Wealth International, Limited (trustprofessionals.com) : Where There's W.I.L., There's A Way

W.I.L. Offshore News Digest :: February 2009, Part 4

This Week’s Entries :


This entertaining piece from Caribbean Property Magazine details one couple's search for the "perfect" location to expatriate/retire to, aka "paradise." They set out in sailboat and tried the Bahamas and various locations in the Caribbean, sometimes sticking around for long periods of time. After despairing of ever discovering a good permanent fit for themselves they came upon a location in Panama near the Pacific coast and border with Costa Rica.

The author and his wife are now in the process of developing and promoting their "paradise" (see here), so we suppose the unbounded praise heaped on the place is not agenda-free, however sincere. The summary of the journey that brought them there is instructive, and possibly might shorten one's own search for paradise.

Beginning in 1990-91, the husband and wife team of Ruth E. Magee and Jack Burns spent 12 years aboard their boat "Davina" searching for that perfect place to live and retire. The following is a brief insight to their journey as reported by Jack ...
As self employed people, Ruthie and I had finally had enough! There were just too many hassles in business, our "Canada" was becoming too expensive to live in, our savings were disappearing as if by magic and it was too cold for too many months of the year!

Being smarter than the average bear, we decided to change what was bothering us and the best way to do that would be to go on a journey to physically "search" for paradise. You know what paradise is right? It is that perfect sun drenched place with cheap beer, white sand beaches and swaying palm trees. There was only one slight snag to this plan ... money -- or lack of it!

Being self employed is not all that it is cracked up to be. So in addition to the cheap beer and palm trees, we knew that our "paradise" must include an environment (aka government) that would allow us to earn a living as well.

As we really studied what we wanted and what was absolutely necessary, our "requirements" list grew. Okay, cheap beer, jobs and warm climate -- those are a given, but then one has to consider health care, infrastructure, affordable cost of living and ease of access to the grandkids -- hmmmm -- paradise seemed to be developing a lot of "requirements" we had not first thought of!

To fulfill a lifelong dream of mine (sailing) and to eliminate one big necessity from our search criteria (a place to live) we decided to buy a small boat, as we figured we could be like a turtle and carry our house around with us as we tried to locate "paradise."

This "life as a turtle" plan had more benefits than we originally realized. The "turtle" method of living allowed us to truly "live and work" in an area for extended periods of time. It was not the 7 countries in 7 days sort of exploring. Our sojourns had us living and working among the different cultures of the places we visited. And, mostly this was island life at first as we felt this would be the only way to discover our paradise and the place we would want to retire to.

We spent three months in the Bahamas and discovered it did not meet our initial "must have" list as far as weather -- it is too cold in the wintertime, too windy in the summertime, plus, it is far too expensive all the time! But, the beaches are fabulous! And, it was virtually impossible to obtain a legal work status at least with our professions.

So we were off to the Dominican Republic! Did that meet any of our comparison list must have criteria? In a quick answer -- forget it! Poor choices for foods, too expensive, and the government -- well, let's leave it at that. Next stop, Puerto Rico. Now remember this was in 1990/91, and at that time Puerto Rico was a great spot to live. We could work and live nicely and -- we did! For almost two years. But during this time we came to realize that this was not the place we wanted to retire. Prices were increasing quickly and the attitude towards "gringos" was deteriorating. So it was adios to Puerto Rico.

Next stop -- the U.S and British Virgin Islands. One word: fageddaboutit! I will not go in to much detail other than to say the sea is fabulous, the food horrid and the prices are out of sight.

Next stop St. Maarten. This appeared to be very close to what we were looking for -- so, we settled in. "Settled in" to the tune of four years. I started a business and Ruthie worked in a major marine supply store. The beaches ... fantastic, cost of living ... well, it was pricey, but our jobs allowed us to enjoy it. But some of the locals and the government made life there difficult to say the least. Shall we say that St. Maarten was scratched off the list, but it took the full four years there to truly discover what the island was all about. [The person who wrote this, on the other hand, likeed St. Maarten.]

This is why it is so important to live and work amongst the local population. If you isolate yourself you will never truly know who you live next to or what is really happening in the community. Is your neighbor a true friend or a foe? Do I truly feel safe? Is there discrimination? Only a protracted period of life there will give you the real answers.

For the next few years we spent time up and down the island chain. Continually looking for what was becoming more painfully obvious -- "the best place to retire is difficult to find, or worse, maybe does not exist at all!" After returning to St. Maarten to re-provision, we set sail directly for Panama. Based on information I had gathered from reading books, surfing the internet and in talks with dozens of other sailors about their stay in Panama, from all accounts -- it sounded great. But we needed to experience this for ourselves.

After 10 plus days of sailing/motoring we arrived in Bocas del Toro, Panama. Initially, it looked great. But it only took a couple of months to realize that this was definitely not a place to retire to. I lovingly refer to it as "Bogus del Toro."

So off we went to Cartagena, Colombia. What we found were great prices so we opened a business and stayed for about six months and then discovered it too was not for us. It is great in the "city" itself but we wanted to live in the country side and after speaking with the locals the consensus was to forget it! It was too dangerous out in the country way back when.

So -- back to Panama! The one area of great appeal was the San Blas islands but unfortunately, an outsider cannot own land there. So, we finally gave up on Panama and sailed back to the States.

But something kept drawing us back. What had we missed in Panama? We definitely had not done our usual stay, i.e., working, etc.. But we could not leave there fast enough as we were not comfortable with the areas we had visited. So what was still so intriguing about Panama we wondered? Giving in to our curiosity, we flew back to Panama with the intention of driving all along the south coast (Pacific side) only. All we can say is "ARE WE GLAD WE DID!"

The difference, at least to us, between the north and south coast (Caribbean versus Pacific) is like the difference between night and day. After only one week we knew we had found our Place in Paradise at last! Never, in our 12 years of searching, had we been so swept away, simultaneously, by a country, its people, its government and the climate.

Our thought was "we cannot move here fast enough!" So, wasting no time, we bought property, set up a corporation, applied for our immigrant status and then flew back to the States to sell our Florida home. We figured that once that was completed we would be free to move "full time" to Panama.

Well, that was in 2006 and it took us another year before all of the loose ends were tied up and we finally made the physical move. We ended up renting out the Florida house as we could not sell it, we sold the car and then contacted Crowley Shipping. We then packed up all of our worldly possessions into a 20 foot container which was scheduled for delivery during the second week of January 2008.

Our priorities then, upon arrival, were to find an inexpensive place to live, preferably close to our property, to buy a used 40 foot container for storage on our property, and to buy a vehicle. Sounds like a short and easy to do list, does it not?

On January 7, 2008 we finally arrived in our new country. So far, we have loved almost every minute of life here in Panama. I say almost because -- well, you see, life in "paradise" does have its challenges.

I decided that a good way to keep our friends and family in touch with us and our adventures in paradise was to start a newsletter and here is the first entry:
Villa Davina Newsletter, January 2008

Well, here it is Monday January 14th 2008, the end of our first week in our new "country of choice." Although we are having difficulties finding a short term rental accommodation we are thoroughly enjoying our relocation. Our flight down from Florida was relatively uneventful except for losing my luggage (with all of my clothes) and one very upset cat (aka SH). With the thousands of miles that SH has traveled, she still does not travel well!

Upon arrival in the Panama City airport, we discovered that our cat carrier (plus the cat) had been placed on the luggage carousel first. So, unfortunately, we were not there to greet SH to her new homeland. When I did arrive at the carousel I saw a woman taking SH cat off of the conveyor belt. I said WHOA. She replied that SH, the cat, was just completing lap #3 of her carousel ride, and was very scared, so she was going to hold her until the owners arrived. I said thanks and attempted to calm down the "Mario Andretti" of the cat world. When Ruth joined me she took over as pit crew and I went on a search and rescue mission for my luggage.

We had hired a company to handle the customs and veterinary clearing of SH, our cat, and we were glad we did as this man was also providing ground transportation to the other airport for our flight to David. But due to the delay of registering our lost luggage and clearing the cat, we were going to miss the connecting flight to David. That glitch would require us to spend an overnight in Panama City which would necessitate the re-drugging of SH for the next day's flight. I explained this dilemma to our cab driver and he asked, "which airline are you using?" I told him we had not made reservations to which he replied, "good!"

I asked why and he said he had a friend at Air Panama. He made a phone call as we raced through Panama City toward the small airport, and he seemed to be speaking as fast as he was driving. He told us that when we arrived at the airport to go directly to the ticket counter and buy the ticket, so we did exactly as told. Upon completion of a very speedy purchase, we were rushed out to the plane. It seems his friend was the pilot and was waiting for us. We have never been treated to such service in an airport! We actually made it to David on time. In the end all went well. The loss of my luggage also proved to be a blessing as it was the heaviest of all of the bags and on the small aircraft you must pay .75 cents per pound over-weight. As it was, we paid $49 dollars with just the luggage we had. It would have been at least another $50 for the lost bag. The lost bag showed up two days later free of charge!

We sent Jorge, our architect, to Panama yesterday (Sunday) to buy two 20 foot containers which he had found for us. Another setback -- as the 20 footers are now somehow "in demand" and so they only have 40 footers available at a reasonable price. We are sitting here in the hotel room waiting for him to call back so we can give him the go-ahead to get one 40 footer, as opposed to our original plan. Lesson number one for anyone moving to their paradise -- please ensure that your plans are flexible!

