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While my conscience tells me that a society void of essential liberties replete with a recent and infamous pattern of human rights abuse cannot possibly play protagonist on the global stage of economic and political superiority, the context of their vast market cannot be ignored. What a difference a decade makes. The Clintonian rise of affluence in America, much like the roaring 20s, was followed by a subsequent market crash and act of war on US soil. Back then, we cared about profit, and the Chinese were nothing more than the last bastion of red communism in a world that was quickly recognizing the virtues of free market capitalism… and Chinese imports consisted of cheap knock-offs. Now, the Chinese are exporting everything from high-tech electronic components to ladies’ underwear….. and cheap knock-offs. Is the ascension so different than that of Japan in the 1980s? Corporate America seemed terrified of the Rising Sun. The media’s constant reporting of increased real estate holdings and corporate buy-outs fueled the fear, humankind’s collective motivation for taking action. As we feared a Japanese takeover then, so we acknowledge a Chinese takeover now. They have been anointed, such that nearly everyone, from Bernard Shaw to the local shoeshine boy, has unequivocably crowned China the world’s next superpower. So How Did It Get To This? Consumption. The mother of all waste. Imagine, for a moment, that you’ve won the Publisher’s Clearinghouse Sweepstakes. After posing with the world-famous prize patrol and your oversized check for $1 million on SuperBowl Sunday, you have a choice to make—satisfy your immediate cravings for consumer goods, or save for the future…. new cars or no-load mutual funds? A society, given its collective accumulation of final goods, capital, and total resources, faces a similar choice: consume resources today (buy new cars with spinner rims) or save/invest today in order to consume more tomorrow (turn the $1million windfall into $10 million). Remember, once the resources are consumed, they are gone forever—the sweepstakes will have ended, our cars depreciated, and the money’s all gone with nothing of value remaining other than good memories and unwanted house guests. In the 1990s, America sat atop a golden throne basking in the afterglow of global victory. In just over 200-years, we had gone from a fledgling startup republic to the most powerful economic force in history; the Cold War was over, we had given the Internet to the world, and everyone was getting rich off the dot-com boom. And so the consumption boom began; Americans were enjoying their new-found standard of living, and it was a long-time coming. Meanwhile, China kept its heads down… saving, manufacturing, and investing in economic infrastructure designed to grow their capital in the future. Think of global economics as a poker table, each country having a seat and a stack of chips. Some stacks, obviously, are higher than others…. and America was the ultimate high-roller. There’s only a finite amount of chips on the table, so when one player wins, it’s always at the expense of others. By establishing shrewd macroeconomic policies and perpetuating a culture that values hard work, China has grown its stack substantially at the expense of players like the United States and Western Europe. With each passing year, America loses more of its chips to China, yet we still consume and spend like a high roller. Drunk off our own past successes at the table, we fail to recognize the diminishing stack before us; we pay for that which we cannot afford by borrowing from others—notably, China! Our government is drowning in debt, our society is drowning in debt, and we have no savings to invest in the future. Imagine two players - one in a slump, refusing to acknowledge the losses before him, and the other, focused and disciplined with a growing stack - where would you rather invest? After two primer articles on investing offshore, I’d say there’s a fair number of readers who realize that betting on a US victory at the table is comparatively less rewarding, and for those interested in investing offshore but not exactly sure which underdogs are playing a smart, focused game, I can offer a few guiding principles: 1) It doesn’t take much capital to start. Remember, the few thousand dollars you have to invest is about two years’ wages for the average worker in an emerging market. 2) Pick your country first, market second. First decide which country shows the most promise (more below); then decide which market is the easiest to penetrate—currency, real estate, equities, etc. Picking the right country can be a difficult task from afar, much like picking a stock. Reading press releases and analyzing financials only provide a limited perspective on future growth. To truly understand potential, you actually have to go there, talk to people at all levels, and judge for yourself. For those interested, I’ve provided some of my own thoughts from recent trips: This Ain’t Your Father’s Carpet Salesman You may be aware that I’ve already written an article on Turkey. I’m bullish enough on its financial prospects that I thought it warranted a few more words. Despite some insipid opposition from the French, Turkey’s ascension into the EU (if it lasts), or at least a strategic partnership, is likely. As it prepares for membership, the government is putting its economic house in order, lowering unemployment, inflation, and interest rates to reasonable levels. Like other countries, the sheer numbers of its population cannot be ignored. Looking deeper within the numbers, we find that Turkey is home to a highly motivated, hardworking, and entrepreneurial culture; young Turks are obtaining advanced degrees, and the comparatively lower cost of doing business in Turkey will flow business ventures and foreign investment into the country. Turks are statistically much younger than their European neighbors, and, like the Irish, old Europe needs these young bodies to flood the job market and pay taxes. Foreign capital is already flowing into Turkey; Europeans seeking second homes on the ocean are picking up tremendous deals in Turkey at a fraction of the cost of European beachfront, and the real estate market can only get hotter. Risks: Turkey is still more bureaucratic
than many places in Europe (more bureaucratic than the French? Sacré
bleu!), and these archaic walls need to fall.
