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THE CARIBBEAN OFFSHORE FINANCIAL SERVICES INDUSTRY
This comprehensive thumbnail history of the Caribbean financial industry will be of interest to anyone who is a user or provider of financial services from one of the Caribbean jurisdictions. The author, Katie Sosna, lives is Dominica and assists people who wish to take advantage of that country's economic citizenship/second passport program, as well as helps people with standard offshore entity structuring (presumably using other jurisdictions for most of those).
The Caribbean nations' desire to diversify away from dependence on colonial-era commodities such as cane sugar, coffee and bananas led them first to tourism and then, having observed the success of Switzerland, financial services. The financial services initiatives were very successful until the O.E.C.D. struck back with its "Harmful Tax Competition" report followed by sanctions in 1998, which devestated most Caribbean nations' financial services industries. They still remain a diminished and much tamer version of their former selves, but are far from a totally spent force and can be quite useful once the limitations are understood.
The development and growth of Caribbean islands into sound, independent economies and societies has been the result of a colourful and turbulent history. The current offshore industry is a strong and viable economic contributor to many of the Caribbean islands and is presently weathering the storm of the ongoing economic crisis.
The Caribbean comprises an array of diverse countries with varied historical legacies and present day governmental systems. Achieving strength through unity lies at the core in the development of Caribbean islands. With progressively advancing economies, representation as a body with one voice is a key in assuring regional success.
One of the first major attempts made toward unifying the Caribbean islands under a single government was embarked upon through the establishment, in 1958, of the British West Indies Federation, which was the formation of a Federal Government encompassing 10 member countries, then known as the British West Indies.
The Federation, however, folded upon the sudden withdrawal of Jamaica and Trinidad and Tobago in 1962. The ensuing discussions on reviving the defunct West Indies Federation achieved success on July 4th, 1973, with the signing of the Treaty of Chaguaramas by which the Caribbean Community and Common Market (CARICOM) was created.
The establishment of CARICOM culminated as several of the islands were in the process of attaining full independence from Britain; for example, Barbados and Guyana (1966), Trinidad and Tobago (1962), the Bahamas (1973), Dominica (1978), St. Lucia, St. Vincent and the Grenadines (1979), Antigua and Barbuda (1981). Presently, the members of CARICOM are Antigua and Barbuda, the Bahamas, Barbados, Belize, Dominica, Grenada, Guyana, Jamaica, Montserrat, St. Kitts & Nevis, Saint Lucia, St. Vincent & the Grenadines, Suriname and Trinidad and Tobago.
Membership of CARICOM is open to any other State or Territory of the Caribbean Region that is, in opinion of the members, able and willing to exercise the rights, and assume the obligations, of membership. The revised Treaty of Chaguaramas of 2001 established the Caribbean Community, including the CARICOM Single Market and Economy.
Countries such as Aruba, Bermuda, Cayman Islands, Colombia, the Dominican Republic, Mexico, the Netherland Antilles, Puerto Rico and Venezuela have acquired Observer Status in different institutions and ministerial authorities within the Community and CARICOM.
The economic mainstay of the islands during both the colonial and post-colonial periods, was in the production of cane sugar, coffee, bananas, spices and citrus. However, strengthened competition, due to eroded trade preferences and the entry of new suppliers into what were previously closed markets, evinced the need to diversify the economies of these small island nations.
At the Barbados Investment and Development Corporation Conference on May 31, 1996, Dr. Compton Bourne, President of the Caribbean Development Bank (CDB), associated the new challenges with the advent of globalization, which he stated, "includes the deepening of international trade relations evidenced by higher ratios of trade to national incomes and by higher ratios of imports to national income.
Countries have become more trade dependent. At the same time, globalization has been attended by strong movements towards regionalism which in the case of industrial Europe and North America have ensured that trade deepening and the benefits associated with it have been largely confined to the countries within those trade groups."
Dr. Bourne also noted that:
"A very important concomitant of globalization is the erosion of trade preferences from which small Caribbean economies have traditionally benefitted. The affected commodities are mainly agricultural and agro-industrial (bananas, rice, sugar and rum), but manufactured commodities may also be affected.
"The removal of trade preferences has proceeded at a faster pace than the dismantling of protectionist barriers erected against agricultural and manufactured goods in which developing countries, largely because of labour cost differentials and natural endowments, would have competitive advantage."
With the hope of offsetting some of the damage done by the decreasing export of goods, many of the islands looked towards tourism as a means of diversification. It was felt that the tourism industry would bring a host of associated benefits such as infrastructural development through the construction of international airports, hotels, a service industry and upgraded road networks, which would act as primary catalysts for economic and social change.
However, whilst tourism did succeed in boosting the economies of many Caribbean nations, the region was learning fast not to put all its "eggs into one basket." Thus serious steps were taken to evolve a financial industry that could contribute to each island's economy and make use of the emerging technological capacity that allowed for business to be done on a transnational level.
IBCs came to the Caribbean in the early 1980s.
Many Caribbean governments had long seen the importance of adapting rapidly to an increasingly fiercely competitive global environment and the danger that small developing economies could face in the absence of a policy framework for financial interrelations with the global economy. From the early 1980s, islands such as the British Virgin Islands (1984), Bermuda (1981), Barbados (1982), Antigua and Barbuda (1982) and the Bahamas (1989) enacted International Business (IBC) Acts alongside the development of their tourism industries in an attempt to identify economic activities that would reassure a continuous and substantial flow of revenue. Other islands, namely, Belize, Anguilla, Dominica and St. Lucia followed suit by enacting similar IBC Acts in 1990, 1994, 1996 and 1999 respectively.
One of the motivating factors that led these governments to consider the financial services industry as an alternative was the wealthy economic status that Switzerland had managed to maintain as a result of its steadfast political, banking and financial principles. The offshore industry originated in Switzerland, a country which always remained neutral during war and as a result has been able to maintain its wealth and protect its financial interests.
This made Switzerland very attractive as a tax haven since both individuals and corporations internationally explored the possibility of protecting their assets by opening bank accounts, known today as Swiss offshore bank accounts. Additionally, the spread of similar Offshore Financial Centers (OFCs) throughout the world was due to a series of tax and financial restrictions that were imposed by governments in many developed countries during the 1960s and 1970s. High taxes and fiscal restrictions created an outflow of capital and deposits to less regulated and tax exempt institutions, such as Eurocurrency and offshore centers.
The Swiss strategy was being closely observed by many governments in search of ways to broaden the economic bases of their countries. Parallel to this, the British Dependencies of Jersey, Guernsey and Isle of Man were successfully progressing economically as their offshore and financial services centers grew to accommodate the masses of British and European citizens that sought offshore financial services to avoid the exorbitant taxes that were being levied both in Britain and throughout Europe.
Four main factors highlighted as the major catalysts in the emergence of OFC's are:
Moreover, globalization increased the ability of multinational corporations and financial establishments to move from one place to another. Capital and labor mobility, strengthened by market liberalization, the removal of barriers to trade and technological advancements in the area of software and hardware with which information is transmitted at the speed of light, propelled global offshore activity and investments.
- The removal of impediments to foreign exchange on the conversion by nonresidents of current earnings in Western Europe.
- The implementation of capital controls as a means of decreasing unsustainable balance of payments deficits recorded mainly by the United States in the late 1950s and several OECD member states during the 1960s.
- The imposition of high taxes and tightened monetary policies in an effort to curb balance of payment deficits due to fiscal imbalances in some OECD countries.
- The Glass-Steagall Act of 1933 which prevented commercial banks from investment banking and caused U.S. banks to seek to increase their banking activities in foreign currencies while expanding to new territorial horizons.
According to Ahmed Zoromé (2007), the Eurocurrency market grew at a remarkable pace during the 1960s and 1970s, with the shift of financial activities to Eurocurrencies gaining considerable momentum after 1966, when U.S. money market rates rose above the interest rate ceilings on dollar deposits allowed by Regulation Q (a regulation imposed by the U.S. government which limited the interest rates that banks could pay, as well as a rate of zero on demand deposits -- checking accounts).
This resulted in a credit crunch that, in turn, forced U.S. banks to seek funds in the Eurodollar market. During the years 1966-1977, the gross size of the Euro-market, that is the sum of all Euro currency liabilities including interbank deposits, grew 17-fold, from US$18 billion at the end of 1966 to US$310 billion at the end of 1977.
Cayman Islands capital market became the 5th largest in the world, while foreign investments in low tax jurisdictions within the Caribbean and South Pacific islands grew 10-fold from 1985 to 1994.
In the Caribbean sphere, the offshore sector flourished. Behind New York, London, Tokyo and Hong Kong, the Cayman Islands capital market became the 5th largest in the world, while foreign investments in low tax jurisdictions within the Caribbean and South Pacific islands grew 10-fold to over $200 billion from the period 1985 to 1994. By 1995, the British Virgin Islands had an estimated total of 60,000 registered IBC's accounting for 41% of all international business companies in the world.
Meanwhile, in St. Vincent and the Grenadines, the IMF estimated that the offshore financial sector contributed EC$30 million to the economy, that is, 3.5% of GDP, in fees, job creation, rentals and use of utilities. The St. Vincent and the Grenadines offshore sector was also reported to have grown rapidly and had a total number of 11,400 registered entities, of which 28 were banks, 608 were trusts and the rest included international business companies.
