy to meet demand. Much of it comes from South America – particularly Argentina, Brazil, Paraguay and Uruguay.

An Opportunity to Profit

And that’s precisely what I was watching on the shores of the Rio de la Plata. Many of those cargo vessels plying their routes up and down the river were linking the soy farmers of South America to all those pigs in China … not to mention the mass of Chinese consumers who use protein-rich soy oil for their daily cooking needs.

As economic growth in China and other emerging Asian economies fuels dietary change and protein demand, that spells opportunity to profit for the savvy sovereign investor.

In my years as a financial writer, I’ve learned that great investment opportunities never crop up by accident. Instead, they are typically a response to some economic sea-change.

The problem is that investors never see a global phenomenon until it’s already upon them – and by then they’ve missed the easy money. Part of that blame falls on Wall Street, where brokers rarely look past America…

To profit from the rise of the emerging-market middle-class requires that you rethink what Wall Street has told you for decades. Because, the richest veins on the planet today run through places like Jakarta, Hanoi, Accra, Dubai, Shanghai and Mumbai – the areas where literally hundreds of millions of new consumers are taking root.

One response to this economic sea-change is the giant wave of consolidation now taking place in the global agricultural market.
Swiss-headquartered commodity-trading giant Glencore International (London: GLEN) last month swooped on Viterra, Canada’s largest grain handler, in a $6.1 billion acquisition that will shake up the established hierarchy of the global grain market.

Access to Growing Demand in China

This multibillion-dollar deal not only gives Glencore a foothold in the crucial North American grain market, it gives the company direct access to the growing demand across Asia, particularly in China, where Viterra already operates grain-marketing and distribution businesses.

Viterra is also a major producer of animal feed for pigs and chickens.

Glencore, which in 2011 turned over $186 billion, has built a world-class reputation as a group of smart, influential and wealthy traders. Ivan Glasenberg, the company’s chief executive, has made no secret of the fact that he aims to make Glencore a bigger player in the North American grain industry and in emerging Asian markets.

Meanwhile, a legislative change in Canada that will take place later this year means Viterra will be able to buy more grain directly from farmers, thus potentially increasing Glencore’s profits.

Glencore is also in the process of merging with mining giant Xstrata, a major player in the global copper market and, in turn, China’s breath-taking growth. No doubt that pursuing two takeovers at the same time is aggressive, but Glencore has proven adept at creating shareholder value over time.

The new Glencore should be a core holding for any investor who can see the obvious reality – that the emerging middle class is placing ever-greater demands on the commodity world. Glencore is key player in sating those demands.

Until next time, stay Sovereign…

Jeff Opdyke

Bernanke’s Most Dangerous Lie Yet

The Fed Chairman Ben Bernanke isn’t a very good liar. But he does have the guts to lie on national television.

A few weeks back he gave an interview on 60 minutes. Bernanke boldly said there was no risk of inflation because “the money supply isn’t changing in any significant way.”

The fact that he was shaking throughout the entire interview is a pretty obvious sign he was lying (although you would think he would be used to it by now). But there’s also concrete proof that he was simply spinning this story his way.

This concrete proof is a forgotten indicator that the government has gone to great lengths to hide from you. It’s because this particular indicator shows inflation risks are rising.

I’m talking about the broadest measure of the U.S. money supply, known as M3. And for those of us still watching it, this indicator is predicting dangerous inflation and some killer profit opportunities for 2011.

Why the Government Doesn’t Want
You to Know About This

In 2006 the government stopped recording M3. Fortunately, a few economists still keep track of this forsaken statistic. And right now it’s pointing to inflation, not deflation.

The chart below shows the annual U.S. money supply growth through November of 2010. Although the government discontinued M3, the website Shadow Government Statistics is one of the few organizations that still keep track of it.

As you can see, M3 (blue line in chart) has been rising for the past six months. That tells me the Fed’s so-called deflation risks are disappearing.

More Money = Higher Inflation Risks

This rebound in broad money supply indicates inflation is more likely than a deflationary spiral.

One of the top indicators of CPI inflation is money growth. Over time, the broadest money measure (M3) has worked as the best single inflation predictor. So M3 changes before CPI inflation changes.

Once M3 starts rising at a more rapid rate, CPI inflation will start to pick up. By then, it will be too late for the government to control it.

But there are a few things you can do to protect your assets now.

Turn This Dangerous Possibility into Profits

The best way to shield your assets from inflation is by having solid exposure to commodities and assets denominated in foreign currencies.

Because commodities are priced in dollars, when the buck loses value, the price of these hard assets increases. So by investing in commodities, like gold, silver, grains, and oil, you can protect your wealth against inflation.

You should also invest a portion of your portfolio in assets denominated in stronger currencies, such as the Singapore dollar and the Australian dollar.

Keep in mind that a higher cost of living (in other words, loss of purchasing power) offsets capital gains in dollar denominated assets.

Let’s say for example your cost of living doubles because of inflation. In that case, even if your dollar assets double in value, you won’t be a dollar richer.

Investors who have all their assets in dollars ignore that simple idea. With money supply data indicating more inflation ahead, now is the time to rectify that mistake.

Bottom line: Bernanke may lie, but the money supply statistics don’t. Take action now to make sure you’re not on the losing end of this massive cover-up.