Sunday (13th) was a quiet day for us and we walked around through the town square of David and enjoyed the scenery and serenity. Then we walked around looking for different restaurants. We have seen (and heard) one place located on the second floor above a furniture store. To the untrained eye, the establishment appeared to be -- shall we say -- seedy! Naturally, we said "let's give it a go!" Turns out that it is not really just a restaurant but was primarily a pool hall -- a very loud pool hall. It had lots of tables, a bar and, a restaurant of sorts.

Missing our weekly get-together with our pool playing friends in Ft. Myers we opted to have a beer and play some pool (that rhymes with fool). Here, you actually rent the table for $1.60 per hour. We had four beers and one hour of pool (4 games, I lost 3 to Ruthie) all for the whopping price of $4 dollars. Well, seems we have found the "cheap spot" for beer.

For those of you who love Chinese food, we found another fabulous spot. It is a 24-hour restaurant just down the street from Puerta del Sol and even though it is a "local" restaurant named La Tipica, it has fantastic Chinese food. We had fried rice with shrimp (lots of shrimp) and a dish of chicken chow mien and a pitcher of beer for the ridiculous price of $9.00. There was way too much to eat so we brought it back to the hotel room and had two additional meals from it.

The down side was that we do not have any cooking facilities, so we improvised and heated it up using an aluminum baking dish set on top of our toaster. Just activate the toaster (3 times) and stir -- worked great -- until we melted the sides of the toaster. The upside is the toaster still works, sort of, and I have discovered that cold Chinese food is not that bad!

I just received a call from Jorge and he is buying one 40 foot container to be delivered tomorrow. Yea right!

P.S. Here it is Wednesday, January 16th, and our container (the one we bought) has not arrived, and we just got a call from the shipping company (Crowley) saying they did not ship our container of personal belongings because they were missing paper work -- how does it take over a week to figure that out. Welcome to the world of mañana!

Stay tuned, same time, same channel for part two of our move. You will read more about tropical magic, also known as "how to remove a container from a truck -- without a crane!"


Nothing here from Doug Casey that he has not said before, modulo the usual small revisions to his thinking as events unfold. The interview format, from The Gold Report, is a good way to get acquainted or reacquainted with Doug's thinking. One segment which registered in our brain was this one on the gold mining stocks: "So I am not saying gold mining is a great business. It is not. It is a crappy business. Still, we could have a bubble in the stocks. I am hoping we do." Is he saying he is depending on an irrational mania to really make those speculations pay off? Buyer beware.

Bullion and oil appear in the lineup of power players that Doug Casey thinks investors can count on as the world slips deeper and deeper into what he calls the "Greater Depression." Despite the raging economic storm and Doug's doubts that Western civilization's governments will take the actions needed to quell it, though, the Chairman of Casey Research is nowhere close to calling the game. In fact, he sees silver lining in the clouds of crisis -- opportunity -- and expresses optimism that technological advances, coupled with capital rebuilding once over-consumption runs its course, will prevail eventually. The Gold Report caught up with the peripatetic author, publisher and professional international investor between polo matches in New Zealand, one of several nation-states he calls home from time to time.

The Gold Report: You have been discussing what you are calling "crisis and opportunity," and in fact have a summit by that same name coming up in Las Vegas next month. Could you give us a high-level overview of what you foresee?

Doug Casey: We have definitely entered what I describe as the Greater Depression. It is not coming; it is here. It is going to get much, much worse as far as I am concerned and unfortunately, it is going to last a long time. It does not have to last a long time, but the root cause is government intervention in the economy and everything they are doing now is not just the wrong thing, it is the opposite of what they should be doing. It is almost perverse.

The distortions and misallocations of capital and the uneconomic patterns of production and consumption that have been going on for over a generation need to be liquidated and changed, but everything the government is doing is trying to maintain these patterns. So it is going to be horrible. In addition, the government is necessarily directing more power toward itself with all of its actions. If I were you, I would rig for stormy running for a good long time.

By "a long time," do you mean a couple of years, a decade, a generation?

This is, in some ways, uncharted territory. Let me say that for the long run I am very optimistic. Why? Two things act as the mainsprings of progress. Number one is technology and that is going to keep advancing, so that is very good. Second is capital and savings. Individuals will solve their own problems and, therefore, they will stop consuming more than they produce, which is what they have been doing for years, and they will again start producing more than they consume. The difference is savings; that builds capital.

So technology and capital are going to solve the depression. But the government can do all kinds of stupid things to make it worse. Look at the Soviet Union. They suffered a depression that lasted 70 years from its founding. Look at China. The whole reign of Mao was one long economic depression. That could certainly happen in the U.S., too, where the government misallocates capital in such a way that technology does not advance as it could and people cannot build individual capital the way they would. I am optimistic, but anything can happen.

But didn't China and the Soviet Union have governmental structures very different from those in Western Europe and the U.S., and those structures allowed for more intervention? Are you projecting that we might slip into an era where Western civilization will allow their government to run themselves like the Soviet Union and China did?

It seems to be going in that direction. Of course, Europe is going to be hurt much worse than the U.S. Europeans are much more heavily taxed and much more heavily regulated. The average European is much more reliant upon the state psychologically as well as economically. So it is all over for Europe and this does not even count the problems that they are going to have in the continuing war against Islam, which are much more serious for Europe than they are for the U.S. So, no, Europe is fated to be nothing but a source of houseboys and maids for the Chinese in the next generation.

So do you think that societies in Western Europe -- and even the U.S. -- will allow themselves to be governed in the same fashion as the Soviet Union and China were during their depressions?

Oh, totally. I do not see why that would not be the case. Even Newsweek says we are all socialists now. That seems to be the reigning ideology. In addition, psychologically, the average American -- just like the average European -- looks to the government to solve things. This is very bad. Most people are unaware that Homeland Security, which is one agency that should be abolished post-haste, is building a 400-acre campus in southeast Washington, D.C., where initially they are going to put 25,000 employees. That is as many as the Pentagon has and with 400 acres, Homeland Security has a lot more room to grow. Ironically, the property is at the site of St. Elizabeth's Hospital, the first federal insane asylum in the United States. Once a bureaucracy has a piece of real estate and builds buildings, it is game over. They are just going to accrete and grow and grow, so that is one indication. The trend is clearly in motion.

It is all over for the U.S. In fact, let me say this. America does not exist anymore. What is left is not even these United States. That was decided in the 1860s. It is the United States. America, which is basically an idea, a concept, is dead and gone. The United States is just another of 200 awful little nation-states that have spread across the face of the earth like a skin disease. There is no longer any difference that I can tell between the U.S. and any other country.

How would you describe the concept that America was based on that is now gone? And is there another country in the world embracing that concept? Will there be a new America?

No, there is no other place. I have been to 175 countries and lived in 12. My feeling is that the best thing that you can do is set your life up so that you are not to be considered the property of any one government. You might have a passport or several passports and, therefore, that government thinks they own you. But if you do not spend time in a country, practically speaking, there is nothing they can do about it.

So, no, there is no real haven for freedom in the world today. The best you can do is go where the governments are so unorganized that they cannot control you effectively. That is one reason I like to spend time in Argentina. They have an incredibly stupid government, but they are also very inefficient and ineffective. So it is wonderful as a place to live. I also spend time in Uruguay, because it is a tiny little country with no ambitions to conquer the world. The nice thing about New Zealand, where I am now, is that it is a small country, only 4 million people, lots of open land. It has got some severe problems, but it is pleasant. I think the U.S. is going to be the epicenter of a lot of problems in the years to come.

Few of our readers are probably in positions where they could live in 12 different countries, but they have amassed assets here in the United States. What advice would you give them to safeguard those assets?

The key is to remember that we are going to have a long and deep depression, so most things that worked well over the last 20 years are unlikely to work well in the future. I had been predicting the real estate collapse for a long time. It has still got a way to go, too, because a lot of real estate debt remains that has to be liquidated. There is a lot of leverage out there and there has been a huge amount of overbuilding. So it is far too early to get into real estate, at least in North America or Europe.

It is also way too early to get into the general stock market, for all kinds of reasons. Dividend yields are still extremely low. Earnings are going to collapse. Government bonds are perhaps the worst single thing to be in, because with the government printing up money literally by the bushel basket, the dollar is going to start losing value radically and interest rates are going to start going up radically at some point. So you have to rule out most stocks.

I am afraid that the most intelligent thing you can do is to own a lot of gold, preferably gold coins in your own possession. And I think speculation in gold stocks makes sense at this point, because gold stocks are about as cheap as they have ever been relative to other assets, really, in history. Now is an excellent time to do that as well. But that is in terms of speculation.

Investment risk is tough enough, but the biggest problem is political risk. That is what you have to watch out for. That means you have to diversify internationally. This is harder for most people, harder psychologically, and it takes more assets to make international diversification viable. But if you are in a position to do it, it is the most important thing you can do.

Since you mentioned having coins in your own possession, should we assume you are not a big fan of the ETFs or some of these other paper gold promises, if you will?

