Alan's Finance Blog

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/

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/

Exclusive Interview with Ron Paul Reveals Major Concern about U.S. Gold Supply

By Bob Bauman

Dear Sovereign Investor,

Yesterday I got a rare chance to talk to an old friend of mine who has by now become a household word to many concerned Americans — U.S. Rep. Ron Paul (R-Texas).

I first came to know Ron when we both served in the U.S. House of Representatives in the 1970s – and we almost always voted alike on the issues.

I am certain that most of you recall Ron’s 2008 presidential campaign and the surprising enthusiasm and support this avowed Libertarian was able to generate. While he did not come close to winning he received over $32 million in contributions, almost 99% from individuals — and he produced an army of true believers that is still around.

None of this surprised those of us who have known Ron for a long time, but his candidacy was a shock to the leftist elites and the liberal news media.

In my recent conversation with Ron, he made some startling revelations to me.

What Ron Paul Revealed
Exclusively in Our Conversation

He told me he is considering another campaign for president of the United States. “It’s something I think about every single day,” Ron told me.

Earlier this year, he won a somewhat surprising victory in the Conservative Political Action Conference’s (CPAC) presidential straw poll.

Political observers say that this two-time presidential contender could wreak havoc for Republicans if he decides to make a third-party or independent bid for president in 2012.

Ron cited an increased national awareness and new enthusiasm for his Libertarian views that he said resulted from his 2008 campaign. It will be a “tough decision” he said, but indicated that he thinks Americans are ready for a new direction in national politics.

Ron Paul’s Latest Demand May Send Gold Prices Soaring

What I found really interesting was that Ron called on the Obama administration to allow an audit of all government gold reserves. His goal is to determine their total amount and to see if there is official manipulation of gold prices.

Imagine what would happen to the price of gold, if true reserves turn out to be less than the stated amount.

Gold prices move the way most prices do – based on simple laws of supply and demand. If supply sharply declines, prices will soar. This could create a windfall for investors.

Earlier this year, Congress backed his call for an audit of the Federal Reserve. Chances are Congress will back his demand for the gold supply audit, too.

What an Audit Could Mean for the Dollar

If an audit showed the U.S. to have significantly less gold in reserve than stated, creditors world-wide may push hard for a new world reserve currency. They may demand that the U.S. increase its gold supply – a tough thing to do right now amid sky-high government debt.

Either way, the dollar will suffer.

Ron told me, “eventually the dollar is doomed” as the world’s reserve currency unless the U.S. government abandons its international “imperial” policies and leaves both Afghanistan and Iraq.

These are just a few highlights of our conversation. I recommend you listen to the full Ron Paul interview at

http://www.globalconferencecall.com/playback.html?m=sovsoc/conf84318_32013.mp3

Bob Bauman JD

Legal Counsel, The Sovereign Society

What Little Investment Means Christmas in July?

Enjoy the Gifts that Keep on Giving When
You Invest ‘Down Under’

New Zealand is an awkward place for an American at Christmastime, as I learned during a trip there this past December.

That’s mid-summer in the Southern Hemisphere, and families spend their holiday at the beach. Yet, all the winter trappings of Santa season are on display wherever you look. Really disconcerting.

I’m reminiscing now because it’s Christmas in July in New Zealand (where it’s now winter and, thus, oddly appropriate). And it has a summer fruit that’s ripe for the picking right now. I’ll explain…

Central bank governor Alan Bollard is playing Kris Kringle. His agency, the New Zealand Reserve Bank, raised interest rates for the first time in three years.

They pushed up the Official Cash Rate last month by 0.25% (or 25 basis points, to the hardcore finance crowd).

Small nudge, true. But the move means the land of Middle Earth is now on board with central bankers in Canada, Australia and Norway, who have also recently raised rates. They all sense what’s really going on with all this phony money sloshing around the world.

They all want to head off inflation before inflation takes the head off their economies.

For an investor like me (someone who globe-trots to find profitable opportunities outside America), this is fine news! Suddenly, New Zealand is back on the investment radar.