In 1999, Antigua and Barbuda had a total of 12,378 registered international business corporations. Coupled with tourism, the offshore sector in the Caribbean islands assisted in generating a satisfactory level of self-sufficiency by providing financial resources that promoted infrastructure development, created jobs and increased economic independence.
The OECD Empire Strikes Back
However, a few years within what seemed to have had developed into a success story of evolving offshore financial centers and economies was suddenly smothered. On April 9, 1998, a report entitled "Harmful Tax Competition: An Emerging Global Issue" was published and approved by the Organization for Economic Cooperation and Development (OECD). In this report, the OECD's definition of "Harmful Tax Competition" highlighted four key characteristics of harmful preferential tax regimes.
According to the OECD's definition, a tax haven is:
"A country or jurisdiction that imposes low or no taxes on certain activities (in particular, geographically mobile financial and other services), implements ring-fencing (whereby low tax rates or exemptions are mainly applied to non-residents and are partially or fully withheld from the domestic economy), lacks transparency (little or no disclosure of financial information, and has limited exchange of information with international authorities)."
This definition presented by the OECD was devastating to the economies of countries that already had an established offshore services industry or were in the process of developing one, due to the fact that the monies earned were either lost or significantly reduced and could not be easily replaced. Affected countries shared the opinion that the parameters set by the OECD for classifying offshore jurisdictions as tax havens transformed the fundamental principles of client corporate privacy and tax incentives -- the grounds on which offshore industries are built -- into serious offences against OECD member states.
Countries that were blacklisted as a result of the initiative also felt that the move entirely disregarded the rights of countries to implement their own social, political and fiscal policies as sovereign states, while they were being accused of modifying their laws with the sole intention of "robbing" foreign capital and causing financial distress by reducing tax bases and attracting foreign investors. The OECD's grip on the islands was only released with the support offered by the George (W.) Bush administration, which felt the plight of the small Caribbean states and strongly believed in free enterprise and encouraging competition.
The Caribbean islands were unprepared to confront the magnitude of the OECD initiative and the ensuing negative economic impact. Barbados, an economically stable CARICOM country, stood to lose 2,000 jobs which were created by the financial services industry and 1/3 of the government's revenue. Barbados's Prime Minister Owen Arthur was concerned about the island's inclusion on the OECD's List of Tax Havens since a collapse of the offshore finance and information services sectors would also signify the loss of a significant earner of foreign exchange and would have a negative direct impact on other related industries and social stability.
Dominica, St. Vincent and the twin-island nation Antigua & Barbuda were also hard hit by the OECD's initiative. In all three islands, the loss of fees, exodus of offshore banks and loss of employment destabilized these economies, bringing them to near collapse. In April 1999, even before the OECD included the islands on its List of Tax Havens, the United States and Britain issued an "advisory to their financial institutions, recommending enhanced scrutiny" for transactions in these islands. In an effort to have the advisories lifted, Caribbean governments implemented several measures to bring their offshore financial sectors in line with the requirements of the Americans and the OECD.
Some of the measures implemented by Caribbean governments included the revision and enactment of several offshore laws. Many of these legislations involved Anti-Money Laundering (AML) measures, which sought to combat illegal financial activities and erase loopholes from existing offshore laws.
For instance, Antigua & Barbuda effected many amendments to the Money Laundering (Prevention) Act and the International Business Corporations Act, Dominica passed the Money laundering (Prevention) Act and the Exchange of Information Act; in St. Kitts and Nevis, acts passed include the Financial Intelligence Unit Act, No. 15 of 2000, the Proceeds of Crime Act, No. 16 of 2000, the Financial Services Commission Act, No. 17 of 2000, The Nevis Offshore Banking (Amendment) Ordinance, No. 3 of 2000; and in St. Vincent and the Grenadines -- the International Banks (Amendment) Act, 2000 and the Confidential Relationships (International Finance) (Amendment) Act.
Furthermore, more than 3/4 of the offshore banks that were functioning on the islands were asked to move, while others that were discomforted with the state of affairs simply packed up and left. In Antigua, for example, several IBCs were made inactive and later struck from the country's Companies Registry.
CARICOM governments also held consultations with the OECD in an attempt to discuss ways in which both economic and legislative reforms could be implemented so that their respective countries could be removed from the organization's blacklist and without draining too much of the islands' economic resources in light of the damaging financial and political effects that were already occurring. Coupled with this, a Caribbean leg of the Financial Action Task Force (FATF), the Caribbean Financial Action Task Force (CFATF), was established.
Offshore services are perfectly legal, supported by legislations that regulate the operation and functions of offshore entities and the provision of offshore service by agents. The legislative and financial reforms undertaken by the CARICOM governments continue to provide an ever progressive framework for the construction of stable and safe offshore financial centers within the region. As technological advancements increasingly erase geographical boundaries, the task of keeping abreast with global changes will be an ongoing one for CARICOM governments.
Today, advanced telecommunications facilities enable offshore service providers operating within these jurisdictions to render quality and efficient offshore and financial services. State of the art company registries throughout the region ensure quick offshore company incorporation, normally within 24 to 48 hours, and secure formation document filing. Millions of people throughout the world are provided with offshore corporations such as trusts, insurance companies and IBCs which aid in relieving tax burdens and the constant threat of loss of assets and belongings to litigation claims.
Economic Citizenship emerges as an opportunity for small islands to gain foreign investment.
In addition to the offshore sector, Economic Citizenship also emerged as an opportunity for small islands to increase opportunities to garner valuable foreign investment. Although not available on a large scale as before, due to the cancellation of most programs throughout the world, Economic Citizenship has been viewed a major offshore product by a small selection of nations. Currently only offered by the two Caribbean islands of Dominica and St. Kitts & Nevis, these ongoing Economic Citizenship Programs are extremely well regulated, and are administered with stiff international due diligence checks and thorough application processes.
The Economic Citizenship Programs of St. Kitts & Nevis and Dominica continue to contribute towards development in key economic and social areas such as education, infrastructure development and healthcare. Acquiring Dominican and Kittitian citizenship offers the added advantage of becoming part of the Caribbean Community and Single Market, which is steadily growing and strengthening as a dynamic and unified group as it deepens and fosters ties both internationally and regionally.
By acquiring a second passport through Economic Citizenship, people from around the global are afforded the opportunity of living in economically, politically and socially stable countries. People, who live in countries where basic human rights and freedom are denied, are also able to enjoy freedom of expression, travel, and free enterprise. Economic Citizenship in both Dominica and St. Kitts allow for visa free travel to over one hundred countries.
In conclusion, with nearly a decade gone by, the development of Caribbean islands as key players in the global economy has, without a doubt, been challenged by many legislative issues and world circumstances. However, the will to prosper and secure a stronghold on the right policies that will propel the Caribbean islands forward into new eras, has already been established by the memories of the islands' hurdles over stumbling blocks throughout their history. Thus, the Caribbean offshore financial sector will continue to be a viable player in the global financial industry and offer valuable offshore services to clients from around the world.
The “Buyers Advantage”
A legend from the Godzilla of bear markets, 1929-33, was that after a particularly rough day near the end of the agonizing decline a young trader commented to an old trader: "Bad day, huh?" The old trader's reply: "Not for the buyers."
Has the great financial collapse resulted in bargain buying opportunities in Caribbean real estate? If we are to believe the author of this article, a real estate consultant specializing in the Caribbean luxury resort and hotel market, not in high-end properties such as beach-front land: "The downturn has not affected raw land prices that I can find, on any of the islands or Central America. If anything prices are edging up still. What is happening is that large pieces of land which have been sitting on our books for months, even years, have suddenly been snapped up in the last three months. A result I believe, of money moving out of banks and the stock market and into the safety zone of real estate, especially beach front real estate."
If true, it may indicate the pain has not gone on long enough. Or it may indeed be because the wealthy are hedging their bets and reallocating a part of their portfolios into real assets, including the high-end properties they are familiar with.
Exact timing of the recovery is of course an unknown. The author's range of 1-5 years is not exactly precise, but that is about as far as we would go too. In the long run we agree with the author of this article and many others we have featured in these pages: Investment will once again flow into the Caribbean and Latin America once the recovery commences. Those looking to move into the area in order to live well may also end up doing well. The wind, of which there is plenty in the Caribbean, will be at their backs.
I think many people are very, very pleased to see 2008 come to close. And all of us are looking for a brighter future in 2009 and beyond.
If you are a realist, you may find that an expectation of a brighter financial future a bit harder to manage than you would have done a few years ago.
The wisdom of the words engraved on King Solomon's ring by his shrewd chief advisor "this too shall pass" comes to mind. Legend has it that Solomon accumulated fabulous wealth and ruled his kingdom with justice and strength for 40 years. There are not too many modern leaders who can claim as much!
The real question is not whether its good or bad now. Let's face it, it is not good. But it will pass, and inevitably it will be good. The real question is what can you do now to position yourself financially to get the best, not only out the existing Caribbean property market, but also the future?
Let us ask some more questions to find this answer.
What did those smart property buyers who have gone through tough times in the past and done very well out of them do then, and now?
They took up the opportunity of what is known as the "buyers' advantage." A tried and tested formula. These cycles come round regularly ... and here we are again in a bear real estate market. There are many shrewd investors who have dumped their paper money and are buying into a property market, where developers and owners are being forced to sell ...