ETFs are okay for the convenience that they offer and for significant amounts of money, but gold coins should be first on your list, no question about that. If you are only talking about $50,000 or $100,000, or $200,000, coins are fine to keep in your own possession. They will not take up much room and you can put them in some safe place (which, incidentally, is not a bank safe deposit box).

Are you recommending putting all of your investment in gold into the bullion or are you also recommending some portion in producing junior and explorations?

Both, but look at the stocks as being speculative. Most of your money should be in gold with a bit of silver, too. Silver is basically an industrial metal, but it has monetary characteristics. Now is the time to be very overweight in the metals and I think owning gold stocks is a good idea. They are very cheap.

Anything else investors can do to preserve whatever may remain of their wealth?

Owning real estate in some foreign countries is a very good idea -- from a lifestyle point of view, an asset diversification point of view, and a possible capital gains point of view, too. They cannot make you repatriate foreign real estate. Having some U.S. dollar cash while we are going through this deflationary period is very wise as well, but that is not going to last. Eventually the U.S. dollar is going to reach its intrinsic value.

Not that you have a crystal ball, but how would you see the rest of 2009 playing out?

Nothing goes straight up or straight down, but it seems that 2009 is going to see much higher gold prices and much lower stock prices and much lower bond prices, too. But remember, the worst is yet to come.

You have not heard an awful lot about people losing their pensions yet, but that is going to happen because what are pensions invested in? They are mostly invested in stocks and bonds and commercial real estate. All three of those things are disaster areas, and bonds are the big disaster area yet to come. So I think it is going to be nothing but bad news in 2009. What happened in 2008 was just an overture to what I think is going to happen in 2009 and ‘10.

Even into 2010?

Yes. This is not going to be cured overnight, mainly because of what the government is doing. As I said, it is perversely exactly the opposite of what they should be doing, which is abolishing all the agencies and freeing up the economy. They are passing lots of new regulations, they are going to have to raise lots of taxes eventually, and they are inflating the currency. So it has to last, at least into 2010. It is going to be quite dismal, actually.

And what happens with the unfunded Medicare liabilities?

They are not going to be funded. They are going to be defaulted on and, actually, that is the best thing that could happen. That is one of the things that should be done now. The U.S. government should default on its debt. This is shocking for people to hear, but it would not be the first time the U.S. government has done that. It did that almost at its founding in continental days.

This debt represents a tax liability that is being foisted off on the next generations who have no moral obligation to pay and should not pay. I think as an ethical point, the U.S. should default on this debt. It is impossible to pay it back, and it will not be paid back. It is more honest to acknowledge that bankruptcy now as opposed to pretend it is going to be paid back. Defaulting even might forestall runaway inflation in the dollar, which would be a catastrophe of the first order. So it is the smart and moral thing to do, and it is going to happen eventually anyway. All the real wealth will still be here. A lot of it will just change ownership. The big losers will be those who lent to the State, thereby enabling its depredations, and they deserve to be punished.

But even a default tomorrow will do no good unless you put the U.S. government into reverse and disband all of these ridiculous, destructive agencies that have grown like a cancer for years. Taxes should be cut 50% to start with, just out of hand. And the defense establishment -- it is a misnomer; it is not defense at all but rather foments wars around the world -- should be cut hugely. Not with a butcher knife, but a chain saw. But none of this is going to happen; in fact, just the opposite. That is why I am so pessimistic now that the tipping point's finally been reached.

Are we at the tipping point?

Yes, we have absolutely gone over the edge. The consumer is no longer in a position to consume. Everybody is going to cut consumption to the bone and hopefully find something to produce instead. It would be better for people to start viewing themselves as producers than consumers. That would be a step in the right direction to get them psychologically more in line with reality.

In last fall's meltdown, gold held up, but the stocks did not. Quite a few producers and soon-to-be producers, and some companies making discoveries, seem to have bottomed out in November and December. But worry persists in the market. Suppose another shoe drops or another black swan appears? Richard Russell (Dow Theory Letters) and others have been talking about the Dow going down to 5,000. What would that do to the gold stocks?

Gold stocks are also stocks, and the best environment for gold stocks historically has always been when both gold and the stock market are going up. But since the last gold stock bull market came to an end, I think it is entirely possible to see a bubble develop in gold stocks with all the money being created. I certainly hope so. I am actually optimistic for gold stocks just because they are so cheap relative to everything else.

They have been beaten down.

Yes. And that fact, along with the waves of money being printed around the world and the much higher gold prices we are going to see, could cause a speculative mania to develop in the gold stocks. Nobody is even thinking about that possibility right now, because they are so battered. But this is the time to get into the right ones because it is likely to happen in the future.

The 1929 crash -- which was really the preamble, because 1930, ‘31, ‘32 and ‘33 were certainly bigger -- is when gold stocks such as Homestake did their best. How do you see that playing out this time around? Is it different this time or do you expect a similar pattern?

You know what they say, "History doesn't repeat itself, but it rhymes." I think that, first of all, the gold mining industry is a much worse industry now than it has ever been in the past, because just as all the easily defined light sweet oil basically has been discovered, all the easy-to-find high-grade gold basically has been discovered. Most mines that are going into production are low-grade, which means that you have to move a lot of dirt, which means that they are much more capital-intensive than in the past. So gold mining is a worse industry from that point of view.

Also, politically speaking, with the rise of the green movement, there are people who do not want any oil burned, any dirt moved, any trees cut. They do not want to see anything happen. This makes it much harder to do gold from a permitting and political point of view. We are in a much higher tax environment than in the past. So it is a tough industry. It really is. It is just a 19th century choo-choo train type of industry that interests me only as a speculative vehicle. You will notice that gold went from lows of about $300 to highs of about $900 and none of these gold companies are making any money because their costs actually went up faster than the price of gold. So I am not saying gold mining is a great business. It is not. It is a crappy business. Still, we could have a bubble in the stocks. I am hoping we do.

Are we not going to see a change in that in 2009? Oil, which is one of the large components of that cost, has come down dramatically. A lot of these producers must be locking in oil at these lower prices. Won’t that translate into year-over-year earnings increases for the gold producers?

That is possible. The producers actually may show increases for the next couple of years. I do not doubt that. But I do not think oil will stay where it is. I think oil is eventually headed back to $150 a barrel or more.

So why would you not own oil as well as gold?

It is a good idea, but we were not really talking about oil. I would say that oil is a good thing to own. Oil is a real buy now. It is as good a buy at $40 as gold is at $900 right now. Maybe a better buy; who knows?

If we go into worldwide depression, will oil continue to be a good buy or will it self-regulate around this $40 a barrel?

I am bullish on oil. Although I am philosophically not very sympathetic to the peak oil theory, I think it is a geological fact. Also, China and India and the other developing parts of the world do not use a whole lot of oil now. As they develop, they will to want -- and almost need -- to use a lot more oil. That is going to keep pressure up on the demand side. But the supply side actually finally is constrained, so it is going to mean higher prices. In a depression-type environment, U.S. and Western oil consumption could drop a lot, but the third world would take up most of that slack. So I have to be bullish on oil.

Are you bullish on any other sectors or commodities?

I am bullish on agricultural commodities. They ran way up last year and then collapsed again. I think a good case can be made that most of the soft commodities are quite cheap and will go higher, so I would look at those, too. I think gold definitely, oil in the years to come has the potential to go much, much higher, and the agricultural commodities have a lot of potential.

Gold appears to be uncoupling from the dollar. Historically, when the dollar was strong, gold would be weak. But we have had a couple of recent instances in which both the dollar and gold have been strong. Obviously, we have seen a total decoupling of gold from oil. It used to be when oil was running, gold was running and vice versa, but that no longer seems to be the case. Is that just an old wives' tale or is something going on?

I have never seen any necessary relationship between gold and oil, just like there is no necessary relationship between rice and natural gas, or nickel and soybeans. All these commodities tend to move together, all the currencies tend to move together and stock markets tend to move together, but they all have their own dynamics. I think it makes sense to compare the relative prices of various commodities and see what may be cheap or dear relative to other things based on the fundamentals.

On any given day, somebody may have to buy or somebody may have to sell a huge amount of almost anything. It is unpredictable and you cannot tell what constraints are out there in the market. I do not even pay attention to day-to-day fluctuations because they are just random noise. I watch the big trend. It has been shown that if you just made one correct trade and stuck with it at the beginning of every decade for the last four decades, you would have realized something like 1,000 times on your money. To me, this is the proper approach to the markets, not to try to second-guess from day-to-day what is going to happen. That is foolish because you get chewed up with commissions and bid-ask spreads and double-thinking your own psychology and so forth.

I really just like to look at long-term trends. In terms of long-term trends, you have got to be long gold, long silver, long oil; you have got to be short bonds. I think that is really all you need to know. The other things we mentioned such as agricultural commodities and so forth are worthy of attention. But, as I said, I am not a day-to-day trader. I think that is very foolish.

Are these the themes that you and your group of speakers will focus on in Las Vegas?

They are. I certainly want to invite anybody who reads this interview to join us. We put on very small, very classy seminars. They are not gigantic mob scenes, so it is possible to get to know individual speakers and fellow attendees in a very collegial atmosphere. I think it is something that anybody who is seriously interested in these kinds of things should consider.