Best Regards,

Evaldo Albuquerque
Editor, Exotic FX Alert
Blog: http://wcw.worldcurrencywatch.com/

The Easiest Offshore Bank Account

Where can you find an easy, affordable, manageable, accessible offshore bank account? It’s closer than you think.

Just head north to Canada.

Before I continue, let me make something clear – our neighbor to the north is not a tax haven or ideal for asset protection. But for general diversification or to simply move some assets outside the U.S., Canada might be just the place you are looking for.

A Safe Haven Close to Home

Canada offers a sound banking system, conservative lending regulations and a currency that should continue to appreciate versus the U.S. dollar.

In fact, my colleague Sean Hyman believes the Canadian dollar will be the top-performing currency of 2011. For two reasons, rising oil prices and an economy that thrives no matter what’s happening in the world.

What’s more, Americans can look to Canada as a safe place to park some assets outside of the horrors of U.S. banking and the financial system.

It’s an easy-to-access banking destination that bears many of the same attributes you’ve become accustomed to in the United States — including the same language and deposit protection. The Canadian Deposit Insurance Corporation (CDIC) provides C$100,000 protection per account (US$100,000).

With 316 banks failing over the last two years here in the U.S., banks in Canada are now among North America’s leaders. Canadian banks are profitable and outperform their North American counterparts because of tighter government restrictions on lending capital requirements.

In the aftermath of the credit crisis, not a single Canadian bank collapsed thanks to the country’s responsible banking practices and conservative lending regulations. Financial institutions in the U.S., on the other hand, continue to founder and fail. In fact, 12 U.S. banks have failed this November and December alone.

One reason Canada has escaped the same fate is its foreign ownership law. This law restricts foreign banks from owning more than a 10% stake in domestic banks.
Because of this, Canadian banks are less dependent on risky foreign institutions and aggressive lending tactics.

Easily Add One of the
Top Currencies to Your Portfolio

Canada can also be considered a currency haven. The country has banks that are allowed to house accounts in various currencies. The Royal Bank of Canada (RBC), for instance, offers currency accounts in U.S. dollars, Canadian dollars and British pounds sterling. This is a good and simple way to diversify your nest egg.

In fact, some of the bigger Canadian banks may offer discount brokerage platforms. Using these low-fee services, investors can trade securities in Canada inexpensively.

In the last 12 months, the loonie has hit par with the U.S. dollar. As of yesterday, the loonie was hovering around $0.99 U.S. cents. The Canuck buck deserves to trade on par or at a premium to the greenback for many reasons.

Earlier this year, Canada also has a trade balance surplus with the U.S. compared to monthly trade deficits of over $40 billion here at home – and that’s to say nothing of the U.S.’s exploding budget deficits.

Canada’s economy, however, like most other economies, has been slowing since June. A high Canadian dollar continues to put pressure on exports and acts as a drag on employment growth in the country’s manufacturing belt in Ontario and Quebec.

But resource-driven exports — like oil and natural gas — have remained buoyant in 2010 and should continue to push the Canadian economy forward in 2011.

Bottom line: Canada is the nearby destination for “offshore banking.” Why not take advantage?

Stay Sovereign,

Bob Bauman, JD
Legal Counsel, The Sovereign Society
Blog: http://bauman.sovereignsociety.com/

Three Simple Strategies to Escape U.S. Taxes

President Calvin Coolidge has been ridiculed for supposed limited intelligence. In reality, he was but a man of few words. Unfortunately, one of his most memorable quotations no longer applies fully today as it did in his time …

“The chief business of the American people is business.”

Today anyone attempting to start or conduct a business in the United States faces discouraging obstacles in high and uncertain taxes, government edicts and a maze of state and federal regulations.

So why don’t more Americans “go offshore” when there is so much potential business abroad?

Probably because they aren’t aware of the attractive possibilities for profit. But there are many jurisdictions friendly to Americans seeking to do business offshore. While I often write about getting a second passport and dual citizenship, doing business can be a way to gain offshore asset protection and opportunities at the same time.

Tax Free Offshore … If You Know Where to Look

Even though U.S. persons (citizens and permanent residents) are taxed on their worldwide income, there are many places where local business taxes are reduced, or where business may be totally tax exempt.

One way that these places exempt foreigners who live or do business there from taxes on income earned abroad is by a “territorial” tax system. This means imposing taxes only on income earned within the country’s borders.

Special Use Tax Havens:
Countries That Want Your Business

Many countries impose the kind of taxes we know and dislike – the high kind. But these are tempered by government policies of granting special tax holidays, concessions, or rebates to favored business enterprises they want to attract and promote, usually to increase local employment.

These concessions typically include:

• corporate tax credits for local job creation;
• tax exemptions for manufacturing and processing of exports; and
• tax benefits for international business or holding companies, offshore banks, insurance or other selected industries.

In the U.S., critics call this kind of domestic business tax break “corporate welfare,” but many nations (including the U.S.) offer these business inducements to foreigners. Among nations that offer generous special tax concessions to foreign-owned businesses are Chile, Portugal and Barbados.

Tax-Free Zones: Exactly What They Sound Like

Closely akin to special use tax havens are “tax-free zones” established within specified areas of some countries. These zones are used as trans-shipment points for finished goods, such as the Colón Free Trade Zone in Panama or the Hong Kong free zone.