What did those property buyers who are really hurting now, do? They did the opposite. They waited for the good times to be well started, and while they were buying during the "boom" in a "seller's advantage" environment, the smart property investor (that bought during the last downturn at discount) was selling.
Here is the once in a lifetime chance, in an economic recession that is lower than anything we have seen before. A chance to get in at the bottom and be ready to sell in the upswing. Instead of buying during the upswing, like those people who have not seen the inevitable boom-bust economical cycles and learned how to really profit in both!
So, in this current economic climate, why is the Caribbean such a good investment opportunity?
FACT Recent wealth creation in developed countries has created a strong demand for safe, accessible, exotic vacation properties.
THUS In a sign of that positive growth, OPIC said exports from Central America in 2006 grew 10.4% from 2005 to 2006, to $20.4 billion. Investor interest is evident in not only the five Central American nations in CAFTA-DR (El Salvador, Honduras, Guatemala, Costa Rica and Nicaragua), but throughout the Caribbean Basin which encompasses all Central America countries and the island nations of the Caribbean.
FACT Changes in the global geo-political landscape through terrorism and violence have given the Caribbean region a new momentum as a safe haven.
THUS Investment opportunities in the English and French speaking Caribbean are supported by a good rule of law, rapidly improving/affordable telecommunications, political maturity and positive attitude to foreign direct investment and tourism.
FACT The strength of the Euro and the British Pound has given rise to an enlarged investor base eager to invest in "affordable" dollar-based assets. Real estate denominated in US dollars is also perceived as a natural hedge for US dollar based investors.
THUS The main sources of foreign investors in the Latin America/Caribbean region in 2007 were the United States, the Netherlands and Spain.
FACT Supply and demand are key factors and the Caribbean has annually 8 times the enquiries for accommodation than available. The flights are highly booked which is reflected in the prices both for the air travel and for the room or cabana. (From: Harlequin Property)
THUS "The recent downturn in the U.S. economy is not impacting the interest in the Caribbean," said Alec Sanguinetti, Director General and CEO of the Caribbean Hotel Association (CHA). "As a matter of fact, our Caribbean Hotel & Tourism Investment Conference drew a record-breaking 522 delegates," he said.
FACT The Caribbean is a prime tourist and secondary home destination with increasing direct access from North America and Europe.
THUS The12th Annual Caribbean Hotel & Tourism Investment Conference (CHTIC) concluded with a very optimistic outlook for the Caribbean region as a record breaking 522 delegates (up from 404 a year ago) met at the newly opened Hyatt Regency Trinidad and heard that there is currently more than $100 billion in investment in the region (according to the World Travel & Tourism Council) devoted to improving and expanding tourism facilities and infrastructure. "This is a clear indication that there is strong interest in the Caribbean from the investment community that is looking at the future."
FACT Local governments have matured with regards to their treatment of foreign direct investment.
THUS Latin America and the Caribbean received a record $105.9 billion in foreign direct investment (FDI) last year, up from $72.9 billion in 2006, according to the U.N. Economic Commission on Latin America and the Caribbean (ECLAC), due to regional economic growth and sustained global demand for natural resources. Within the context of global FDI, growth in Latin America and the Caribbean in 2006-07 reached 46%.
FACT The region has been overlooked by traditional institutional property funds due to barriers to entry such as decentralized legal, jurisdictional, financial and local government organization.
THUS Among developing regions, FDI in Latin America/Caribbean registered the highest increase (an average 17% rise in developing countries and 43% in economies in transition).
FACT Local institutional investors also recognize the value of co-investing or joint venturing with external investors.
THUS Latin America and the Caribbean received a record $105.9 billion in foreign direct investment (FDI) last year, up from $72.9 billion in 2006, according to the U.N. Economic Commission on Latin America and the Caribbean (ECLAC), due to regional economic growth and sustained global demand for natural resources. Within the context of global FDI, growth in Latin America and the Caribbean in 2006-07 reached 46%.
FACT The global credit markets are depressed and recessed, but the investment banking community continues to show strong interest in doing business in the Caribbean.
THUS In one of the first indications that JPMorgan is committed to maintaining the close relationships that Bear Stearns (JPMorgan is assuming control over some of Bear Stearns assets) enjoyed with many of the region's key institutions, JPMorgan recently confirmed that it is sending a senior delegation to the Euromoney/Latinfinance 2008 Caribbean Investment Forum. The delegation will be led by Joyce Chang, Global Head of Emerging Markets Strategy.
FACT U.S. Free Trade Pact Spurring FDI in Caribbean Foreign direct investment in the Caribbean Basin is increasing, in part due to a U.S. free trade agreement with the region, according to the Overseas Private Investment Corporation (OPIC). OPIC says the Central America Free Trade Agreement-Dominican Republic (CAFTA-DR) laid the foundation for significant economic growth in 2006 in such nations as Guatemala and Honduras, and spurred strong foreign investment in the tourism and mining industries.
THUS Ms. Chang confirmed JPMorgan's commitment to the region: "JPMorgan is strengthening and expanding it business in the Caribbean region. We were founded more than 200 years ago and have a proud history of, in the words of one of our founders, doing ‘only first-class business ... in a first-class way.’"
FACT The Caribbean is more than just a vacation destination, its also a steadily growing market full of business opportunities for international companies.
THUS The Merrill Lynch Global Wealth Report 2008 states "as signs of financial market recover appear, we project that high net work individuals will likely return to their pursuit of high returns, particularly in emerging frontier markets -- such as the Caribbean."
So you are convinced now that the Caribbean is a great current and long term opportunity to put your money? So am I!
Now we can dig down a bit and review some of the opportunities available. The downturn has not affected raw land prices that I can find, on any of the islands or Central America.
If anything prices are edging up still. What is happening is that large pieces of land which have been sitting on our books for months, even years, have suddenly been snapped up in the last three months. A result I believe, of money moving out of banks and the stock market and into the safety zone of real estate, especially beach front real estate.
A Variety of Options to Choose from ...
Waterfront property has always been hot. As Florida's coastal property becomes harder to find, more difficult to afford, and more constricted by regulations, the Caribbean is luring an increasing number of investors to its shores.
Resort operators are "falling over each other" to find resort sites in the region, says Florida broker Michael Saunders. The newer Caribbean resort properties are available at a wide range of prices, from $600,000 to over $4 million, and many condos at the lower end of that range can be rented out as hotel rooms when not in use by the owner to help offset carrying costs. Ritz-Carlton, Trump, The Raffles Hotel Group, St. Regis Hotels, and Starwood Hotels and Resorts are among the major players joining in the new Caribbean rush, according to Saunders.
Although the big resort operators are among the most prominent investors in the region now, the Caribbean market is still in its infancy, says Scott Berman of PricewaterhouseCoopers in Miami. A variety of investors are active in the region, and it is still possible to purchase a home and garden in a gated community in Panama for $75,000 and beachfront casitas in Belize for $99,000.
The Caribbean region suffers from an absence of equity risk capital in the US$5-50 Million bracket for property investments. This void creates excellent opportunities for providers of such capital.
The fund's investments will only be opportunistic in nature and involve purchase of assets at a significant discount and/or development to a higher use. It may be an investment pool the author is running or promoting, or it may be referring to funding opportunities in general.
It is unclear what "fund" he is alluding to here, as this is its first mention.
The recent subprime crisis and related credit crunch has reduced available credit and liquidity while demand for high end secondary homes remains. This has increased the number of opportunities and improved the terms that the fund can achieve on its deal pipeline thus increasing overall anticipated returns.
Furthermore there is limited competition in this investment arena. 20-40% off High End Luxury Resort and Residences Ritz Carlton, Four Seasons, Raffles, Fairmont, Trump Resorts, Viceroy, Mandarin Oriental, to name but a few of the major luxury brands building small and large resorts in the Caribbean. All of them and many other national brands offer fantastic off-plan pre-construction prices.
Wholesale purchases at the hi-end pre-sale level can often yield a 20-30% profit within a short time.
Which Caribbean islands are up and coming islands versus the established islands? Telling the difference between a true up and coming island (5-10) year appreciation) vs. an island that is going to take 10 to 30 years is not so easy. All islands want luxury progress sooner rather than later, especially if they have a luxury development being constructed today, but without a long term government supported infrastructural and implementation plan, it is an impossible dream.
- From 1,000 acre golf resorts, to 40 acre beach resorts, the opportunities just in the high end market are diverse.
- Prices from $400 per square foot to over $3000 a square foot
- Usually preconstruction prices are significantly below market and the opportunity to choose your specific villa, mansion, condo, bungalow or hotel suite is easier the faster you know about the development.
- Studies have show that a 5 Star hotel will significantly improve the surrounding area, and sometimes whole nations economy and spark a new upscale pride and price on the island.
My view is that buying in an established island carries the least risk. It has brand and market position, a suitable airport, amenities, international business people living and working there and some proven history of being stable.
But, this comfort and lesser risk comes at a price. And that price is really not worth it for most of us, only for the very fortunate few that have the willingness and ability to buy at prices per square foot that are higher than in our own home countries. Also, the appreciation on these islands, again, in my view, will not be as dramatic as a true up and coming island.
It is easy to spot an established island, Barbados, the British Virgin Islands, and Anguilla are established. There is very little land left, they have been catering to the rich and famous for many years, and are perfect if you are retiring today and have the funds and desire a pure high end lifestyle.