Anytime a stable, financially viable country raises its rates vis-à-vis my hometown U.S. dollar, I perk up.

New Zealand’s assets are suddenly more attractive. The interest-rate spread between the N.Z. dollar, or “kiwi,” and the greenback has widened.

This makes the kiwi more appealing – it is worth more and more of my dollars. And that means good things for my preferred global investments: dividend paying companies.

The way I see it, if the kiwi’s appealing, then kiwi dividends are even more appealing.

When an economy is growing (which a rate hike clearly hints at), then corporate profits are expanding.

When corporate profits expand, companies generally share the wealth in the form of bigger dividend payouts.

And larger dividend payments when the kiwi is gaining ground on the dollar equals more greenbacks when you bring your money back home.

Sounds pretty good to me!

Got Milk?

I’m not saying N.Z. stocks are suddenly up, up and away. The world remains a dicey joint.

Economic, market-based and politician (yes, you read that last one right) risks lurk around every corner. Sometimes they’re waiting in broad daylight with a big club to beat you over the head – particularly the politician risk (and particularly the U.S. politician risk).

That said, N.Z.’s baby step toward interest-rate normality means one thing to me as an investor … that it’s time to start mining this tiny nation for investment values before professional investors jump in with two hands groping for an alternative to the S&P 500 and the Dow.

Commodities – agriculture in particular – rule New Zealand’s economy.

Here’s a fun fact: Despite a Hobbit-sized land mass, New Zealand accounts for about 35% of the global dairy trade.

Kiwi cows are keeping Asia, especially China, fat and happy. In case you haven’t heard, dairy consumption is growing in Asia faster than you can say “cheese.”

And early investors in this sector are going to smile – all the way to the bank.

Kiwi interest rates will keep climbing and New Zealand’s commodities will gain a higher profile. And the best gains will come not to those who wait. Don’t be late to the party.

Now, this rate decision could definitely be a case of central bankers testing the waters.

Sure — maybe they just want to gauge how markets react and how the economy responds. The new rate-hike cycle may not go full force until fall. Who knows?

But whatever the case, the point remains the same: Institutional money will hit New Zealand sooner than later.

And I think you should be there first.

Look, N.Z. is not a huge market – just $50 billion or so. For comparison, Dow Jones Industrial Average component 3M Co. alone is $53.3 billion, give or take. An inflow of money into such a smallish exchange bears meaningfully on returns.

So, where would I be looking?

Yield, Baby, Yield …

I’ve been involved in New Zealand’s markets since 1995, and I can tell you the industries I’m nosing around include telecom, manufacturing, building materials, property, retail, healthcare and food.

N.Z. has some fine companies paying very attractive dividends – attractive like 4% to 9%!

So, I mean Attractive.

And these aren’t those loopy dividends that a troubled company is likely to axe in a couple of months. These are stable dividends paid by stable companies, whose stock prices just happen to be down these days because of that little global dustup we had.

I know some will grumble about “the consumer,” given the supposed near-extinction of that animal amid The Great Purging of the last few years. But N.Z.’s economy is looking up. Joblessness has fallen. Consumer sentiment is up, though consumers do remain cautious. Nevertheless, those are wonderfully divergent trendlines, given what the U.S. still struggles with.

And others will kvetch that higher interest rates are, in textbook terms, bad news for companies since rising borrowing costs pinch earnings. True. But coming off such low levels—the new rate is just 2.75%, after all—interest rates need to rise a good deal before hindering corporate growth and spooking investors.

Think about it this way: In the 1990s and the middle years of the last decade, rates in the US were in the 5% range … and down in N.Z. they were jumping around between the 6% and 8% range … and stock markets were whistling a carefree tune.

So I don’t have big fears that a new interest-rate cycle will suddenly clamp off profit growth and send N.Z. stocks back into hibernation.

For those who like the taste of kiwi—and those who’ve never tried it—now’s a good time to start digging in the dirt down under.

Until Next Time, Keep a Global View.

Jeff D. Opdyke
Senior Editor, The Sovereign Society