Other tax-free zones are major bases for industry, business and finance. They are complete with well-developed infrastructure and favorable laws to attract business to the zone. A good example is the Jebel Ali Free Trade Zone in the United Arab Emirates, although at the moment the UAE economy is in a major downturn.

Canadian Welcome:
Benefits for Americans Who Move North

Canadian law favors a special independent class of preferred immigrants including investors, entrepreneurs, the self-employed and those who will add to the “cultural and artistic life” of the nation.

For potential investor visa applicants, the government rolls out the proverbial red carpet, officially known as the “Business Migration Program.” Business experience, marketing skills, contacts within Canada, an adequate credit rating and available funds all greatly increase your chance of success. Applicants are usually required to submit detailed business proposals or general business plans, which must accompany the application for permanent residence.

America May Not Want Your Business,
But Someone Does!

I’ve only scratched the surface of countries that may be right for your business. But clearly, taking your business offshore may allow you to enjoy greater financial privacy, lower taxes, and a better business climate.

If you are looking for a place to do business offshore or to make a new home, the haven that will meet your needs does exist. It’s “out there” waiting for you, and we’ll help you find it.

Bob Bauman, JD
Legal Counsel, The Sovereign Society
Blog: http://bauman.sovereignsociety.com/

Shield Assets from Lawsuits in One Easy Step

By Bob Bauman JD, Legal Counsel, The Sovereign Society

It’s hardly news that America is one of the most sue-happy nations in the world. For many years it’s been commonplace to hear about people winning hefty settlements for frivolous lawsuits.

To grasp the severity of the problem, consider that over 50,000 lawsuits are filed each week in the US. More than $200 billion is paid each year in, damages, lawyers’ fees and costs related to tort lawsuits.

And these days, it’s easy for you to become a target.

Do you have a neighbor, friend or colleague with a petty grievance against you and your barking dog? You better take that complaint seriously. If you don’t, one day you just might find a process server at your door giving you notice of a lawsuit filed against you.

Frivolous litigation, expensive legal defense costs, outrageous jury awards and government privacy invasions have combined to create an urgent need to protect your family and business wealth and your privacy.

So today, I’m going to tell you all about asset protections trusts (APT) – a legal device that secures your wealth from lawsuits, creditors, an irate ex-spouse and even the government of your home country.

What Is a Trust…
and Who Really Needs One Anyway?

Stripped to bare bones, a trust is a three-way legal device. It’s a contract of sorts, that allows one person (the trustee) to take title and possession of cash or property and hold, use or manage those assets for one or more other persons (the beneficiaries).

The person who creates the trust (the grantor) decides what it will do and donates the property to fund it. You actually create the trust by writing and signing a trust declaration, usually as part of an overall estate plan.

Setting up a trust requires expert legal and tax advice and a careful review of existing arrangements that affect your estate.

One special kind of trust that I often recommend is the offshore asset protection trust (APT), and The Sovereign Society has long advocated its use.

The offshore APT is a powerful wealth preservation structure.

• It offers an ideal means to protect your assets and to assure your heirs and chosen beneficiaries get what you want them to have after you’re gone.
• It defends your wealth and can be the key to strategically sound and successful estate planning.
• It adds a significant layer of asset protection – distance. A domestic trust in your home country may serve your needs, but an offshore APT places your assets outside the jurisdiction of courts in your home country. And it avoids the public and lengthy post mortem probate process required when the deceased has only a last will and testament.
• It can hold title to, and invest in, real estate, cash, stocks, bonds, negotiable instruments and personal property. An APT is an excellent vehicle for investing in offshore funds, currencies and other investment possibilities generally denied by SEC rules to individual American investors.
• It can provide care for minor children or the elderly; or pays medical, educational or other expenses; provides financial support in an emergency, for retirement, education, during marriage or divorce or carries out premarital agreements.

Doing business with an offshore APT is little more difficult than dealing with your local bank, although the hours may differ in other parts of the world. These days, with instantaneous digital international bank transfers, telephones, faxes, e-mail and the Internet, foreign asset haven jurisdictions provide the kind of communication services you as a trust grantor needs to operate an APT.

With regard to affordability, the cost of creating a simple offshore trust in Panama, for example, can cost as little as a few thousand dollars, plus $1,000 annual maintenance fee.

A highly complex APT in a foreign nation can exceed $15,000, plus several thousand dollars in annual maintenance fees. Unless the total assets to be shielded justify such costs, an offshore APT may not be practical. The cost calculation should always precede a final decision on creating an APT. My suggestion is that if your total estate is valued at US$500,000 or more, you should consider creating an offshore APT

Where Should You Create Your Trust?

Many offshore financial centers specialize in the creation and administration of offshore asset protection trusts.

What the corporation-friendly State of Delaware is to U.S. companies, these jurisdictions are to asset protection trusts. Many are well developed, globally recognized financial centers. They boast modern, efficient banking, legal and other professional providers who understand servicing APTs and offshore finance in general.

Among established APT havens are Panama and Belize; the British overseas territories of the Cayman Islands, the British Virgin Islands, the Turks and Caicos Islands and Bermuda, and the Bahamas and Nevis (half of the Federation of St. Kitts and Nevis).