But if you are prepared to take a little more risk and wait the time and even participate in the growth of a small island, then look at an up and coming island.
Now or Later? : 5 to 10 years vs. 10 to 20 Years
First, this depends on your view of when the the economic market will be turning around. Let us assume the range is 1-5 years. If you believe that in 1-2 years we will be doing better, then you have got to search out a very very special deal. Perhaps a massive discount on units, interest paid or rental guarantees then you should go for that very special deal in a solid location.
If you think we are looking for a turnaround in the 3-4 year range, there may be opportunities now, but you have to ensure that you acquire the entire future discount now. In other words, make a low offer, but remember to still go after the best location, the best views, etc., even if this comes at a bit of a premium. This will always pay off down the road.
You also want to factor in your carrying costs and if you are leaning toward the 4-5 year range, pre-construction, with minimal down payment now, might be a great way to secure a great price, have relatively low carrying cost while it is being built over the next few years, then reap the rewards when its eventually constructed and the market is much better. Right now construction costs in some areas are lower than they have ever been, materials are not in heavy demand and a smart developer will be buying contracts now to ensure that he reaps the rewards of the current situation too.
Depending on your timeline for investment and or use, you will want to choose either an island that will be "luxury" in either 5-10 or 10-20 years. If you are relatively young, earning well, and want a pristine cheaper, island retreat for now, but in 20 years will want an island with proper hospitals and facilities, the latter maybe be better for you.
If you are looking for a place that will appreciate relatively quickly ("quick" in the current environment is 5-10 years -- no more "flippers"), then an island that is already on the luxury path as of a few years may be a better option for you, and this is where I see the best ROI for that time frame.
Summarizing: Why People are Investing in Caribbean Real Estate?
King Solomon was quoted as saying, "Cast in thy lot among us; let us all have one purse." This seems to me rather good advice too in the present climate of a strong Caribbean property investment. And, as we have established, King Solomon was a bit of a shrewd old fruit.
- The Caribbean is an attractive destination all year round
- Economically and politically stable countries
- Daily flights from UK and Europe and U.S.
- Tourism market not only reliant upon UK and European tourists
- Caribbean is well known playground for rich and famous
- The Caribbean has been named a HOTSPOT by Merrill Lynch global wealth report for 2008
- World class service is available on almost all the islands
- Most new developments are built to Florida hurricane building standards, the toughest standards in the world
Opportunities in all of these areas abound throughout the warm and sunny Caribbean. So while you are freezing this winter, why not cheer up and find some great deals now!
THE RICH REPORT INDEX: URUGUAY
Uruguay has consistently struck us as intriguing expat destination, for a lot of reasons. This report gives the country reasonably high marks as an investment opportunity, and goes on to add: "On the livability score, this tiny "Eurolatin" nation, with its near-perfect climate and friendly faces, could well be one of the most welcome spots on the fact of the earth."
If you took everything you love about Old World, moved it thousands of miles closer to heartland America, cut the prices by about 75% -- and then threw in a perfect climate and peace on earth -- you would likely be in Uruguay.
From the cobblestone, lamp-lit streets of Montevideo (where, according to the New York Times, "the past lives on in style") to the brilliant beaches and sparkling waters of Punta del Este (the leading resort in South America) and on out to the rich, rolling ranchlands of the Uruguayan "outback," there is probably not a more perfect spot on the face of the earth for those in search of security, serenity -- and first-rate living at Third World prices.
Those are just a few of the reasons I have chosen the "Eurolatin" republic of Uruguay -- where a large portion of the populace is of Italian, British, and Germanic descent -- for this month's column, the second in a continuing series of Rich Report Indexes.
The Rich Report Index ... rates a country's investment environment on four key criteria:
We assign countries analyzed under each criterion a value of 1 to 25, with 100 being a perfect score (albeit unattainable, score, since Shangri La still remains somewhere over the "Lost Horizon"). For the sake of reference, the U.S. scores 79 on the Rich Report Index, down four points since the recent spate of trillion-dollar government bailouts.
- Economic Freedom,
- Democratic Safeguards,
- the ROI S-Curve,
- Market Movers.
I could go on ad infinitum about the breath-taking allure of Uruguay, but this is an investment column, not a travelogue. So, let me give you a quick "Rich Wrap" overview, and then let us get to the Index itself: Uruguay is one of the smallest countries in South America, with an area of approximately 68,000 square miles lying on the Atlantic's pristine coastline between Brazil in the northeast and Argentina in the west. More than 1/3 of Uruguay's 3.3 million people live in the capital, Montevideo, a cosmopolitan city mixing modern amenities with Old World charm. You can live very comfortably in Uruguay on as little as $1,500 a month.
And why would serious, savvy financial mavens want to invest -- and/or live -- in Uruguay? Let us look at the Index.
Economic Freedom: 19 -- Uruguay has a thriving free market system only recently tainted by an onerous new income tax system regimen. Still, the country has immutable protections for foreign investors and some of the world's most stringent banking security laws. The Heritage Foundation's Index of Economic Freedom for 2008 ranks Uruguay's economy at 68.1% free, making it the world's 40th freest economy. It is 8th out of 29 in the region.
Significantly, in the area of Fiscal Freedom, Heritage awards Uruguay an impressive 85.9%, a substantial 17.6% above the United States. But, truth be known, that impressive rating is based upon a false premise, i.e., "Uruguay imposes no income tax."
The fact is, as of July 1, 2007, income earned inside Uruguay is taxed at progressive rates between 10 and 25%. Based upon the ratings given to other Latin American countries, that could considerably reduce the country's Fiscal Freedom rating. As The Sovereign Society's offshore assets maven Bob Bauman recently concluded, "We can safely say Uruguay certainly is no longer a tax haven."
Still, what is most important to Rich Report readers is that as EscapeArtist.com reports, "For citizens and foreign nationals alike, any type of income obtained from a foreign source, or assets abroad, will remain untouched by the Uruguayan tax collector. A U.S. pension, dividends or capital gains on stock in a Japanese company, interest from a CD in a European bank or real estate in Australia: they all remain untaxed."
What should also be important to offshore investors concerned about Uruguay's Economic Freedom is the ranking awarded the country by the respected international credit insurance firm of Ducroire/Del Credere. Rating 240 countries on the systematic analysis of their political and financial situations, Ducroire/Del Credere gives Uruguay an "A". The U.S, by contrast, gets a "B".
Add to that, Article 1 of the Uruguayan Act 16.906, passed in 1998 -- "The promotion and protection of the investments made by national and foreign investors in the Uruguayan territory is declared of a national interest" -- and Uruguay may well be an offshore investor's paradise found.
Democratic Safeguards: 23 -- Uruguay boasts a dynamic, deep-seated democracy. On a scale of 1 to 7 (the former best, the latter worst), Freedom House gives Uruguay a Political Rights score of 1, a Civil Liberties score of 1, and a Status of "Free."
Here is the essence of the organization's 2008 report: "Constitutional guarantees regarding free expression are generally respected, and violations of press freedom are rare. The press is privately owned, and broadcasting includes both commercial and public outlets. Numerous daily newspapers publish many of them associated with political parties; there are also a number of weeklies. The government does not place restrictions on Internet usage.
"Freedom of religion is a cherished political tenet of democratic Uruguay and is broadly respected. The government does not restrict academic freedom."
Transparency International, a Berlin-based organization that ranks and scores countries by their levels of perceived corruption (which it defines as "the abuse of public office for private gain"), gives Uruguay a score of 6.9 on a 0 to 10 continuum. It is ranked 23rd out of 180 countries worldwide, tying it with Chile for the least corrupt country in Latin America. By contrast, Brazil ranked 80th with a score of 3.5, Argentina ranked 109th with a score of 2.9, and the U.S. ranked 18th with a score of 7.3.
Bottom line: If you are looking for the "land of the free and the home of the brave" down under, check out latitude 22 00 S longitude 56 00 W.
The ROI S-Curve: 15 -- First a reminder, in Rich Report nomenclature, the offshore investment ROI S-Curve passes through the three stages of Discovery, Growth, and Maturity. Generally speaking, the earlier you enter the S-Curve, the lower the prices, the greater the likely risks -- and the higher the potential rewards. Largely because of its distance from the U.S. and Canada, Uruguay is still in the Discovery stage of the ROI S-Curve. But, please do not take that to mean that there is anything remotely primitive or even underdeveloped about this thoroughly contemporary country.
With barely more than 3 million citizens, Uruguay has 100 private daily and weekly newspapers, more than 100 radio stations, some 20 television channels, widespread cable TV, and, of course, complete satellite coverage. It has the most advanced paved road system (5500 miles), the highest telephone density, and the highest number of web hosts in all of Latin America. In short, Uruguay has all the modern amenities of most European countries.
And yet, the country still does not have its own English-language guidebook. Most people could not find it on the map even if the directions were provided. And that, of course, is great news for offshore investors looking to get in early on bargain-priced properties.
According to the highly respected travel writer Lee Harrison, on Uruguay's "Gold Coast","you can still find a duplex -- on the water -- for under $35,000, and a super-quality waterfront condo for under $45,000. In the plains country, you can own a sprawling ranch for less than $375 an acre. And even in cosmopolitan Montevideo, just $70,000 can buy a 3,000 square foot home with multiple bedrooms and a courtyard.