The Coming Depression: See It Clearly Through Historical Eyes

Over 95% of investors claim not to have seen the current downturn coming nor do they accept the probability of a coming depression (at least they did not by the end of 2007). There continues to be conversation whether we are near a bottom. Much money on the sidelines is eagerly waiting to go back into the market or more likely, existing investments with big book losses waiting for the market to recover. Yet when our probable course is viewed in historical terms, there is a very clear and likely path, much further reduction in the value of everything particularly including real estate, equities, bonds and most commodities (gold is shaping up as a hedge against the problems). What does history tell us?

Most views of history do not go back further than 5 years. In late 2007, I went to numerous prominent investment advisors to look for suggestions. Not one of them gave me recommendations where they would provide investment records that went back more than 5 years, the bottom of the 2002 downturn (Very convenient! I would call this deceptive advertising). The truth is that you need to look at investment histories over 300 years for many realities to simply jump out at you. You see clearly that history repeats. You see clearly during three hundred years that there are major repeating cycles. You see clearly that ideas like buy and hold make no sense when you look at things over several decades. You see clearly that diversification does not really work when measured in terms of decades. (Commodities almost always bottom within three months of major bottoms of stock indexes.)

History needs to be looked at in two terms. Numerical terms of what has happened to the markets and descriptive terms of what has happened to the market.

Let us look first at a numerical description of the market. I am using a chart courtesy of James Flanagan of Gann Global Financial. This shows commodity prices from 1730 to present. You can clearly see the repetition of cycles in the prices of commodities.

Another excellent source of similar material is from Bob Prechter of Elliot Wave Theory. Both of these men provide excellent historical data on stock indexes, bonds, commodities and many other asset classes. As you look at their charts, you simply cannot avoid the conclusion that there are up and down cycles that have repeated many times over the last several hundred years. We are now in a major down cycle when the above chart is updated through February 2009.

Now let us look at descriptions of previous historical financial bubbles and crashes. While there are numerous excellent books, I particularly like Devil Take the Hindmost, A History of Financial Speculation by Edward Chancellor. His book starts will the tulip bubble in Holland in 1630. The book ends with a description of the Japanese Bubble of the 1980s (highly relevant since this is the strategy our government has chosen to peruse as a solution to our problems and this book gives some clear historical description of how it is likely to end). He also finishes with some description of the early problems with derivatives from the 1990s which are highly relevant as we can see how our earlier problems with derivatives ended and therefore where our current problem with derivatives will likely end.

Nearly all the bubbles in history seem to have three aspects in common:
  1. A dramatic increase in the money supply (including money created via derivatives, private equity and hedge funds),
  2. Usually a wonderful new financial instrument to facilitate this increase in the money supply (this time it is derivatives, where the Mortgage Backed Securities have already exploded. One particular aspect of derivatives is the Credit Default Swaps which is an economic nuclear bomb with the potential to explode through counter party failures), and
  3. An easing of credit standards which ultimately leads to much bad credit (we seem to have already lost something like a trillion dollars with several more trillions to be written off as we go through the process with fatal consequences for many banks and financial institutions).
While they may seem like three different issues (increased money supply, new financial instruments and credit quality), in practice they are intimately related to one another in creating their nefarious effects on the world economy.

This is not a happy scenario. But we do no one a favor to pretend the cycle does not exist and that we are not in a major down cycle. If I am correct in the assertions made in this article, it raises serious doubts about the effectiveness of the Obama plan to fix the economic problems of the country.


Investing during the bust is an altogether different game.

No one needs to be told that the real estate market has gone from hot to stone cold over the last couple of years, at least in most places. When you cannot depend on a hot market to bail you out of your mistakes you suddenly need to pay a lot more attention to what an investment is actually worth if you want to avoid losing money. You also must take cognizance of transaction costs, which put you behind by 10% immediately in a bad market.

This is a good primer primer for starting to think about real estate investing today. Although not explicitly referenced, a lot of the advice probably applies double to buying in a foreign country.

Real estate prices have gone berzerk in many parts of the U.S., and in many parts of the world. The unwind has already begun in the U.S., and may be coming to a neighborhood near you soon.

An extremely interesting and informative book which deals with the whole boom and bust phenomena is, Sell Now! by John R. Talbott. Unlike many "real estate experts" the author has done extensive research and a great deal of analysis on various aspects of the bubble. The bottom line is, in so many words, that crazy lending led to crazy prices. When the crazy lending goes away (as it has done and is doing) the crazy prices will go away. Many banks and mortgage companies will be severely weakened by the bust, and the ones that survive will be extremely conservative in their lending going forward. Real estate prices will tend to return to fundamentals -- for investment real estate, prices will equate to actual rental returns (before the boom, residential real estate tended to sell for between 10.5 and 12.5 times annual rents, depending on the location in the U.S. In some places, real estate now sells for over 30 times annual rent).

The author also details how the boom was really international, spreading to many cities all over the world. So it is possible that the bust may be international as well. The Economist magazine did an article last year calling the current real estate bubble, "the greatest bubble in financial history."

So what does this mean for you?

If you live in a house that has appreciated a great deal, and you have a lot of equity, I suggest you read "Sell Now". You may not wish to follow the author's advice, but it would be wise to know what your options are.

Real Estate Bust Dynamics

I was around during the oil patch and later S&L related busts in Oklahoma some years ago. Depending on the location, prices dropped anywhere from 25-30% (suburbs) to 90% (inner city fixer-upper rental property). During the real estate bust in California during the early 1990s prices around LA on average dropped around 25% from their peak in the late 80s. Real estate may not have dropped nationwide since the 1930s, but it has had extreme falls in various places at different times.

For those of you who are interested in investing in foreclosures, I would like to offer some advice.

First, just because a house is a foreclosure does not make it a bargain. House prices may fall for many years, and may recover very slowly, since banks and mortgage companies will be too weak to do any wild lending for a long time. In a stagnant market, rental values will be very important, since it may be difficult to sell for a quick profit.

I have seen a single house go through multiple foreclosures over a period of several years. An investor would buy, thinking he had gotten a bargain, only to have the market fall another 20-40%. The property would be foreclosed again, a different investor would buy at a still lower price, and sometimes face difficulty or foreclosure as prices dropped even further.

If a property has a good, positive cash flow, this is not as much of an issue. You can hold the property, collect the rents, and wait for the market to recover.

If the property produces a negative cash flow, you might face considerable difficulty in holding the property. It is no fun to lose money every month, and in a falling market it is hard to say when you might be able to make money on the sale of the property.

In realistic terms, I would hesitate to pay over 10 times annual rents for a property. If it is a great property in a great area, maybe 12. Over that you will not have much of a cash flow. At present, interest is close to 7%, annual property taxes in most areas are 1% or more of the purchase price, repairs should cost a minimum of 1-2% per year (less than that and your property is probably not being maintained properly), insurance and utilities another 1/2% to 1%, and vacancy and collection losses should be allowed, amounting to 1-3% of the purchase price. Add it all up and it easily exceeds 10% of the purchase price per year to own the property. Paying 10 times annual rent for a property should allow for a moderate cash flow, if everything goes well and you know what you are doing.

Also being realistic, I think property has several years yet to fall before there will be many real bargains in most areas.

I realize that my back-of-envelope analysis here is simplistic, but lots of people get into real estate with no plan for cash flow. Tenants can be unpredictable and destructive, and can pay late or not at all. The time you make money in real estate is when you buy -- you set yourself up for success by paying the right price for the right house in the right area. You set yourself up for failure by paying too much in the wrong area for the wrong house. You set yourself up for success by screening for the very best tenants you can get, without discriminating against anybody. You set yourself up for failure by not checking references, by not checking rental history and credit, and by renting to people just because they talk a good line and wave money in your face. Learning how to screen tenants properly is probably the second most valuable skill that a serious real estate investor can acquire (the first is learning how to buy right).

Over the last few years many people bought houses which were poorly constructed, in mediocre areas, for ridiculous prices. When people come to their senses, many of these houses will be worth perhaps 20 or 30 cents on the dollar, depending on the area and how much they went up during the boom.

There are zillions of books on real estate investing out there, but keep in mind that most of them were written during the boom -- investing during the bust is a different game altogether. Flipping houses, buying a house and painting it and making $50,000, is rapidly becoming a thing of the past.

When the financing really dries up, it might take many years before a house goes up $50,000. But, it can still be a good business if you buy right, if you are set up for a positive cash flow from the beginning, and would like to have a predictable income from rents.

How Do You Know When To Buy?

It is difficult to gauge when to buy in a falling real estate market, but there are some things to watch for.

One, when the mass media becomes universally negative about real estate, it is probably a buying sign. Just as when they were universally positive about real estate a couple years ago it was a selling sign.

The kind of media negativity we have seen lately has been fairly tepid compared to what you need to see as a buying sign. When you see Time or Newsweek with covers like "Will Real Estate Ever Stop Falling?" and "Real Estate Horror Stories" it may be time to start looking.

A positive cash flow from rents would be another promising buying sign. When you can buy a house, rent it out at the market rate, and generate a positive cash flow after paying the mortgage, repairs, utilities, etc, that ordinarily would be a good time to buy. Even if prices drop a little more you have the cash flow to even things out.