In Europe there are Liechtenstein and Gibraltar. Also noted for favorable trust laws are the U.K. Crown dependencies in the Channel Islands, Guernsey and Jersey and, in the Irish Sea, the Isle of Man. Way out in the south Pacific are the Cook Islands and New Zealand.

Before you choose a place for your trust, make certain of the latest developments in the jurisdiction you’re considering. You can keep abreast of the latest trust news in our Sovereign Society publications.

The Sovereign Society also can recommend attorneys and professional trust services in the U.S. and in tax and asset haven nations. Just ask us.

APTs and Taxes

Unlike almost all other nations, the United States taxes all worldwide income of its citizens and those with permanent US resident status, regardless of where they live in the world. (Many nations exempt their citizens from taxes if they live abroad).

Under U.S. tax law, foreign asset protection trusts are “income tax neutral,” as are domestic US trusts. That means the trust itself is not liable for taxes on its income. But all trust income is treated as the grantor’s personal income, reportable annually as gross income on IRS Form 1040 and taxed accordingly at personal income tax rates. The fact that a grantor’s trust is located offshore does not negate the U.S. grantor’s personal obligation to report trust income.

All this may sound complicated but it’s not really. The Sovereign Society can help members with advice on every aspect of offshore trusts. Just ask us.

Stay sovereign…

Bob Bauman, JD
Legal Counsel, The Sovereign Society
Blog: http://bauman.sovereignsociety.com/

Currencies: The Quickest Way to Grab Profits from Emerging Markets

By Evaldo Albuquerque

Dear Sovereign Investor,

In 1989, Stanley Druckenmiller, former money manager for George Soros, made millions off the German deutschemark after the Berlin wall fell.

In 1992, Soros did even better. He became an overnight legend when he grabbed a sweet $1 billion in a single day just by shorting the British pound.

What do these two traders have in common?

You could argue they applied their big macro themes to the currency market. But in reality, it’s even simpler.

They just followed the investment money. They knew the countries with the strongest fundamentals would attract the most investors – and the most cash. And the weakest countries would chase investors (and their money) away.

So they simply bought the currencies from the fundamentally strong countries and shorted the currencies from the fundamentally weak countries.

Simple, but brilliant.

Years later, it’s still embarrassingly easy to copy this killer strategy. But you need to know where the investment money is flowing. Today, it’s flowing straight into emerging markets like never before.

A New Era of Emerging Markets Has Already Begun

It’s no secret that emerging markets have done a complete 180 over the last decade. Take Brazil for example.

When I was growing up in Brazil, the country was a mess. We had very high unemployment rate, hyperinflation, political instability, you name it.

Today, Brazil has an all-time low unemployment rate, record consumer confidence, and an uncontested thriving economy.

Brazil is not alone. Many other emerging market nations are going through the same experience. What happened to them? They simply learned from their past mistakes.

During the 1990s, there was no better place to find economic turmoil than emerging markets. The Mexican peso crisis in 1994, the Asian crisis in 1997, and the Russian debt default in 1998 were some of that decade’s highlights.

Surviving a crisis is a harsh lesson for everyone involved.

Naturally after enduring a crisis, most emerging markets wanted to ensure it never happened again. So leaders started making some serious reforms.

Today most emerging markets are collecting the fruits of those reforms. Most are sitting on piles of cash.

That’s one of the reasons most emerging markets recovered so quickly from the recent global recession especially compared to the big developed nations like the U.S. and E.U.

Emerging Markets: Where The Action Is

The contrasting situation between emerging market and developed nations creates a mixture of push and pull factors.

Developed nations are plagued with very high levels of debt, weak economic growth, and rock bottom interest rates. This bad scenario doesn’t attract investors. Instead it pushes investment cash outside the country.

Emerging markets have low levels of debt, very healthy economic growth, and rising interest rates. That’s why more and more investors are turning to emerging markets.

In the last few quarters investors have been pouring billions of dollars into emerging market nations. The graph below shows how these countries’ stronger growth is attracting investment cash, according to the estimates from the Institute of International Finance.

As you can see, these emerging markets are becoming little cash cows for investors from all around the world…

The Best Way to Profit From These
Incredible Opportunities

It’s amazing how much money is flowing into these emerging markets. These capital flows are very important to currency traders because it practically guarantees these countries’ currencies will rise against the dollar.

They create very profitable trends for those who are trading in the spot market, especially when there’s a well defined trend in the dollar. And that’s exactly what we have right now.

Thanks to Bernanke’s new $600 billion quantitative easing plan, you know the dollar is heading no place but lower.

As a currency trader, you can simply pair these stronger emerging market or “exotic” currencies with the weak dollar for some decent gains.

During the last weak dollar trend over the summer, I helped my Exotic FX Alert subscribers pair the weak dollar with the stronger Mexican peso and Polish zloty for gains of 46% and 108% (among others).

It’s a simple strategy. But it really is as easy as watching where the capital flows will head next and being ready to jump on these opportunities in the spot Forex market.

Bottom line: Emerging markets are where the money is heading.

Best Regards,

Evaldo Albuquerque, Editor
Exotic FX Alert

What Gold’s New High Really Means

Gold: Back in the News …

By Bob Bauman JD

Dear Sovereign Investor,

No, I don’t mean because gold hit an all time high price yesterday, as gold futures smashed through the US $1,400 per-troy-ounce mark.