So, why does Uruguay score so low on the ROI S-Curve? Simply put, because it is an intermediate to long-term investment. It is not quite land banking, but it could take a good decade for serious offshore investors to see a sizeable return. Real estate is location, location, location. Uruguay is more than 5,000 miles from North America's southernmost border. And that is why it is still at the Discovery stage.
Market Movers: 10 -- Market Movers are key developments of such august proportions that they can change a country's economic outlook, usually, though not invariably, in short order. Both in nature and in weight, they comprise a judgment call. So, consider them in that light.
The fact is, at this point in time, Uruguay has no major development underway that could qualify as a short-term Market Mover. Still, according to the U.S. Department of State, the country has made a "spectacular recovery" from its economic crisis of 2002. And that recovery invites investment.
In 2003, Uruguay's economy experienced a modest 2.5% rise in GDP. It surged in 2004 and 2005 with growth rates of 12.3% and 6.6% respectively. Growth equaled 7.0% in 2006 and reached 7.4% in 2007. The projection for 2008 is for the GDP to continue growing in the 7 to 8% range. And because of its relative isolation and independence, Uruguay is not expected to be heavily impacted by the worldwide recession.
A single line in the State Department's Uruguay Profile may indicate the closest the country comes to a market-moving capability. According to the Profile, "Though still small, the information software industry is growing rapidly." In fact, Uruguay is already the leading supplier of software and IT services to Latin American nations. And it has set a target for its software and associated services exports of $500 million by 2010. Is this alone substantial enough to qualify as a short-term Market Mover? Hardly, but, along with Uruguay's burgeoning GDP, it is, perhaps, a sure harbinger of future expansion and attendant opportunity.
So, to sum it up: Uruguay scores a laudable 67 out of 100 possible points on the Rich Report Index. Its strongest showing is in Democratic Safeguards; its weakest is in Market Movers. But, keep in mind that the Rich Report Index rates investment opportunities, not livability. On the livability score, this tiny "Eurolatin" nation, with its near-perfect climate and friendly faces, could well be one of the most welcome spots on the fact of the earth.
In the next Rich Report, we may expand our horizons and take a surprising look at one of the most unsung opportunities in the Eastern Caribbean. Until then, live well and prosper.
LIVE IN TONGA
If you are considering expatriating from the U.S. or Europe and do not mind moving really far away, well why not consider Tonga? Tonga is in the South Pacific ocean, due east of Australia near Fiji. Tonga has a 98% literacy rate, with possibly more Ph.Ds per capita than any other country. Tonga is dependent on aid from New Zealand and Australia as well as remittances from the half of the citizenry that lives abroad. So we would not expect a stridently independent mentality to be prevalent there.
This article, which is as much about the idea of expatriating as it is about expatriating to Tonga per se, claims that the living in Tongo is cheap and easy. And they do not seem to mind you staying there once you have arrived.
Change has certainly been a popular slogan for a long time now in the States, and now it looks like it will be implemented. Who knows what will change, but changing your address to somewhere in paradise was always a good idea and now it seems especially apropos.
So far the changes for some have been loss of job and home, with more to come as they predict. So why wait for change to hit you when you are down? Get proactive and make the change yourself. Sell out and get out. Head for where prosperity still exists and to where no matter what happens, you will never freeze or starve. Change everything and move out of these countries in turmoil! Yes, out of Dodge and by sunset, for the sun may well be finally setting back there. So, kiss your horse (and your house, if you still have one) goodbye and sail away.
Be tough, you cannot take everyone and everything, not all at once. Someone in your family tree has to be the pioneer in these times. This time, "go west" means beyond California, out of America and the same for those in UK or Europe. Just to put this radical "change" into perspective, a 12 hour plane ride is probably all we are talking about, so do not think of yourself as a potential lemming.
Search these topics just for some reasons to kick yourself in the butt and into action.
The truth about the FED, Federal Reserve Banking System This is the key to it all and applies to almost every of the Allied countries.
The truth about the mainstream media A brainwash test. RU?
The truth about 9-11 Not about Porsches, this has to be the most controversial of all the sites on the Internet for it is the most damning, and, if any of it is even close to true, it is not just of America's government that is suspect. Who knows if any of it is true, but it belongs on the list of things to research as so many insist today, just in case. Be sure to put a dash between the 9 and the 11 or you will get all you ever wanted to know about Porsches.
Concentration camps in America? Well, if any of the above is true, this fits too.
You will not find what you read on many of these webs in the mainstream media, so do not look for validation there. In fact, you will discover why the mainstream media will no print or televise what you read online. This is just part of your new education of how things must really be -- after all, the handwriting is now on the wall; just read it. Who knows for sure what is really true, educated guessing, logical deduction and what is just a fable? Sorting through the BS is going to be a task, but all the knowledge and truth is mixed in there. The more you study the more you will get the picture that the Big Bad Wolf is already in grandma's bed with her nightie on. Perhaps now is the time to trade that red hooded jacket for a bathing suit, repack that basket and come join us in paradise. Only in fairy tales do dead grandmothers get out of the tummy of the Wolf.
Anyway, most of us came here to paradise for what wonderful things it had to offer as opposed to what ugly things might be driving us out of where we are from. It was the pull, not the push that has us happily here. If we were not content, we would have gone back.
What is the change, dollars for dimes? Less freedom? That would have to be part of it, matters not who is pretending to run America. Face it; there may be more freedom in Iran than America right now. Inflation is written all over every tender little note, public or private. At this writing the legal tender stuff passed off as "money," which the U.S. Constitution defined must be gold or silver, still has some incredible international value in spite of what must be coming down.
Now, is the best time to cash out and exchange those FED notes for some real cheap foreign real estate and come out of this way ahead. This diatribe is not intended to be political, but rather more motivational, but certain political experiences can be motivating. I have not been this ardent in anything I have ever written, but finally I am convinced. We have been seriously duped and in about every of the Allied countries. Please know that I am just trying to alert not hurt, because I cannot forget that when Galileo told the people of his day the earth went around the sun, not the sun around the earth, they put him in jail for 8 long years. So one has to be careful of what they say when entire masses of people and governments can be wrong and still go against you out of ignorance.
I doubt it matters which guy or gal is President since they are not much more than "greeters" for the greatest train ride on earth. None of them are going to stop this runaway freight and many are planning for an International train wreck. Ah, but some say there is a light in the tunnel and others say duh, that is the train coming! As long as you are not on that track, at least you are safer. So, where shall we go?
Where do you go on this planet when you finally decide that is the only reasonable and logical answer for those lucky to have just enough cash to manage a new start? As far as you can get out of the Northern Hemisphere is the first thought and then maybe "Tonga" is the final destination. A place where even if the worst imaginable were to come to pass there is free food on most every tree in your yard and veggies grow like weeds. What about Tonga? Right, I know, it never occurred to you and I suspect no one knows where it is anyway. Most of the expats here in the Vava'u Island Group of Tonga heard about Tonga online. Another reason to look to the Internet for your information and answers, not TV.
Tonga is in the middle of the South Pacific, near Fiji and below Samoa, in the cooler latitudes. I discovered it back in 1984 and moved here in 2001, just before 9-11. We will not mention 9-11 again in this article for it was a horrible event and a worse revelation ... and when "change" really started to happen. We have the advantage of getting a head start in settling here, but that advantage we can pass on to you to help you make the move. You will be glad you did. You probably cannot imagine how glad right now. We can talk about it over a fresh squeezed juice (add what you want to it) on the verandah overlooking the island group one day.
There are opportunities in business here, which grow with the expanding expat community. You can get 9.9% interest on savings in large banks here in Tonga that are from Australia and New Zealand. Some just live on that. It is cheap to live here if you do not need pure maple syrup from Canada every day or caviar. Imported goods are what cost real money. The better for your health fresh fish, fruits and vegetables are cheap in the market or free if you grow them or catch them. It rains mangos here during the season and is about the only hazard you have to be concerned with, that and falling coconuts, in this trouble free Vava'u Island Group of Tonga. Once you have secured a piece of land, from $5000 up, bought or built a home, that should end worrying about your future. Many live well here on their social security, for as long as that lasts.
One of the main considerations for moving anywhere in the world is will they let you immigrate and what are their qualifications? Without going into what all those countries have as barriers to your immigration, Tonga, the most interesting and beautiful is the least difficult -- at least so far. The qualification to live here is generally what you spend to do just that -- move here. We can get into all of this in more detail. Just drop me an email.
Here are some websites (below) that will give you some idea of what Tonga is all about. Get familiar with the place and then we can get more serious about how it can work for you.
Web sites about Tonga:
EscapeArtist.com lots of articles and books about the matter at hand.
BBC country profile on Tongo
South Pacfic Real Estate -- property, articles and photos
TongoHoliday.com has about every accommodation place listed in Tonga.
Vavau.to -- All about Vava'u with every business listed and the news.
These websites above just saved me few thousand words. If you have any questions, feel free to ask and don't be bashful. Things are going to be interesting. I am glad to be where no matter what happens, in Tonga, everyone can eat well without having to eat each other.
“You never ‘change’ things by fighting the existing reality. To ‘change’ something, build a new model that makes the existing model obsolete.” ~~ Buckminster Fuller Robert
PRESERVING WEALTH DURING THE GLOBAL BANKING CRISIS
“Accepting losses is the single most important investment device to insure safety of capital.”
Any piece from Gary "SirChartsAlot" Dorsch, editor of Global Money Trends, is a take-no-prisoners rapid-fire cascade of commentary and charts. Here he writes about how hard it has been to preserve capital during the financial implosion.