Another buying sign would be the failure of a large bank due to mortgage foreclosures. Many mortgage companies have already failed, but no large banks. Failure of a number of large banks would be a definite buying sign.

When basically nobody wants to buy real estate for an investment it is also a buying sign. You are looking for extreme negativity, when very few people are interested in real estate. In general terms, when nobody wants something it is a good time to buy it -- given that it is still a viable asset. It may take a few years for things to get to this point, so a lot of patience and observation is warranted.

Another promising sign would be very large-scale auctions of foreclosed property. There are a few isolated auctions already, but when things really get into gear there should be auctions with hundreds or even thousands of properties. Banks and mortgage companies will have so many foreclosed properties and the market will be so slow that they will have few other options for dealing with them. A foreclosed house costs a bank or mortgage company money every month, and generates no income. An owner-occupant can wait things out if they can still make their payment, but a bank or mortgage company does not have that option.

Most likely you should look for several signs taken together as confirmation of a good time to buy. One sign in isolation may not in itself be enough. Every one of the above signs were present in the bust in Oklahoma and Texas in the late 1980s and early 1990s.

Auction Basics

You will not necessarily have to buy a house at an auction to get a good deal, since large auctions of properties can depress prices locally. Large scale auctions can be a cause as well as a result of depressed markets, depending on how contained or how out of hand things become.

Auctions may or may not be the way to go for you, since you normally cannot inspect a property as much as you would be able to with a non-auction sale. It can be easy to pay too much for a property at an auction, since you can get caught up in bidding against others. You have to make decisions quickly involving tens or hundreds of thousands of dollars.

On the other hand, you can get some great deals at auctions. Most people who come to auctions are not serious bidders, many people basically come to see if they can get something for nothing. If you come prepared to buy after thoroughly evaluating the properties available and knowing how high you will go for the properties you want, you can get some bargains.

If you can, attend one or more auctions to see how things work before you actually bid on anything. Actual knowledge of the auction process will be extremely valuable should you decide to purchase one or more properties at auction. Auctioneers are trained to build excitement and get people to bid -- their intent is to get you to bid as much as possible, since they are usually paid a percentage of the sales price. Your interest is in paying the lowest amount possible. Keep in mind that in some auctions you may encounter what is known as a "shill" -- a person hired by the seller or auctioneer to bid on properties and raise the prices, who has no intention of ever winning a bid and buying a property. The more reputable auctioneers will not permit this, but there are still "shills" out there.

If you decide to bid at an auction, be sure to arrange financing beforehand, if you need it. Some sellers will provide financing for properties purchased at auction, but it is not common. It is customary to put 5 or 10% down on the day of the auction, should you have a winning bid, and to close within 30 days or so.

Sheriff's Sales, where you purchase a property at auction at the county courthouse, are another matter. The main drawback with this sort of sale is that you often do not know exactly what you are getting. You often do not have the opportunity to inspect a property closely before purchasing it, and you do not always know if the title is completely clear. If you are able to do your homework on the property, if you can determine whether the condition and title are both good, it can make sense.

In a market that falls rapidly and deeply, it often makes sense to buy from the bank after the Sheriff's Sale. You have more time to inspect the property, you can often purchase for far less than the balance owed at the Sheriff's Sale, the title is generally guaranteed to be marketable, and most sellers will at least haul off the junk and take care of some repairs to the property. Some people specialize in buying at Sheriff's Sales and know the ins and outs -- if you decide to go this route, do a few dry runs by going to Sheriff's Sales before you actually plan to bid.


Valuation in a rapidly falling market is a tricky matter. Assessed value from the courthouse can be wildly optimistic, since the County Assessor will sometimes keep increasing assessments even after the market has begun falling. It is not uncommon for a property to be assessed 20-35% or more than it actually sells for in a falling market. I have seen properties assessed for 10 times more than they sold for.

In a rapidly falling market appraisals also tend to be less useful. In a falling market, houses cannot readily be compared to other houses which sold nearby under different sales conditions -- how can you compare the value of a house which sold when financing was extremely easy to the value when financing is extremely tight? Location and features are of course important, but if nobody can get financing, how much is a house worth? Best to forget what houses sold for during the boom, since those prices are gone and are not coming back anytime soon.

If you are able to hold a house for income, valuing a house based on a multiple of annual rents is a very good gauge. Rents tend to be far less volatile than prices under most circumstances, and rental amounts can be easily estimated by checking what comparable places rent for locally. As I discussed above, I would be reluctant to pay much over 10 times the annual rent for a house. Over this and you may have a negative cash flow. Essentially you would be subsidizing your tenants every month, paying them to live in your property. Better that you should just send me a check every month (ha-ha).

I would also be reluctant to accept the valuation advice of real estate salespeople. They know what houses sold for in the past, rather than the present and future value, which is what you are concerned with. Some of the on-line valuation sites like Zillow.com can be useful since they can give information on comparable sales -- but in a falling market it is best to understand that current and future values are often much lower than comparable sales would indicate.

In this new market, your estimation of value is probably as good as the next person's, provided you do your homework.

In the pre-boom days it did not make sense to spend $40,000 on a kitchen (unless it was a very high-end house) or $20,000 on a bathroom, since you could rarely recoup the investment upon sale. We are probably going back to that environment -- make the house nice, but few luxury features or over-improvements will pay off for most houses. If you can buy houses with some of these features without paying extra for them, fine, but in general it probably would not make sense to drop that kind of money on most houses. Do not be persuaded to overpay for a house just because it has granite countertops or a jacuzzi tub or whatever. These kinds of things really will not increase the value of a house much going forward.

Do not forget that it costs around 8-10% of the sales price to sell a house -- 6% for the real estate salesperson, figure 1-2% for lender required repairs, 1%-2% for closing costs like title insurance and the paperwork blizzard where everybody even remotely connected with the transaction piles on to get their cut. If it is a slow market, plan on paying some of the buyer's costs as well. If the property is vacant for a long period of time before it sells, it may cost considerably more than 10% to sell.

Since it costs so much to sell real estate, it does not make sense to buy a property unless it is at least 10% under market value. If you buy at market value and have to sell before the market comes up, you are at least 10% underwater due to the selling costs. In a bad market you really cannot afford to pay the market price.

The Garbage Property

During the boom, a lot of "garbage" properties sold for a lot of money. People would seem to pay almost any price to get into real estate, and they could get into a garbage property since they were cheaper than places that were actually built properly.

It was amazing to me that banks and mortgage companies would lend on some of these places.

A garbage property is a property that has very little economic value apart from being used as perhaps a low-end rental. Garbage properties are places that were basically not built properly in the first place, or which have been remodeled very badly over the years, or which have been very badly maintained over a long period of time. It might be possible to fix a garbage property, but why not buy a place that was built and maintained properly for a little more money?

During the real estate bust, you should be able to buy properties that were built extremely well for not much more than a garbage property.

Even as a rental, garbage properties can be a lot of work -- lots of repairs (since they were not built properly in the first place) hard to get and keep good tenants (tenants know quality and junk when they see it), and the rents are usually lower.

You can make money on garbage properties, but it is a lot easier to make money on houses that were built and maintained properly.

Investing In Farm Land

Farm land has come up in price quite a bit in the last few years. Most people probably would not think of farm land as an investment, but it does have certain advantages.

A growing world needs more food, and that means rising prices for some crops, and thus for land. Many farmers rent land so they do not have to tie up capital, and that leaves an opportunity for those with money but no desire to farm.

Decent farm land can be bought for under $1,000 an acre in some parts of the country (wheat land in Oklahoma, for example). Good land for growing corn tends to be quite a bit more expensive (corn does not do so well in Oklahoma).

Crop prices (and crop land prices) tend to not be correlated with stock prices, so it can be one way to diversify out of stock and bond investments.


The vision of a shared currency pulling Europe together economically and politically to rival the United States has begun to unravel.

In the previous Offshore News Digest we posted a sobering piece from Gary North warning of the dire situation faced by the European banking industry. Looking around for corroborating evidence or coverage we found this article from Gary "SirChartsAlot" Dorsch in his issue of Global Money Trends which was published a couple of days earlier than North's article. The coverage is very different. The crisis is the same.

A sound banker, alas, is not one who foresees danger and avoids it, but one who, when he is ruined, is ruined in a conventional and orthodox way along with his fellows, so that no one can really blame him.” ~~ John Maynard Keynes.

For almost a decade, yields on bonds issued by different Euro-zone governments moved close together. By joining the Euro-bloc currency regime, every member state could suddenly reap the benefits of "free-riding" in the Euro-zone bond market, or borrowing at almost the same interest rates as Germany, irrespective of whether the country's economic fundamentals justified the lower rate.

But as the global financial crisis gathered in intensity last September, yields in the 16-member Euro-zone bond market started to diverge. Global investors became more selective, and started demanding higher interest rates from member states with large budget and external trade deficits. Euro-zone yield spreads diverged more widely than at any time since the introduction of the Euro, with Germany enjoying the lowest interest rates and Greece and Ireland offering the highest.

But the vision of Euro-zone economies and interest rates converging behind the shield of a shared currency, pulling Europe together economically and politically to rival the United States, has begun to unravel, raising skepticism about the long-term viability of the Euro itself, and sparking a flight into gold as a safe-haven. Already, three Euro-zone economies -- Spain, Greece, and Ireland -- are under heavy attack from the global banking crisis and credit rating downgrades, and there are concerns that Portugal and Belgium, may be under fire next.