I am referring to the fact that the president of the World Bank, Robert Zoellick, wrote yesterday in a Financial Times article that leading world economies should consider “employing gold as an international reference point of market expectations about inflation, deflation and future currency values.”

Zoellick’s argument was simple recognition of the current reality. No matter what the U.S. Federal Reserve or other fiat money issuers say, gold is being sought out as an alternative currency right now. Smart people have faith in gold and declining faith, if any at all, in the sinking U.S. dollar.

Gold is the “anti dollar” and that’s why it is wildly popular now as a result. As Zoellick put it, “Although textbooks may view gold as the old money, markets are using gold as an alternative monetary asset today.”

If any proof is needed of that statement, gold closed at records last Friday and Thursday but the precious metal has scored 17 record highs in less than five weeks in September and October. The latest string of records came after the Federal Reserve’s decision to start another round of U.S. bond buying, pumping out an inflationary additional $600 billion over eight months.

The Gold Standard

When I served as a member of the U.S. House of Representatives I co-sponsored Rep. Phil Crane’s legislation that would have returned to the U.S. to at least a partial gold standard.

I have made my pro-gold views known in these pages on several occasions. You can go back and review my pro-gold thoughts if you wish.

Martin Wolf of the Financial Times correctly wrote a few days ago, before the new gold price high:

“It is not hard to understand the attractions of a gold standard. Money is a social convention. The advantage of a link to gold (or some other commodity) is that the value of money would apparently be free from manipulation by the government. The aim, then, would be to “de-politicize” money. The argument in favor of doing so is that in the long-run governments will always abuse the right to create money at will. Historical experience suggests that this is indeed the case.”

A Perfect Hedge

Think about it. Gold cannot be inflated by printing more. It cannot be devalued by government decree — as we have seen once again in the last few days, the free market dictates the price. And, unlike paper currency or investments in stocks and bonds, gold is an asset which doesn’t depend on anybody’s promise to repay.

Although gold has been mined for more than 6,000 years, only about 120,000 metric tons have been produced. Lump that together and it’s just enough for a cube measuring only 18 meters (about 55 feet) along each of its six sides. New gold mined each year totals less than 2,000 metric tons, about the size of the living room in a small modern house. Gold remains one of the scarcest, and most sought after metals on earth.

Time and again, gold has proven the successful hedge against devaluation of an investor’s national currency. It’s one of the few investments that survives, even thrives, during times of economic uncertainty.

Sovereign Society Favorite

For those who in recent years followed Sovereign Society repeated advice to buy gold, the investment has paid off handsomely.

With gold at record high prices and the world facing a prolonged period of economic turmoil, buying gold even now may be a good hedge against the future.

People who have known prolonged prosperity may not fully understand the historic implications of gold and its role when bad times arrive. Once those bad times arrive, (as they have now), gold again is being recognized as the one perennial investment that’s still “good as gold.”

Bob Bauman, JD
Legal Counsel, The Sovereign Society
Blog: http://bauman.sovereignsociety.com/

Forget Swiss Real Estate – Bargains Beckon in Zurich Stocks

By Eric Roseman

Dear Sovereign Investor,

Low interest rates, strong demand for housing – coupled with the conviction of potential buyers that real estate investments are not a risk – are the perfect ingredients for a bubble.

This story is currently playing out in Switzerland’s real estate market.

A potential real estate bubble remains a top concern as Swiss mortgage credits expand at a fast pace, resulting in continuously elevated price increases.
What does the Swiss real estate bubble mean for you?

It’s important to underline what’s happening in Swiss property because so many offshore investors hold the Swiss franc.

Today, the Swiss franc remains strong. After the Norwegian kroner, it is the healthiest currency in Europe based on trade and budget surpluses, and reduced foreign debt obligations.

More than any other currency beyond the U.S. dollar, the Swiss franc plays an important role in most offshore portfolios and foreign accounts as a long-term store of value. And any anomalies in Swiss assets – including real estate – could impact domestic capital markets.

So while Swiss real estate isn’t a good deal right now, the real opportunity is in Swiss equities.

The Bubble in Swiss Credit

Since early 2009, the Swiss National Bank (SNB), famous for its conservative state of financial affairs and the Father of the mighty Swiss franc, has been the bastion of rapid credit acceleration. As a result of cheap money, it’s also fostering a bubble in real estate as Swiss short-term interest rates remain around 0.40%; mortgages can be had at around 2% or less.

Click here to view larger image

Over the past 12 months, Swiss National Bank assets have ballooned by 35.9% while growing more than 50% alone over the past six months, according to Grant’s Interest Rate Observer. Over the past three months, Swiss bank credit has mushroomed by 29.4%.

What’s amazing is that all three reporting periods rank as the biggest growth in central bank credit among the largest central banks in the Western world. Even more amazing is how this can happen to such a conservative central bank.

Blame it on the credit crisis.

Swiss-Style Quantitative Easing

Starting in March 2009, the SNB began to aggressively purchase EUR in order to maintain export competitiveness and depress the value of the surging franc. That’s when the SNB launched its own version of Quantitative Easing or QE, buying back Swiss government bonds and ballooning its balance-sheet with government securities and a truckload of Euros.