"Accepting losses is the single most important investment device to insure safety of capital. It is also the action that most people know the least about, and are least likely to execute. The most important single thing I learned is that accepting losses promptly is the first key to success. It is a great mistake to think that what goes down must come back-up," warned Gerald Loeb, the Dean of Wall Street, in his epic book The Battle for Investment Survival, last copyrighted in 1965.
"In all cases, where actual losses are involved, I am inclined to say that when a new investment has shrunk by 10%, it is time to stop, look, and listen. I think it usually ought to be sold-out, and the loss taken. I am almost inclined to say, dogmatically, sell it out before trying again," Loeb advised his readers, concerning wagers in the stock market that turn sour, due to unexpected and unforeseen events.
A once-in-a-century financial crisis has brought some of the world's largest banks to the brink of insolvency, and quasi-nationalization, choking-off credit to wide swaths of the private sector, and threatening to throw the world economy into its deepest and longest recession since the "Great Depression" of the 1930s. Global stock markets have been mauled by the fallout from the "credit crunch," losing roughly $32 trillion of market value from peak levels reached in October 2007.
According to Mr. Loeb, "Successful investing is a battle for financial survival. Investing is fundamentally, an effort to obtain a rental from others, for the temporary use of one's capital. One should attempt to conserve the purchasing power of money, through the purchase or retention of fixed interest and principal obligations, including cash and a government promise to pay, only during cycles of deflation, and various forms of equity holdings, only in cycles of inflation."
During this once-in-a century financial crisis, the strategy of owning high-grade bonds and gold, proved to be "safe-havens" for preserving wealth. With the U.S. stock market suffering its worst year since the 1930's, the Lehman Treasury bond index posted a gain of 14.6%, its best performance since 1995. 10-year U.S. Treasury yields started the year at 4.03% and closed at 2.20%, after trading near 4.11% as recently as October. Gold ended +5% higher in U.S. dollar terms last year, and gained 30% against the Aussie dollar, 35% vs. the British pound, and 10% vs. the euro.
Shell-shocked investors in the U.S. stock market were badly burned last year, and are now sitting on a record $3.85 trillion in money market funds. However, the Federal Reserve has driven the fed funds rate into a target range of zero to 0.25%, and has vowed to keep interest rates pegged near zero for a long period of time, probably through 2009 and beyond. Taxable yields on money funds have tumbled to a pitiful 0.40%, after annual operating expenses are deducted.
The idle cash parked in U.S. money market funds is nearly equal in size to China's foreign exchange reserves and the Sovereign Wealth Funds of Kuwait and Saudi Arabia combined. Would holders of U.S. money market funds agree to buy long-dated Treasuries, in order to finance the deficit at historically low interest rates? Or should investors turn to high-grade corporate bonds, for companies with strong balance sheets, little debt coming due over the next few years, and yielding 400 basis points or more than Treasuries?
Barclay's High-Grade Corporate Bond Index [iShares ETF, symbol: LQD] has recouped most of its losses from the post-Lehman bankruptcy shakeout [see chart], including its $5.60 annual dividend payments. Still, buying corporate bonds is not without risk, especially if the Dow Jones Industrials tumble below the November low of 7,500, ushering in a "Great Depression," and increasing the odds of company defaults. Also, corporate notes might sink under the weight of $2 trillion of fresh Treasury debt this year.
The plunge in the U.S. Treasury's 10-year yield to 2% was preceded by a stunning collapse of commodity markets, especially for base metals and energy. In the span of just 6 months, the Dow Jones Index of 19 exchange traded commodities, swung from a annualized +40% gain in July, to a stunning -41% loss in December [see chart]. Volatile swings in the commodity markets are often seen as leading indicators for producer prices, and ultimately, the consumer price index. ...
If a long period of deflation and depression lies ahead, then a best-case scenario one might expect is an "L" shaped economic recovery, after stock markets finally reach the elusive bottom. The lethal "credit crunch," engineered by the top-tier U.S. banks, has led to the massive destruction of 2.6 million U.S. jobs, which in turn, is fueling a downward spiral, where unemployment depresses consumer spending, retail sales, and business investment, which in turn, lead to further layoffs. As long as this vicious cycle remains unbroken, high-grade bonds would remain a safe-haven.
On December 18th, Dallas Federal Reserve Bank chief Richard Fisher said the U.S. central bank would take whatever steps necessary to avoid a depression. "We stand ready to grow our balance sheet even more should conditions warrant. At the current time, the biggest concern is deflation and the Fed can worry about inflation later. We have to do everything we can to lift the economy up and prevent deflation from taking hold." ...
There might be no alternative to fixing America's greatest financial crisis since the "Great Depression" of the 1930s, than to ask the Fed to monetize the upcoming supply of Treasury debt. The biggest risk for today's buyer of Treasury-notes is that the Fed might be successful in reviving inflation, but alert traders can gauge trends in the commodities markets, for the first signals of such a development. The gold market is more focused on the upcoming tidal wave of paper currency that central banks will churn out in the months ahead. Even the Swiss National Bank is vowing to devalue the Swiss franc against the euro, with a massive money printing operation.
Big Buyers of US Treasuries Sidelined for 2009
Still, risks remain for buying the Treasury's debt at historically low interest rates. The two biggest foreign buyers of U.S. Treasuries over the past 15 months have been the Arab oil kingdoms ($245 billion) and China ($233 billion). But with dwindling external surpluses, and big economic troubles at home, the Arab oil kingdoms and China's government could be absent from this year's Treasury auctions.
"The Arab world has lost a total of $2.5 trillion in the past four months, as a result of the global financial crisis," admitted Kuwaiti Foreign Minister Sheikh Mohammad al-Sabah on January 19th. Declines on foreign stock markets accounted for $600 billion of the losses, while Arab investors were also hurt by sharp declines in oil revenues, declining value of property investments, and other repercussions of the global downturn. Ignoring Loeb's empirical rule of limiting one's losses to 10%, when they inevitably arise, due to unforeseen events, was an expensive education.
In the second half of 2008, the OPEC oil reference price plummeted 75% from a record high of $140/barrel in July, to as low as $34.50/barrel in December. Persian Gulf property prices also crashed as the credit crisis engulfed the financial markets. Consequently, investor sentiment turned negative and the efforts of Arab Gulf kingdoms to stimulate their economies and boost investor confidence failed. The UAE stock markets absorbed the biggest blow, shedding 72.4%, Saudi Arabia's TASI lost 56.5%, and Kuwait's lost 38%, during the past year [see chart]. ...
China's trade surplus climbed 13% to a record $295 billion last year. But Beijing will spend 4 trillion yuan, or $586 billion, of its surplus cash on domestic stimulus projects this year, to cushion its economy from a hard landing. China's exports, the key engine of growth for its economy, have plunged from a +22% growth rate a year ago to -2.8% in December. 1/3 of the 45,000 factories in the major export cities of Dongguan, Shenzhen and Guangzhou have shut down, idling millions of workers, and forcing Beijing to spend more money to create new jobs.
Crackdown on Banks Required for Economic Recovery
The U.S. economy has little chance of a sustained recovery unless President Barack Obama's financial squad will crack down on the corrupt management of the elite U.S. banking cartel that has brought this great calamity upon millions of innocent American and foreign workers. Former Treasury chief Henry Paulson handed out $200 billion of taxpayer money to the elite U.S. banks, with no strings attached, and no stipulations to increase lending to the private sector.
Banks have also raised $115 billion by selling FDIC-guaranteed bonds since November 26th, enabling them to rollover their debts coming due at super-low rates, while leaving the rest of corporate America high and dry, and worried about defaulting on their bonds, in the event of an economic depression. In order to preserve precious cash, companies have resorted to slashing capital spending and their payrolls.
Obama will have a "strong message for the bankers," adviser David Axelrod said January 19th. "We want to see credit flowing again. We do not want them to sit on any money that they get from taxpayers," he warned. Obama's approach is in sharp contrast to that of former Treasury chief Paulson, who argued on January 12th, "The banks need to lend. They cannot hoard capital. But I do not believe it is proper or right for politicians or the government to tell banks whom to loan to and how to lend," highlighting Paulson's collusion with the Wall Street banking cartel.
In the first significant reform of the TARP program, Obama is ordering the Treasury Department to limit bank executives' compensation and dividend payments by institutions that get "exceptional assistance" from the financial rescue fund, said Larry Summers, White House chief economist on January 13th. "Until taxpayer money is paid back, ban dividend payments beyond de minimis amounts, and put limits on stock buybacks and the acquisition of already financially strong companies."
Fears that TARP recipients would be forced to limit their common stock payouts to 1-penny per share rattled a jittery banking sector [see chart]. The common stock dividends, if fully paid by U.S. banks at previous levels, would channel $25 billion to shareholders this year. Taxpayers have been told the bail-out money is necessary to rebuild bank capital, yet a significant portion of the money ended-up with the directors of the top elite banks -- the beneficiaries of $250 million in common stock dividends.
Fears that Citigroup would be forced to slash its dividend payments sent its preferred series-P share plunging from $18 at the start of the year, to $6.60 today, to yield 30.7%. Over time, the U.S. government could exercise more day-to-day control over the U.S. banking system, which desperately needs more capital. Estimates of future losses from bad-loans range from $700 billion to $2 trillion.