Currency union may have narrowed the wide-gap between the richer and poorer nations of Western Europe, but the good times also masked the underlying structural differences between the various economies, which are now becoming more visible as the global recession deepens. On January 29th, the Die Zeit newspaper wrote, "The global banking crisis is widening the interest rate gap between the Euro countries. Serious economists are wondering when the first state will go bankrupt. After that it is only a short step to catastrophe -- the collapse of the currency union."

Membership in the Euro-currency was originally tied to strict budgetary discipline. The annual deficit of a member country was to be limited to a maximum of 3% and its total debt to 60% of the country's gross domestic product (GDP). But for many years, Greece, Spain, and Italy took advantage of the easy money that came their way, borrowing beyond their treaty-set limits, while their trade deficits remained wide. But S&P downgraded Greek debt to A- in January, citing a current account deficit of 14% of its GDP -- the highest in Europe.

A year ago, Greece could issue 10-year bonds priced to yield +50-basis points higher than Germany's Bund. But trade surpluses from countries like Germany are no longer being recycled back to Greece and other less prosperous Euro-zone countries. Instead, Greece has become a favorite target for the European bond vigilantes. Greece expects to borrow €43.7 billion this year, pushing its debt-to-GDP ratio to almost equal to the country's €250 billion annual output.

Without the crutch of euro membership, Greece could not have attracted foreign investors at interest rates that were nearly equal to those of German bunds, while its economy ran a trade deficit of Eur36.5 billion, compared to Germany, the world's biggest exporter for the past 6 years, which earned a surplus of €178 billion in foreign trade last year. Standing alone, the Greek drachma would have plunged, and sending Greek bond yields even higher.

The European Central Bank has slashed its key repo-rate by 225 basis points since October to 2.00%, unwinding a tightening cycle that spanned over the previous 2 1/2 years. Yet despite the drive towards sharply lower ECB rates, yields on Greece's 10-year bond have begun to move in the opposite direction, climbing 125 basis points higher, while at the same time, yields on Germany's 10-year Bund have tumbled by 75 basis points. In lockstep, the price of gold has risen from €540/ounce in September to above €720/oz today (2-17), tracking the widening interest differential between the German Bund and the weakest link in the Euro-bloc.

One of the drawbacks to membership in the Euro-bloc is the lack of sovereignty over one's own money supply. The electronic printing press, often utilized by central banks to monetize the government's debt, is largely controlled in the Euro-zone by the Bundesbank hawks, united with ECB chief Jean Claude Trichet. The ECB hawks reject the increasingly popular embrace of "Quantitative Easing," which is being adopted by central banks in England, Israel, Japan, the United States, and even Switzerland, in order to combat the destructive force of deflation. The Euro-bloc also precludes member states from unilaterally devaluing their currencies, in a beggar thy neighbor strategy, to boost overseas exports.

Interest rates for Spain's 10-year note have jumped 0.5% since the beginning of this year, which might not seem unusually large on the surface, but is actually quite destructive, considering that an underlying trend of deflation is seeping deeper into the Euro-zone economy. Measured in euros, the Dow Jones Commodity Index is 38% lower than a year ago, and it is only a matter of a few months, before EuroStat begins to report consumer inflation turning sharply negative.

While government and media commentators are still attempting to assure the public that there could be no repeat of the 1930's -- a deflationary spiral leading to global depression -- the commodity markets are telling a different story. Deflation is seen as a precursor to depression, because falling prices generate less cash flow to companies, reducing their ability to pay-off debts, which in turn, can lead to a vicious cycle of mass layoffs, production cutbacks, and weaker consumer spending.

For Spain, higher bond yields and mortgage rates are especially worrisome, since the number of Spanish jobless has risen by 1 million workers in the past 12 months, as thousands of small businesses, which employ around 80% of the workforce, lose access to easy credit and cannot roll over debts. The Spanish jobless rate rose to 14.4% in December, twice the average of the European Union, while industrial production has plunged by 20% from a year ago.

Bundesbank chief Axel Weber is telegraphing a half-point ECB rate cut to 1.50% next month, "We should not avoid lowering interest rates aggressively, because we understand at this current juncture, all indicators look like the Euro-zone economy is in free-fall," Weber warned. But Bundesbank hawk Juergen Stark is warning that the ECB should not adopt "Quantitative Easing" or printing money to lower Euro-zone bond yields. "Overly aggressive reductions in our policy rate when we cannot see any risk of deflation would exacerbate and not resolve uncertainty. Those who advise us to go to zero interest rates and then experiment at the zero level are not those who are responsible for the possible consequences," Stark said.

But Greek central banker George Provopoulos sees the situation very differently -- the worst since the Great Depression of the 1930's. "The outlook for the global and the Euro-area economy in 2009 appears dismal. The current crisis is the biggest since the 1930's and exiting from it will not be easy or quick," he warned. Foreign direct investment into Greece has fallen from €31.3 billion in 2006 to just €4.6 billion last year. The Athens stock market index, ASE General, which was trading at 5,000 a year ago, has tumbled to 1,800, hard hit by a sharp drop in tourism and ship building, which accounts for 25% of its economy.

Greek central banker Lucas Papademos has gone a step further, saying he would support the use of unconventional tools at any time, such as "Quantitative Easing," or printing money in order to buy corporate or government bonds. Papademos indicated that the ECB would not necessarily have to cut rates to zero before expanding its monetary policy toolkit. "Any measures that may be deemed appropriate to improve the functioning of markets and help stabilize the financial system may be taken independently of the level of policy rates," he said.

The Luck of the Irish runs out

A year ago, Ireland's debt to GDP ratio was among the lowest in the Euro-zone at 41%, and at one juncture, Ireland's 10-year bond was yielding 25 basis points less than Germany's. Ireland enjoyed an economic boom since the late 1990's, expanding at more than double the average growth rate across the 13-nation Euro-zone, with high-tech multinationals arriving to take advantage of its 12.5% corporate tax rate, one of the lowest in Europe, earning it the nickname of the "Celtic Tiger."

But the Irish Republic's economy was the first to slide into a recession in the Euro-zone last year, its first setback since 1983. Irish house prices fell 9.1% during 2008, compared with a fall of 7.3% in 2007, and are expected to fall 10% in the year ahead. The average home price in Ireland was €261,600 in December, down from €287,900 at the end of 2007, and €310,600 at the end of 2006.

The global credit crunch was a key factor behind the collapse of a decade-long bonanza in Ireland's housing market, culminating in a move by the Irish government on January 15th, to take Anglo Irish Bank into full state ownership. The move came as fears that a collapse of the bank, from toxic mortgages and other bad debts, would bring down the entire economy. The decision reversed a previous move to pour €1.5 billion into the bank while leaving it independent.

This was part of a €5.5 billion package to prop-up the three major Irish banks, Allied Irish, AIB, and the Bank of Ireland, as agreed in December. Ireland's Finance chief Brian Lenihan made clear that full state control was the only way to prevent a catastrophic run on the bank, with €80 billion of customer deposits outweighing assets. "The damage to the country's reputation in trashing deposits and refusing to honor obligations will be enormous," Lenihan said. Ireland is a key financial hub in Europe, administering €1.7 trillion of funds.

At its peak in 2007, AIB was worth €21 billion. It is now worth €528 million. Over the same period, the Bank of Ireland's market value has fallen from €18 billion to €340 million. In 2007, total Irish financial stocks together were worth €59.4 billion. Now they are worth €1.65 billion. Both AIB and the Bank of Ireland are reported to have large volumes of bad debt similar to Anglo Irish. For the moment these banks remain outside full state control, but are in dire need of additional cash infusions.

Ireland's government debt has now become the riskiest in the Euro-zone, surpassing Greece's sovereign bonds, according to credit-default swap (CDS) rates. Part of the reason is Dublin's guarantee scheme for the debts held by Irish banks is more than 11 times the size of the Irish economy. CDS traders are betting that the possibility of widespread bank bailouts will drive up government borrowing, at a time when the worst economic slump since the Great Depression curbs tax revenue.

CDSs on Irish government bonds jumped 95 basis points to a record 355 basis points last week, the most of any Euro-zone country. This rate compares to 265 basis points insuring against a default by Greece. A basis point on a credit-default swap contract insuring €10 million of debt from default for five years is equivalent to €1,000 a year. Iceland retains the riskiest debt ratings with contracts on its government debt at 995 basis points.

The transfer of credit risk from the private sector to the public sector, in bailing out the banks, is exposing Anglo Irish's property portfolio to the government's expanding debt, putting its strained public finances under even more pressure. Ireland's Treasury is set to borrow some €15 billion this year, taking the total national debt towards the €70 billion mark, but that number can climb far higher. The European Commission predicts the budget shortfall in Ireland will reach 11% of GDP this year.

The recent run-up in gold prices versus the euro, up nearly 20% so far this year, is tracking the widening yield spread between Irish and German bonds, mirroring the same pattern seen with Greek bond spreads. While the current yields on Euro-zone bonds do not suggest that any member state is in danger of defaulting on its debt, the divergence in yields represents the first cracks in the Euro currency regime.