But is also looks like the Swiss borrowed from the United States and embarked on a real estate credit binge over the past few years.

Low real interest rates have already fueled big bull market bubbles in Western real estate over the last decade with dire economic consequences once they collapse. And collapse they always do.

Real Estate on Steroids

Swiss real estate, always steady and always as solid as the currency it’s denominated in, has started to take-off in several Cantons around Zurich.
A close friend of mine in Switzerland is already active since 2007 in Swiss residential real estate and calls the cost of Swiss money “exceptionally cheap financing.”

I suppose others think the same and have started to buy whatever supply is left in a market that’s traditionally been very tight. Yet super low rates combined with low vacancy rates of under 1% in Zurich can only mean one thing – higher prices.

According to Zillow.com, Swiss residential real estate prices have surged 22.9% over the last 12 months. Throw in some leverage and cheap financing and you’ve got a superb speculation on steroids.

For now, the party continues in some of the hottest real estate markets in Switzerland.

Low rates usually mean only one outcome: Speculation with a bad ending once the music stops.

But there is an Alternative for Investors

Swiss real estate isn’t a great franc-denominated investment right now – at least in most areas that have already appreciated.

But, the Swiss SMI Index in Zurich offers great bargains supported by the highest interest rates compared to bonds and money-markets in decades. And that’s where the value is.

The reason for this is that many large-cap Swiss stocks, like two of the open positions in The Sovereign Individual Portfolio – a best-of-breed global pharma player and the world’s largest food company – pay dividends far in excess of Swiss benchmark government bonds.

Swiss equities have trailed other European averages in 2010 and that makes them attractive since a strong franc has crimped some exporters.

Overall, the stock market is extremely attractively valued and provides long-term investors a good entry point with low multiples and high dividends in one of the world’s strongest currencies.

I’ll take large-cap Swiss stocks any day compared to most residential Swiss properties. Bargains beckon in Zurich stocks.

Eric Roseman
Editor, Commodity Trend Alert
Blog: http://roseman.sovereignsociety.com/

The Trade of the Decade

And it’s Not a Guess. It’s Legal
Inside Information.

By Jeff D. Opdyke

Dear Sovereign Investor,

Let’s say I’m an insider and I’m telling you in no uncertain terms the exact actions I’m taking – actions that, if you invest based on the information, will make you some money.

Do you pursue those profits?

It sounds illegal, right? Ivan Boesky … Securities and Exchange Commission violations … prison showers.

Only, in this case it’s not illegal at all.

The information is out there for every investor to consume, analyze and act on. Most won’t think to act. Some won’t know how to act. But those who follow through will assuredly accumulate profits.

How much? Might be 30%; might be 50% – might be much, much more. These things are never clear before the fact.

But the point is, the investment is assuredly a winner.

And that investment is: the Chinese yuan.

The insider: Zhou Xiaochuan, governor of the People’s Bank of China.

Mr. Zhou Goes to Washington

Misguided, uniformed, vote-chasing U.S. lawmakers continue to push for sanctions on China – as though China is to blame for America’s inability to manage its finances prudently and the Obama administration’s inability to grow the jobs market quickly.

Not understanding the real ramifications of what they’re seeking, American policymakers insist China is manipulating the yuan and beggaring the U.S. (never mind that America’s current currency policies are beggaring the rest of the world).

But Mr. Zhou is clear in telling America to shut its apple-pie hole – though he’s much more diplomatic than that.

The central banker earlier this month told the National Press Club in Washington, D.C., that aiming to correct global imbalances by forcing China to quickly rebalance the yuan is the wrong approach.

“People may not have that kind of patience, so they would like to see a quick change in the balance, but it may cause a kind of overshooting,” the central banker said.

For “people” you can insert Messrs. Bernanke and Geithner, Democratic Sens. Chuck Schumer, Harry Reid, Nancy Pelosi … really, just about any Congressional member and/or policymaker overseeing the U.S. economy and constantly yapping these days about China’s currency policies.

I’m not defending China. They yuan clearly needs to revalue, and it will – over time. But the U.S. is trying to teach a dragon to sing from an American songbook, and the dragon doesn’t care for all that jazz.

And therein lies the profit opportunity.

China’s Unmistakable Message

Mr. Zhou, in a recent opinion piece in China Finance magazine, published by China’s central bank, said the government will continue to hew to its long-standing plan to keep the yuan “basically stable at a reasonable and balanced level.” To achieve that, he wrote, the People’s Bank of China will “dynamically manage and adjust the yuan exchange rate under the trading band that has already been announced.”

Strip out all the bureaucratic language and the message couldn’t be clearer: China will manage its currency based upon its own, domestic priorities … and China will allow the yuan to strengthen against the dollar, but at a pace China deems appropriate.

In the currency market, it’s not very often that an insider dishes up reliable information on an assured winner. But Mr. Zhou, perhaps the insider-est of insiders, is telling you, point blank, that the yuan is going higher against the dollar – China will see to it.

But he’s also telling the U.S. to drop the hissy-fit already and get back to managing what really needs managing – the U.S. economy.

The Trade of the Decade

As for the investment angle here … buy the yuan. And hold it.

For a long time.