Sterling Plunges deeper into a Black Hole, lifting Gold
As part of a second rescue package, designed to prevent the UK economy from spiraling into depression, PM Gordon Brown has created a special fund for the Bank of England to buy high quality corporate bonds and other assets directly from banks, starting on February 2nd, to combat deflation and unblock frozen credit markets. The UK government will also insure banks against default on toxic loans in exchange for legally binding commitments to lend to British businesses and home buyers.
Brown and UK Treasurer Alistair Darling have refused to specify where the money will come from to pay for the latest banking bailout scheme, but it is expected to dig Britain deeper into debt, adding up to an extra £350 billion. Prior to the second rescue package for UK-banks, gilt issuance was expected at £146.4 billion ($222 billion) this year. But now, there is no ceiling on government borrowing. Most importantly, the BoE has been authorized by the Treasury to begin monetizing the debt, or printing money in order to buy the new supply of gilts.
Sterling plunged deeper into a black hole on the foreign exchange markets this week, as traders anticipate the arrival of "Quantitative Easing" in England, more BoE rate cuts, possibly to near-zero percent, and an explosive surge in the UK's M4 money supply, which is already expanding at a +16.4% annualized clip. The BoE has slashed it base rate by 350 basis points since October to a record low of 1.50%, pulling out all the stops to stop the slide in the UK housing and stock markets.
Fresh concerns about the stability of the UK's financial system pushed sterling to an 8-year low of US$1.3750, an all-time low of ¥124 and towards parity with the euro. Roughly £484 billion off the value was wiped off of Britain's top 100 companies in 2008, and UK home prices fell an average 18.9%, reducing the average home value to £159,896, adding greater momentum towards a depression.
Yet the BoE's rapid-fire rate cuts, designed to stabilize markets, have back-fired on the central bank, by crushing the value of the British ounce to ¥124, which in turn, fueled the unwinding of "yen-carry" trades, and the dumping of UK-listed shares, by Japanese and hedge-fund speculators. There is a real danger that the devaluation in sterling becomes a full-blown crisis and a headache for gilt holders, as "Printing Press" headlines make for uncomfortable reading.
The big-4 British banks have a combined loan book of more than £6 trillion, more than four times Britain's annual GDP of £1.3 trillion, and a collapse of this sector, would deal a punishing blow to the broader economy. Combined with a sharp slide in global commodities, a view of a deflationary depression in Great Britain has emerged. The speculator's first instinct was to jump into British gilts, guaranteed by the BoE's printing press, as a "safe-haven" from the global meltdown storm.
Mirroring the sharp slide in base metals, crude oil, and grain markets, yields on the UK's 10-year gilt plummeted from as high as 5.20% in July to a record low of 3% in December. Yet counter-intuitively, one is surprised to learn, that the best performing asset in the UK, during times of a deflationary depression was the ultimate hard currency -- gold, a hedge against inflation [not really, just out-of-control inflation], and safe-haven in times of turmoil. London gold appreciated 35% to a record £600/oz, as the British ounce lost its purchasing power against the euro, Japanese yen [see chart], and U.S. dollar, and while UK banking shares were bludgeoned amidst fears of nationalization. If the BoE is successful at some point, under the QE framework in reviving inflation in the UK economy, British gilts would lose purchasing power to the yellow metal.
Trying to increase wealth, while navigating through the stormy seas of a treacherous banking crisis, is a most daunting challenge. Short sellers profited handsomely in this bear market, if they held steadfast during the vicious short squeezes engineered by the "Plunge Protection Team" along the way. The British government has provided a viable blueprint for other governments to follow to thaw out the credit crunch, which must include, at its core, the printing of trillions in paper currencies, in order to monetize the vast amount of government debt offerings in the year ahead.
REFORM PLAN RAISES FEARS OF BANK OF ENGLAND SECRECY
The Bank of England will be able to print extra money without having legally to declare it under new plans.
A proposed "reform," ostensibly to allow the BoE more power to overhaul troubled financial institutions, would also allow it to stop publishing details of its weekly balance sheet. Some obstreperous sorts are objecting that this would allow the BoE to flood the market with money, possibly leading to hyperinflation.
Where is the trust, we wonder. Where is the trust?
The Bank of England will be able to print extra money without having legally to declare it under new plans which will heighten fears that the Government will secretly pump extra cash into the economy.
The Government is set to throw out the 165-year old law that obliges the Bank to publish a weekly account of its balance sheet -- a move that will allow it theoretically to embark covertly on so-called quantitative easing. The Banking Bill, which is currently passing through Parliament, abolishes a key section of the law laid down by Robert Peel's Government in 1844 which originally granted the Bank the sole right to print UK money.
The ostensible reason for the reform, which means the Bank will not have to print details of its own accounts and the amount of notes and coins flowing through the UK economy, is to allow the Bank more power to overhaul troubled financial institutions in the future, under its Special Resolution Authority.
However, some have warned that it means: "there is nothing to stop an unreported and unmonitored flooding of the money market by the undisciplined use of the printing presses."
It comes after the Bank's Monetary Policy Committee cut interest rates by half a percentage point, leaving them at the lowest level since the bank's foundation in 1694.
With the Bank rate now at 1.5%, most economists suspect the Government and Bank will soon be forced to start quantitative easing -- directly increasing the quantity of money in the economy -- in a drastic attempt to prevent a recession of unprecedented depth.
Although the amount of easing is likely to be limited, news of this increased secrecy will spark comparisons with Weimar Germany and Zimbabwe, where uncontrolled use of the central banks' printing presses ultimately caused hyperinflation.
The Bank said it will still publish details of its balance sheet, but, significantly, the data -- the main indicator of the extent of quantitative easing -- will not be presented until more than a month has elapsed. For instance, under the new terms of the law, if the Bank were to have embarked on a policy of quantitative easing last month, the figures on this would not be published until the end of this month.
The reforms, which are likely to be implemented later this year, will make the Bank of England by far the most secretive major central in the world, experts said.
In the U.S., where the Federal Reserve has already cut rates to close to zero and started quantitative easing, the main way to track its purchases of securities and the expansion of its balance sheet is through precisely these same weekly accounts.
"Quite why the Bank has to keep its operations so shrouded in secrecy is a mystery to me," said Simon Ward, economist at New Star. "This [reform] will make it much more difficult to track what the Bank is doing."
Among the details which will no longer be published are those revealing the extent to which London's banks are using the Bank's deposit facilities -- a yardstick of pressure in the financial system.
Debating the issue in the House of Lords recently, Lord James of Blackheath, a Conservative peer, said: "Remove [this] control and there is nothing to stop an unreported and unmonitored flooding of the money market by the undisciplined use of the printing presses.
"If we went down that path we would be following a road which starts in Weimar, goes on through Harare and must not end in Westminster and London. That is the great fear that the abolition of that section will bring about -- but the Bill abolishes it."
Former U.S. Law Student Who Became Escort Pleads Guilty to Tax Evasion
Woman admittedly ran escort business to pay student loans and failed to file income taxes for 2003.
This story has it all: sex, big money, tax evasion, IRS raids, civil forfeiture ... Behind the titillating headline story there are lots of little lessons to be gleaned, such as if you are going to run an illegal operation and hide the procedes, avoid publicity.
A former San Francisco-area woman who worked as a high-priced call girl to pay off her Stanford Law School loans has pleaded guilty to tax evasion, ending almost 5 years of cat-and-mouse with U.S. prosecutors.
Cristina Warthen, 35, now of Los Angeles but formerly of the California cities of Palo Alto and Oakland, entered her plea yesterday (January 26) before U.S. District Judge James Ware of San Jose. Warthen is scheduled to be sentenced on June 15.
The maximum penalty is 5 years in prison and a $100,000 fine, but an agent from the U.S. tax collection agency's criminal investigation division, Arlette Lee, said yesterday that Warthen's plea agreement indicates she will pay the government $313,133.74 and serve 3 years of probation, including one year of home confinement.
In her plea agreement, Warthen -- nee Cristina Schultz, before she married millionaire Ask.com co-founder David Warthen in May 2004 -- acknowledged she ran an escort business in which she exchanged sexual acts for money. ...
The TouchofBrazil.net website in 2004 featured photos of her in various states of undress while offering pricing for her company and her nationwide travel schedule; it described her as a "Portuguese-speaking entertainer and physical model."
Warthen now admits that she grossed more than $133,000 from her escort business in 2003 but did not file a tax return for that year, and she acknowledges she tried to hide her income by storing cash in a safe-deposit box and buying postal money orders in amounts designed to avoid federal currency transaction reports.
Not disclosed, but one wonders: Was the woman's lifestyle obviously inconsistent with what she reported?
Clients posting reviews of Brazil's services at another website gave her rave -- and sometimes explicit -- reviews up through February 2004, a month after IRS agents seized evidence and $61,171 from her apartment, her storage locker and her safe deposit box.
The U.S. justice department in July 2004 sued to keep that money under federal civil asset forfeiture laws that let the government keep property or money representing a federal crime's proceeds even if the owner has not been charged with the alleged crime.
That forfeiture complaint had said Schultz operated an interstate prostitution business since at least August 2001 -- three months after earning her Stanford Law School degree -- by charging as much as $1,300 for two hours, $5,000 for overnight and $15,000 for three days to serve clients in the San Francisco bay area, Los Angeles, Washington, New York City, Chicago and Seattle.