If the Euro zone's economic downturn morphs into a 1930's style Great Depression, the temptation for weaker member states to opt-out of the Euro regime, in favor of currency devaluation, such as recently engineered by the Bank of England for the British pound, or central bank monetization of government debt might become unavoidable. That's the message of gold's rally versus the Euro coinciding with diverging Euro zone bond yields versus the benchmark German Bund.

Gold hit a record €765/ounce on February 17th, after a report by ratings agency Moody's sparked fresh fears about the deteriorating health of Western European banks, with big loan exposure to Emerging European countries. The global financial crisis has forced Hungary, Ukraine, Belarus, Latvia and Serbia to seek more than $35 billion in emergency loans from the IMF to stave off default on their bonds.

Ukraine led a rise in borrowing costs across the region, with the extra yield offered by Ukrainian bonds compared to U.S. Treasuries rising to a record high 32.25% this week. At the same time, investment in the SPDR Gold Trust, (GLD) an exchange-traded fund backed by gold, rose 14% last week to a record 985 tons, mirroring a flight from the Euro into the yellow metal.

Western European banks have bought up most of emerging Europe's banks. But as emerging European currencies weaken by the day, the rising cost of loans taken out in foreign currencies such as the Swiss franc, the euro and the yen is pushing many borrowers into default. Since August, Hungary's forint has dropped about 28% versus the Swiss franc, and 23% versus the euro. Hungary's total stock of foreign currency mortgages rose to 2,374 billion forints ($10.2 billion), or about 9% of the country's entire GDP in December.

The banks with the greatest exposure are primarily located in six countries: Austria, Italy, France, Belgium, Germany and Sweden which account for 84% of the claims on Emerging Europe. The BIS indicated last week, that Austrian bank claims on emerging European clients totaled $277 billion, or nearly 75% of Austria's GDP. For Sweden, claims mostly on clients in the Baltic countries of Estonia, Lithuania and Latvia represent 23% of GDP and for the Netherlands, exposed mostly to Polish, Russian and Romanian borrowers, this is just under 16%.


ST JOHN’S, ANTIGUA: Eastern Caribbean authorities have defended this week's takeover of the embattled Bank of Antigua (BOA), saying the move was taken in the interest of depositors.

"In essence, we were able to successfully avert a disaster and save the deposits and interests of the customers of the bank," said Errol Cort, who is chairman of the Eastern Caribbean Currency Union.

"There are over EC$400 million (US$153 million) in deposits at the Bank of Antigua with nearly 80% representing the deposits of the citizens and residents of Antigua & Barbuda," the Antiguan finance minister added.

Last week, the U.S. Securities Exchange Commission (SEC) stepped up its investigation of Texan billionaire Sir Allen Stanford and the Stanford Group of Companies, accused of perpetrating fraud of a "shocking magnitude" against investors by misrepresenting the safety and liquidity of the uninsured certificates of deposits.

The development triggered a run on the BOA by anxious depositors, even though the Antigua-based commercial bank was not named in the probe.

Eastern Caribbean regulators said they were forced not only to assume control of the bank, but to create a company, the Eastern Caribbean Amalgamated Financial Company Ltd (ECAFC), to carry on BOA's operations while a number of necessary legal and financial activities were being carried out in preparation for the final sale to a new entity.

Authorities believe the ECAFC will take control of operations of the bank so that despite the ongoing issues in respect of the SEC, the institution will continue to function normally and engage with its customers in a manner to which they are accustomed.

Governor of the Eastern Caribbean Central Bank Sir Dwight Venner added that the Memorandum of Understanding between the relevant parties provides for the creation of a new entity, Eastern Caribbean Amalgamated Bank, which would purchase the restructured entity.

"The rapid and volatile changes in the international regional and national environment require us to create new and viable institutions and arrangements for our survival and progress," Sir Dwight told reporters ...

Under the arrangement, shares in the new undertaking are divided evenly between the participating banks: the Antigua Commercial Bank; the St Kitts-Nevis-Anguilla National Bank Ltd; the Eastern Caribbean Financial Holdings Company Ltd; the National Commercial Bank Ltd and National Bank of Dominica Ltd.

Antigua’s Senate Approves Seizure Of Stanford’s Assets

The Senate of Antigua on Friday (2-27) approved the seizure of assets of U.S. billionaire financier Allen Stanford, following an $8 billion fraud case brought against him by the authorities in the United States.

The Caribbean country's lower house of parliament has already approved the measure, which calls for the seizing of about 100 hectares of land and assets belonging to Allen Stanford. The measure will now be enforced once the governor-general signs it into law.

Prime Minister Baldwin Spencer said after the approval of the measure that his government wanted to seize Stanford's assets before the receiver appointed by the U.S. Securities and Exchange Commission (SEC) claims them. "We have to give ourselves a bargaining chip, so when the receivers come they have to deal with the government of Antigua and Barbuda," Prime Minister Baldwin Spencer said.

Last week, Antiguan authorities had seized control of Stanford International Bank Ltd and Stanford Trust Company Ltd, both owned by the Stanford group, and had enforced a temporary restraining order on the banks' accounts to prevent panic withdrawals by the investors and the possible distribution of funds by the bank and other Stanford concerns. ...

The move came after the SEC formally charged Allen Stanford, three of his companies and two executives of those companies on 17th February over an $8 billion investment fraud, following raids on the offices of his Stanford Financial Group in Houston, Texas.

The SEC had said that it was freezing the assets of Allen Stanford and his Stanford International Bank, Stanford Group and Stanford Capital Management, adding that a receiver has been appointed to "preserve assets for investors."


“We have ways of making you cooperate!”

European leaders said they will crack down on tax havens as they seek to boost transparency and apply uniform rules governing financial markets to stem the global crisis. A seven-point plan agreed by European heads of state and government from the Group of 20 nations in Berlin today called for "sanctions" against "uncooperative jurisdictions."

"We want to put a stop to tax havens," French President Nicolas Sarkozy told reporters after the meeting. "We want results on this, with a list of tax havens and a series of consequences." At a full G-20 summit in London in April, "Europe wants to see an overhaul of the system," he said. "A new system without sanctions would not have any meaning." The G-20 groups the main industrialized and developing countries, including China, Brazil and India.

Europe's leaders are seeking to tighten rules governing offshore financial centers in response to the crisis that has forced governments to pledge $7 trillion to shore up banks worldwide.

Even so, efforts to shut down tax havens are a diversion as governments seek ways to counter the financial crisis and the global recession that has ensued, Fredrik Erixon, director of the European Center for International Political Economy in Brussels, said after the meeting.

"They are pointing the finger at tax havens but the problems we are having in the financial system have very little to do with tax havens," he said in a telephone interview from Brussels. "They could not agree on something more substantial so they went for the easy targets: tax havens and hedge funds. It is all a smokescreen."

Chancellor Angela Merkel, who hosted today's [2-22] meeting, said in her weekly Internet message broadcast yesterday that Germany wants to eliminate "blind spots on the global map when it comes to financial-market products, market participants and instruments."

U.K. Chancellor of the Exchequer Alistair Darling criticized Switzerland's banking rules for their lack of transparency in an interview with Britain's Observer newspaper today, saying the Swiss government should not allow people to hide their wealth and avoid tax.

"If it wants to be part of the international community, it has got to be open," Darling was quoted as saying. "Indeed, half the many problems we have got now is because people did not know what was going on. It is one of the things Switzerland has got to address."

German Finance Minister Peer Steinbrueck said in October that Switzerland should be placed on a list of tax havens being drawn up by the Paris-based Organization for Economic Cooperation and Development "because its investment conditions encourage some German taxpayers to commit fraud."

The U.S. sued UBS AG in federal court on February 19 to force Switzerland's largest bank to disclose the names of 52,000 American customers who allegedly hid Swiss accounts from U.S. tax authorities. UBS agreed a day earlier to pay $780 million and disclose the names of about 250 customers to defer prosecution on a charge that it conspired to help wealthy Americans evade U.S. taxes over several years.

Sarkozy, addressing lawmakers at the European Parliament in Strasbourg Octobeeer 21, called for changes to the treatment of tax havens such as the Cayman Islands and Monaco.

Merkel, in her written summary of today's talks, said the leaders agreed that "a list of uncooperative jurisdictions and a toolbox of sanctions must be devised as soon as possible." Sanctions would cover "non-cooperation in exchanging information on tax evasion" with other countries, she said.

Funds held offshore by individuals or companies to evade taxes or escape from political instability in their home countries are "somewhere between $5 trillion and $7 trillion," according to OECD Secretary General Angel Gurria.

The OECD, which currently names Andorra, Monaco and Liechtenstein as uncooperative tax havens, is preparing a new "black list" and a separate "green list" of countries that are making progress in exchanging information on bank accounts. The list, together with proposals for retaliation, is scheduled to be ready in May or June 2009, Steinbrueck said.

"We have got to look at all jurisdictions," Brown said Feb. 18 at a London press conference in which he laid out plans for the full G-20 meeting he will host April 2. "I am more confident now we are in a position to take further action on this matter."


Tax havens are not to blame for the global financial crisis and should not be made scapegoats for the banking sector's woes, Gibraltar's leader said on Thursday (2-19).