In the currency world, the yuan will be the trade of the decade – which also happens to be the belief of one of the smartest currency guys I know – Chuck Butler, president of EverBank World Markets, who I first interviewed years ago when I covered the markets as a reporter for The Wall Street Journal.

At the moment, China is committed to letting the yuan trade within a 2% band. And each time China widens the band, the yuan quickly appreciates to the maximum end of that range.

Simply extend an annual 2% band expansion across the next decade – not illogical, given China’s commitment to a managed rise in the yuan – and you get a 26% rise in the yuan against the dollar.

But over the next decade it’s not hard to imagine that China will freely float the yuan. Technically, that has already happened in Hong Kong, where locals can trade the yuan back and forth as much as they want.

When that happens, you won’t see a 2% expansion of the trading band. You’ll see the yuan surge against the greenback.

My call? An investment in the yuan returns at least a 100% gain in dollar terms in the next decade. That means that by the end of 2020, US$1 buys just 3.3 yuan. (Today a buck buys about 6.6 yuan; if you spend a dollar to own those 6.60 yuan, you’ll have 6.60 yuan a decade from now and you’ll be able to buy back $2 – that 100% gain).

Why Buy the Yuan?

Look, you have China committed to increasing the yuan’s value over time. And you have the makers of American monetary policy committed to killing all value in the dollar as they try to re-inflate American assets with untested economic policies.

Bernanke, Geithner, et al. haven’t explicitly said the dollar is dead – they can’t say that without causing a major brouhaha here at home.

But Mr. Bernanke certainly has implied as much in his singular focus on stoking inflation and reducing joblessness at any cost. In doing so, he has completely ignored the impacts his policy decisions have on the dollar. (Comically, Mr. Geithner keeps talking about a “strong dollar” that is as laughable as it is demonstrably wrong.)

Ultimately, what we have is one guy telling you his elevator is going up, while the other guy promises you his elevator is going down.

I know which elevator I’m jumping on.

Which one do you want to ride for the next decade?

Until next time, keep a global view …

Jeff D. Opdyke
Editor, Emerging Market Strategist
Blog: http://globetrotter.sovereignsociety.com/

The Greatest Investment Story in a Generation

The China (Consumer) Syndrome

More Pay = More Profits for Investors

By Jeff D. Opdyke

Dear Sovereign Investor,

Would an extra $29 a month improve your lifestyle?

I’d bet the answer is no. For the average American family, $29 is just 0.8% of monthly income. It’s $3 less than my wife I spent on lunch at a local Mexican eatery a few hours before I sat down to write this.

In short, it’s a fairly trivial amount.

But if you live in China’s Yunnan Province, in the city of Kunming, and you’re an employee at the KFC on Teng Bai Road near Yunnan University, $29 means something. It’s the size of the pay raise the fast-food chain gave you and your fellow employees over the summer … and it represents 17% of your monthly income.

For the average American, that $29 is the equivalent of a $570 monthly pay raise.

So let me ask you the question a different way – would 17% more money each month improve your lifestyle?

Bigger Paychecks Coming Today…
and Tomorrow

China’s rising wages is a topic I’ve written about in the recent past.

But I’m coming back to it today – and from an on-the-ground perspective – because the issue defines some of the most profitable opportunities for investors over the next couple of decades.

It’s also an issue China is now addressing as the country assembles its 12th Five-Year Plan. That’s China’s roadmap to societal improvements and economic growth through 2016. And this latest plan, the details of which will emerge next spring, is certain to push wages higher by 15% to 25%, maybe more, in each of the next three to five years.

China’s leadership is hell-bent on creating a more-balanced economy by downscaling dependence on exports. Chinese leaders want to spur domestic consumption so that the economy is better able to withstand global shocks that disrupt trade.

And lawmakers know that if you put more money in workers’ pockets, those workers will spend more money

This year so far, provincial governments across nearly the entire country have raised minimum wages, typically by between 20% and 30%. With the Five-Year Plan that’s now in the works, paychecks in China are set to grow even larger, quickly.

But look at how income has grown in China in recent decades. (Visit this link to see the surge in urban and rural income.)

Who wouldn’t want their income to grow at such a rapid clip? (The date ranges are different because I don’t have comparable data for rural income, but the same trend is apparent over a shorter time span.)

Let’s put that in perspective: China’s lowest-paid workers (and our urban-based KFC worker falls between “lowest income” and “middle income) have seen their pay rise by an average of 10.7% over the last two decades. American workers – starting from a larger base, granted – have seen per-capita income rise 1.8% annually since 1988.

But those are just numbers. As I said, this dispatch is really about looking at income from an on-the-ground perspective. After all, it’s the people behind those numbers that bring to life an economy and the companies.

So, let’s hang out with that KFC worker to gain a better understanding of where the money is going so that we, as investors, can begin to see potential long-term winners in China’s ascendancy …

China’s Manifest Destiny

Kunming is the capital of Yunnan Province, in China’s deep south, where the country presses into Myanmar, Laos and Vietnam.

This is a “second-tier city,” meaning it’s not an eastern seaboard megalopolis like Shanghai, Beijing or Guangzhou. Kunming has roughly 3 million people in the urban area and ranks as China’s 24th largest city. But with its location so far inland – about 1,000 miles from Guangzhou, on the Pearl River delta – Kunming has largely been an economic afterthought.