Her own April 2003 posting to an escort-reviews website had said that when she finished her law degree, she "owed over 300 thousand in loans and hated the prospect of being a lawyer for the next twenty yrs."
A federal judge dismissed the civil forfeiture action in 2006 as Warthen and the government reached a secret settlement. Prosecutors filed the tax evasion charge against Warthen in September.
UBS IS SAID TO HAVE “WEEKS” TO RELEASE DOCUMENTS, OR ELSE ...
The collision course between the bank and prosecutors is forcing the Swiss government to confront tough choices.
Federal prosecutors have given UBS “several weeks” to hand over scores of United States client names or face possible indictment over its offshore banking services, a person briefed on the matter said Monday (Jan. 26).
While no indictment is imminent, this person said, any refusal to turn over the names would lead prosecutors to ask a federal judge to order UBS, the world's largest private bank, to comply with a previous summons demanding the names of American clients using hidden offshore accounts. If UBS were to refuse, this person said, an indictment could follow, perhaps within months.
Even if UBS turns over the names and averts indictment, it is almost certain to be forced into a deferred-prosecution agreement with a heavy fine, this person said. The bank could also face possible sanctions, from the Securities and Exchange Commission and banking regulators, that could limit its overall ability to conduct business in the United States, the person said.
Karina Byrne, a spokeswoman for UBS, declined to comment on Monday on how the bank was dealing with the investigation. A Justice Department spokesman declined to comment.
UBS, a giant in global financial services, is battling to maintain its centuries-old tradition of Swiss banking secrecy amid mounting legal pressure from the Justice Department to turn over up to 19,000 records of American clients who used hidden offshore accounts at the bank.
While the bank has not provided any names, it has in recent months submitted -- under a subpoena from the Manhattan district attorney, Robert M. Morgenthau -- related records detailing wire transfers originating from the United States to same-name accounts in Zurich.
The Justice Department's criminal investigation is focused on UBS's provision of cross-border private banking services to United States clients. Prosecutors suspect that from late 2002 through 2007, UBS helped these clients hide $20 billion in violation of United States tax laws, thereby evading $300 million a year in taxes. UBS shut down the business, which it had run out of three offices in Zurich, Lugano and Geneva, last year and has been closing the accounts.
Prosecutors have so far identified about 300 names of wealthy American clients of UBS and are preparing to build criminal tax-evasion cases against them within a couple of months, according to the person.
The collision course between the bank and prosecutors is forcing the Swiss government, which considers UBS a strategic part of the Swiss economy, to confront tough choices.
In recent months, UBS executives told the Justice Department that they could not hand over client names because doing so would violate Swiss laws on banking secrecy. Americans can use offshore accounts, but have to disclose them and pay taxes on their holdings.
Last November, Mark Branson, the chief financial officer of UBS's global wealth management and business banking unit, which had overseen the private cross-border business, told investors that the Justice Department's request for client names was "a matter between Swiss and U.S. government authorities."
But prosecutors recently rebuffed a suggestion by UBS that they deal directly with the Swiss government instead of the bank. The Swiss finance minister, Hans Rudolf Merz, is expected to press the case in Davos this week at the annual meeting of global business and political elite.
BREAKTHROUGH FOR U.K. TAXMAN AFTER GUERNSEY AGREES TO REVEAL BANK ACCOUNT DETAILS
Agreement does not allow for “fishing trips.”
Guernsey has agreed it will respond to HMRC requests for "banking information in any case where a company or individual could be liable for income tax, corporation tax, capital gains tax, inheritance tax or VAT." This is not the same as a "show us everything you have got" inquiry.
The tax haven of Guernsey threw open its doors to British authorities yesterday (1-20) as HM Revenue and Customs stepped up its efforts to track down evaders. The island haven, popular with UK savers and investors who want to keep their money from the clutches of the taxman, signed an agreement with Britain under which it will hand over information on individuals and companies on request.
This is the latest agreement to be signed by the UK as it intensifies its campaign against those who are avoiding paying tax. It comes days after it emerged that HMRC is setting up a new unit to look at the tax affairs of the richest taxpayers in a further drive to combat tax evasion.
A similar agreement was signed with the British Virgin Islands last October, while authorities in the Isle of Man and Bermuda have also agreed to open their doors.
Under the scheme, HMRC can ask for banking information in any case where a company or individual could be liable for income tax, corporation tax, capital gains tax, inheritance tax or VAT.
A spokesman for HMRC said it plans more agreements, but it has no arrangements in popular havens such as Liechtenstein, Andorra and Monaco.
The taxman raised £400 million last year after a crackdown on savers with cash in offshore accounts with Britain's biggest banks. It is set to raise even more as it looks at accounts held at smaller banks and building societies.
Stephen Timms, Financial Secretary to the Treasury, said: "This new agreement represents a significant step in our efforts to counter and prevent tax evasion and avoidance. I welcome the willingness of Guernsey to implement these high standards of transparency and exchange of information."
HMRC said: "This agreement will allow the UK to obtain crucial information on its residents in both the individual and corporate sectors, which should significantly assist our compliance efforts." ...
Jeffrey Owens, director of the OECD's Center for Tax Policy and Administration, welcomed the new agreement. Given the current financial crisis, he said, "it is now more important than ever that countries implement international standards of transparency and exchange of information."
Guernsey has already signed similar agreements with the U.S., the Netherlands, Denmark, the Faroe Islands, Finland, Greenland, Iceland, Norway and Sweden.
THE 80 BEST LIFEHACKS OF 2008, CONT.
Continued from here ...
- 50+ Personal Productivity Blogs You have Never Heard of Before (and about a dozen you probably have)
A bird's-eye view of the productivity blogosphere's lesser-known reaches. Do not miss the follow-up, Readers Recommend: 15 More Productivity Blogs You Probably Never Heard Of, drawn from reader's comments. (Dustin M. Wax)
- 6 Signs Your Lifehacks Are Not Working
Just because something seems like a good idea does not mean it is helping. Here is how to tell when your productivity tricks are causing you more trouble than good. (Thursday Bram)
- Read This Now! Stop Procrastinating and Get Stuff Done – or Else!
Tips on breaking the hold of procrastination. Took forever to get around to writing this! (Dustin M. Wax)
- How to Ruthlessly Reclaim Work Day Time
Sometimes lifehacks just are not enough to take control of your time. Here is what to do when more drastic measures are called for. (Joel Falconer)
- 10 Hacks to Improve Your Home Office Productivity
Working at home offers plenty of conveniences, but also distractions. Here are some tips on taking charge of your home office to get more done. (Joel Falconer)
- 5 Ways to get out of faffing mode
Stop futzing around and get moving, already! (Steven Aitchison)
- 10 Steps To Working On The Road
Tips for today's mobile professionals. (Thursday Bram)
- 10 Tips For Improving Your Appointment Setting Skills
Great ideas for taking charge of your schedule. (Thursday Bram)
- 50 Tricks to Get Things Done Faster, Better, and More Easily
Your one-stop shop for the best concepts and tricks for increasing productivity. (Dustin M. Wax)
- The Ultimate Student Resource List
Free software, web apps, and websites, along with links to the best of Lifehack's advice for students, make this post the ultimate guide to success for students. (Dustin M.Wax)
- 10 Productivity Myths That Hold You Back
Misguided beliefs about productivity that sap our energy and lead us down the wrong path. (Dustin M. Wax)
- 30 Tips to Rejuvenate Your Creativity
Great ways to recharge your creative batteries and get the ideas flowing again. (Joel Falconer)
- 8 Good Reasons to Be a Lousy Musician
Who says you need to be perfect at everything? Here are some good reasons to give yourself permission to suck at something you love. (Dustin M. Wax)
- The Science of Setting Goals
What goes on in our brain when we set, achieve, and fail to achieve our goals. (Dustin M. Wax)
- 5 Effective Ways to Improve Your Sleep
Tips and tricks to help you get a fuller, more restful nights sleep. (Joel Falconer)
Continued here ...
Man Who Blackmailed Liechtenstein Bank Given 63 Months in Jail
One of the biggest offshore financial stories of last and any year was the case where a former employee of Liechtenstein bank LGT stole customer data and then sold it to Germany, who in turn passed the data on to its fellow national tax agencies. In a different but related copycat case, "Michael F." (full name has not been released) successfully blackmailed a Liechtenstein bank by threatening to release 2,300 bank account statements of the bank's German clients that he and his compatriots has stolen.
The ringleader of the scheme has now been sentenced to 63 months in jail for the criminal scheme, unlike his (more useful?) predecessor who was not charged with any crime.
His two co-accused were given suspended jail terms by the court in the port city of Rostock on Friday, January 23. Michael F., the leader of the scheme, demanded €13 million ($17 million) from Liechtensteinische Landesbank (LLB) and did obtain €9 million.
The case highlighted tax evasion by rich Germans who open secret "offshore" bank accounts in the Alpine principality of Liechtenstein and "forget" to report the earnings to German tax officials.
In a different case, German intelligence paid for a disk of leaked data from a different Liechtenstein bank, LGT.
In Rostock, judges said the trio had obtained statements for 2,300 bank accounts thought to have belonged to rich Germans.
Prosecutors said the defendant had a long criminal record and should be kept in precautionary custody after serving his minimum sentence, but the court declined this. His surname was withheld by German media because of defamation laws.
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