Some British newspapers were calling for offshore financial centers to be included in a shakeup of the regulatory system, and they were right to do so, said Peter Caruana, the British colony's chief minister.

"But let us not use it as a means of getting people to believe that tax havens and offshore financial services centres are the cause of the global financial services crisis," he said in a speech to the Royal Commonwealth Society, an international affairs group, in London. "Everybody knows where the cause is and it is not in Jersey, it is not in Guernsey, it is not in the Isle of Man, it is not in Switzerland, it is not in Gibraltar."

The global financial crisis stemmed from events in the major finance centers of the world -- New York, London and Frankfurt and one or two centres in Asia, Caruana said. "That is where the fault lies," he added. "By all means broaden the family when it comes to the new economic order -- we welcome that."

British Prime Minister Gordon Brown called on Wednesday for the world to take part in reforming banking regulation, including "action against regulatory and tax havens."

Some British newspapers interpreted this to mean Brown will lead an international crackdown on tax havens, a number of which are British territories.

Caruana said he welcomed Brown's call for a global raising of regulatory standards for financial services and looked forward to participating in it, yet he warned against any attempt to interfere with territories' freedom to set their own tax rates.

"But we will fight equally enthusiastically to make sure that international finance centers are not somehow used as a scapegoat for clear regulatory failures in much larger and more important countries in the world than us," he said.

Caruana also said that Gibraltar was expected to continue growing strongly despite the global economic slowdown. "The economy of Gibraltar has grown between 7 and 12 percent in each year during the last 12 to 15 years," he noted. "We may suffer a small reduction in the rate of growth but we certainly expect it to continue to grow at anything upward of 5 percent during these times."

The OECD removed Gibraltar from its list of "uncooperative" tax havens in 2002 after it promised greater openness in tax practices.

Gibraltar officials deny it is a tax haven, saying it complies with European Union rules on regulation, transparency and exchange of information and that it will end its tax-free regime this year by introducing a 10% corporate tax rate.


Belgium's Finance Minister, Didier Reynders, said on Tuesday (2-24) the country will improve cooperation and transparency with its European Union partners in tackling possible tax evasion. Belgium is only one of three countries -- the other two are Austria and Luxembourg -- that have opt outs from EU rules on taxing savings held by a citizens outside their home state.

The three chose not to exchange information on who held deposits but keep the names confidential and levy a withholding tax that is passed on to the resident's home country. The tax rate of 20% is due to rise to 35% from 2011, a level seen as putting off investors.

"We do not want to go to taxation of 35%, that is true, but first we need to have a report from the European Commission about the existing system of exchange of information to make sure it fully complies with the directive," Reynders told reporters. "But after that we will go to the exchange of information. That will not be a problem for Belgium."

Tax evasion and tax havens have become a hot issue for many countries as national treasuries become more stretched. EU Tax Commissioner Laszlo Kovacs has proposed widening the scope of the savings tax rules so that trusts and foundations are included, not just individual deposits.

This follows revelations that many Germans squirreled away money in investment foundations in non-EU state Liechtenstein to avoid tax. The Alpine state has also signed up to the EU savings rules.

Kovacs has also proposed barring an EU state from using national bank secrecy rules to avoid helping another bloc member from cracking down on tax evasion. This step is aimed at Belgium, Austria and Luxembourg and is seen by Kovacs as key to showing the outside world that the bloc is serious about tackling tax evasion.

But unanimity is required among EU states for both proposals to become law, a process that can take years of haggling and Austria has already signaled its unhappiness.

Tackling tax havens is also part of a wider financial reform agenda being discussed globally.

"We do not have any problem with that. To our best knowledge we don't have bank secrecy in Belgium," Reynders added. It was always possible for a judge or tax authority to go to a bank to obtain information, he said. "We do not have the same system as in Austria and Luxembourg."

Reynders wants the G-20 to adopt resolutions on tackling tax havens at a summit in April with the International Monetary Fund implementing these resolutions.

Luxembourg: Banking Secrecy Needs to Be Redefined

Banking secrecy needs to be redefined, but abolishing it abruptly is not in Europe's interest, Luxembourg's deputy prime minister said Sunday (2-23), amid renewed debate over the concept sparked by a US tax probe of Swiss banking giant UBS.

"Old school Luxembourgers say that without banking secrecy, our country would not have gained such importance as a financial center," Jean Asselborn, who is also minister for foreign affairs and immigration, told the Swiss newspaper Sonntag. "But in the 21st century, banking secrecy cannot be the only instrument with which Luxembourg drives its economy. Therefore, we need perhaps to redefine banking secrecy and little by little to expand on the advantage of competence."

This week Switzerland's biggest bank UBS provided data on 250 to 300 clients to the US government, as it also admitted to aiding tax fraud in the United States.

However, a day later Washington upped the ante by filing a lawsuit to try to force UBS to disclose the identities of 52,000 U.S. customers who allegedly evaded taxes, sparking debate about the "end" of banking secrecy.

Like Switzerland, Luxembourg has strict banking secrecy rules protecting client confidentiality.

Asselborn warned that it would not help the European Union to abolish banking secrecy suddenly, as money could flow out of Europe. It could also lead to job losses, he added. "We have 150,000 workers who cross the borders daily to work; 73,000 come daily from France, just as many come from Germany and Belgium. If the banking center is destroyed, it is a disadvantage for not just Luxembourg, but the whole region," he said.

He also expressed frustration at critics for targeting Switzerland and Luxembourg amid the financial downturn. "I am disturbed by the debate that concentrates on Switzerland and Luxembourg in the search for the cause of the financial crisis. It would be fatal and wrong to look for those guilty for the financial misery here. ... How banks in the U.S. dealt with credit ... has nothing to do with Switzerland or Luxembourg, and nothing with banking secrecy."

Austria, Belgium and Luxembourg are the three EU states with strict bank secrecy rules.


Group of Rich Americans Sues UBS to Keep Names Secret in Tax Case

UBS was sued ... in a Swiss federal court by wealthy American clients seeking to prevent the disclosure of their identities as part of a tax-evasion investigation by the United States Justice Department.

The lawsuit accuses UBS and Switzerland's financial regulator, the Swiss Financial Market Supervisory Authority, or Finma, of violating Swiss bank secrecy laws and of conducting what Swiss law considers illegal activities with foreign authorities. It also named Peter Kurer, the chairman of UBS, and Eugen Haltiner, the chairman of Finma, as defendants.

The suit, filed by a lawyer in Zurich, Andreas Rued, on behalf of nearly a dozen American clients, underscores the growing clash between Swiss banking secrecy laws and those of the United States. Tax evasion is not considered a crime in Switzerland. Disclosing client names under Swiss law is a criminal offense and can expose bank executives and officers to fines, prison terms and other penalties. ...

The lawsuit ... stems from UBS's agreement last week to turn over to federal authorities in Washington the names of 250 wealthy Americans suspected of using secret UBS offshore accounts and entities to evade taxes.

UBS reached a $780 million deferred-prosecution agreement to settle accusations that it used undisclosed offshore private banking services to help wealthy Americans evade taxes. But the bank is still under scrutiny by the Justice Department, which is seeking to force it to disclose the names of the 52,000 American clients it suspects may have evaded taxes.

UBS Has £37 Billion from UK clients

The size of UBS’s wealth-management business in the UK will come as a shock.

The wealth-management arm of UBS, under fire in the U.S. for its part in a multibillion-dollar tax evasion scandal, has more than 20,000 clients in the UK who have entrusted £37 billion to the battered Swiss bank.

Last week, the U.S. department of justice demanded UBS hand over details of 52,000 clients, undermining centuries of bank secrecy. UBS has already agreed to pay a $748 million (£516 million) fine and hand over 250 accounts to IRS officials investigating what they suspect is tax evasion on a huge scale.

The size of UBS's wealth-management business in the UK, confirmed by a bank spokeswoman, will come as a shock, especially as UBS said most of its clients are individuals rather than institutions. To access UBS advisors, clients need more than £500,000 in investment assets.

UBS makes a virtue of its access to offshore financial centers, boasting of "more than 3,000 investment funds licensed for distribution in Jersey" on its UK website.

Asked whether UBS faces investigation for tax abuse in the UK, a spokeswoman said she was unaware of any inquiry.

But Vince Cable, the Liberal Democrat Treasury spokesman, said: "The scale of this demonstrates how pervasive tax avoidance through tax havens has become and clearly demonstrates the need for the authorities in the U.S. and the UK to crack down hard on it."

Cook Islands Prepares to Boost Its Offshore Financial Services Industry

Industry has not been growing “according to our expectations.”

The Cook Islands looks set to approve a package to stimulate the country's offshore financial services industry, the biggest revenue earner after tourism. Radio NZ International understands the package is valued at around US$400,000 and will see the establishment of an agency charged with developing new offshore industry products and marketing.

The country's finance minister, Sir Terepai Moaote, says the Cabinet has endorsed a consultant's recommendations on the industry, and next week will consider the formation of a statutory authority and how to fund it.

He says the industry has been static for several years and the package will address that.
"It is not growing according to our expectations and yet this is a very popular country. It is a country that is looked upon by others as very progressive, but in the industry itself we are not working together with the industry because that has been their choice in the past. But now there is a general agreement that both the government and the industry has to work together."