The New Old Europe Czech Republic is damn popular in Europe. If you can get past the tourists crowding the streets of Praha 1, you’ll find, as in Turkey, a disciplined, intelligent population that costs a fraction of the workforce in Old Europe. Prague is growing its infrastructure with a daring sophistication reflected in its bold, new architecture that breaks from standard European tradition. The influx of multinationals seeking to exploit the increasingly affluent Czech market and inexpensive labor is apparent across the crowded office parks and industrial zones of Prague. The Czech Republic is a member of the EU, though it maintains its own currency (CZK) which tends to move with the Euro. Financial volatility and macroeconomic indicators are not an issue here as they are in many other emerging markets, which is what makes Czech such a safe bet. Risks: The Czech government is known for its corruption and kickbacks, though new controls have been emplaced to improve the situation. It can also be difficult to expatriate funds out of the country over long distances. Take An Investment Trip To Paradise Brazil… what’s not to love? Beautiful women, fantastic beaches, low cost of living. Despite a national political scandal derived from alleged corruption charges at senior levels, Brazil remains an excellent investment opportunity, most notably due to the high interest yields. Short term rates are sitting nicely around 20%, and its currency, the Brazilian Real, has appreciated significantly over the last year. Put the two together and you’ve got a recipe for investment success; consider this - if you had invested last year in a Brazilian account fetching 20%, your net return would have been over 70% including the currency appreciation. If you don’t want to repatriate the investment return, there are some incredible beachfront deals available in the local currency. If you happen to be a stock market lover, the Brazilian exchange has outpaced US returns significantly in recent years. If you include the gains from currency appreciation, the return is even more. Risks: The tax code in Brazil is, in a word, excessive. Like Argentina, be cautious of countries trying to tax themselves to financial health - economic cannibalism doesn’t work. Brazil has been effective in attracting foreign capital from multinationals seeking to exploit the large market of consumers, though it can be a difficult market to penetrate. I would personally like to see a stable and speedy conclusion to the current political crisis; a positive step for Brazil would be to repeal some antiquated laws that mar business development in red tape; favorable commercial legislation would only sweeten the international appeal to this already appetizing venue. Its tremendous population certainly warrants increased business development; given the sheer numbers, industry cannot afford to ignore it. Where Have All The Contras Gone? Ask any American about Nicaragua and they’ll likely tell you what a dangerous place it is. Then ask them if they’ve ever been. For a country that was the punch-line of every late night political joke 20-years ago, it has managed to pull itself up through pro-business legislation that favors foreign investment. The Nicaraguan government has incentivized foreigners to provide financial and entrepreneurial capital to grow the economy and infrastructure. Land and labor are ridiculously cheap, and being party to CAFTA, the country will be forced to focus on core products that it can manufacture efficiently. Risks: Nicaragua is a long haul; I think it will be 5-10 years before any significant investment returns can be had, but right now is truly the ground floor, and we’re talking ROCK BOTTOM prices. And The Winner Is . . . . Panama… Stable government; pro-business; well-developed infrastructure; unbeatable location; mature financial, trade, and tourism sectors; foreigner friendly; low cost of living; dollarized economy… the list goes on and on. There are some fantastic real estate buys in Panama now, and, while you’ve missed the ground floor, there are still many years of appreciation ahead. More to follow. This list is by no means exhaustive - there are many more underdogs playing a smart game at the table—India, Iran (yes, Iran), Qatar, and Ireland to name a few… all of which will undoubtedly be the subject of future articles. As always, feel free to contact me with any questions at james@blackknightgroup.com; I answer every email and do my absolute best to provide a reasonable amount of guidance to those of you who are interested. Please do not send me a generic email asking for ‘more information’. Be specific, and remember, I’m an investor, not a realtor, tour guide, travel agent, used car salesman, etc. Recommended Reading The World is Flat by Thomas Friedman
The following are James's previous articles for the magazine:
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Thoughts
On Offshore Investing ~ 