Today, second- and third-tier cities are the place to be.

China is driving growth in these all-but-forgotten towns through policies and incentives – like minimum wages strategically lower than on the east coast – that encourage companies to locate manufacturing plants inland, thus, spreading the wealth across the country. In effect, China is implementing its own Manifest Destiny.

In response, companies that serve consumers are pushing westward, too, reaching hundreds of millions of new customers who have an increasing amount of money to spend.

These include the obvious arrivals, like retailers, but also apartment-tower developers, shopping-mall owners, modern hospitals and neighborhood pharmacies, and new, local airlines to serve gleaming new airports.

There are the new-car and motorbike dealerships and the new highways and toll roads to get around town … or the country.

And, of course, water companies and natural-gas providers are arriving and running new pipelines to parts of the city previously unserved.

Arriving as well: hygienic, hypermarkets and department stores (some foreign; many local) that are replacing street-side wet markets and barebones stalls. They stock fresh produce grown by Chinese agribusinesses and packaged goods like infant formula, heat-and-eat noodles and bottled teas … all made in China, many of which are national brands, and some of which are going regional and global.

This trend toward increased consumerism contains untold profits.

China’s Generation of Spenders

With his $29 monthly pay raise, our KFC worker now earns 900 yuan a month, or about $135. At that level, he brings home 70 yuan (US$11) more than the minimum wage.

As a service-sector worker, though, he still earns less than Yunnan’s urban-area per-capita income of 1,586 ($239). But he has built his lifestyle on a smaller salary and now, with 17% more income, he has money to either increase his savings or increase his spending.

Chances are he spends.

He is part of the Little Emperors, a generation of coddled kids, mainly boys, created in the 1980s and ‘90s by China’s one-child policy movement. Since girls marry and end up helping a husband’s family, Chinese couples, who could only have one child as a result of this policy, got rid of baby girls and kept the boys.

Those are some spoiled kids today. Like America’s Baby Boomers, they’ve always gotten what they want. And they know parents and grandparents will leave their wealth to this one child.

Thus, our KFC worker is eager to spend. And in the new China, temptations abound.

A Day in the Life of the New China Consumer

Two miles from his work: New World Department Store’s Kunming location, a mall-like store that attracts the young and trendy.

He’s meeting his fiancée in the basement there to grab dinner in the café and to shop at the supermarket. But first, he has two quick errands. He stops to deposit his paycheck in his first bank account, at the China Construction Bank branch on Qingnian Rd, and then ducks into the Li Ning outlet a few blocks farther down. He has wanted a pair of tennis shoes made by China’s most famous athletic-shoe firm, and his income now allows for the splurge.

He knows he has plenty of time to shop because his fiancée said she was stopping by the Shiseido cosmetics store a mile to the west. Like so many working Chinese women, her discretionary income is growing, and much of it goes to make up, particularly Japanese brands.

Our chicken-fryer has found his shoes and pays for the purchase with his new China UnionPay credit card, a financial service new to him. Within a decade, he’ll be part of the largest base of credit-card users in the world.

The Grocery List

After a quick bite in the café, our KFC worker and his fiancée stroll through the supermarket in the basement of the department store to pick up a few items before heading to their apartment.

When they were small kids shopping with their parents, they would have stopped at a much-smaller market stall or a no-frills convenience store – and in both instances the selections would have been minimal and the branding basically non-existent.

Today, they take for granted the ability to buy anything they want at stores stocked with branded goods from around China, around Asia and around the world.

On their grocery list:

- Want Want Rice Crackers, one of China’s most popular snack crackers, made by Shanghai’s Want Want Holdings.

- Vitasoy chocolate soy drink, a product made by Hong Kong-based Vitasoy International Holdings. This drink is popular among Chinese who are adding more-nutritious foods to their diet as their incomes increase – and dairy and soy are two of the fastest-growing segments.

- Sweet corn, grown by China Green Holdings, one of China’s premier emerging agribusiness leaders. Rising incomes are also allowing Chinese consumers to buy better produce.

- A case of iced jasmine green tea. Ready-to-drink tea is the fastest growing soft-drink segment in China. This couple grabs a brand produced by Japan’s Ito En Ltd., which has been selling into China for three decades and is seeing its sales take off these days.

Bountiful Ways to Profit from
China’s Consumerism

Every company I mentioned is publicly traded in Asia, though I’m not saying any are buy recommendations at the moment.

I’m using them to illustrate my broader point: China’s expanding consumerism, fueled by the government’s push to increase salaries, provides savvy investors numerous profit opportunities. You just have to stop and think about how you would spend more money, if you had it, and where to find the companies in Asia that are the beneficiaries of that spending.

The story I just laid out represents maybe an hour in an average Chinese worker’s day. These sorts of consumer decisions happen all day long, and touch everything from travel to healthcare, banking to recreation.

They are exactly the kinds of opportunities I continually search for as an investor in Asia, and as the writer of the Emerging Market Strategist investment service. Based on what I’ve seen firsthand in my travels across Asia in the past decade, investors without exposure to Asia’s growing middle class – particularly the Chinese middle class – are missing the greatest investment story in a generation.

Until next time, keep a global view …

Jeff D. Opdyke
Editor, Emerging Market Strategist
Blog: http://globetrotter.sovereignsociety.com/