World Bank President: Time To Diversify Out Of The Dollar

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According to Robert Zoellick, World Bank President  and former Goldman Sachs head and US Secretary of State, you shouldn’t take the US Dollar’s reserve currency status for granted. Swelling government deficits and the strength of emerging countries is weakening the demand for the dollar. Time to head for the exits?

So how should you diversify out of the dollar?

According to Zoellick, the Euro and the Chinese Yuan are good alternatives (source: BusinessWeek). But a lot of people think that investing in a basket of currencies is a better approach. In the short-term, currency volatility is unpredictable since exchange rates are more likely to be impacted by government policy than fundamentals. In the long term, all fiat currencies devalue and buying gold and silver is probably a better bet. But if you really want to park your savings in cash, consider a currency that has stronger fundamentals the the US dollar, the British pound and euro.

Until 2000, the Swiss Central Bank had a legal requirement to hold 40% of its reserves in gold. This requirement has been relaxed to around 20%, but in terms of volatility the Swiss franc is still one of the most stable currencies. You can purchase the Swiss franc via the Currencyshares ETF (FXF) quite easily.

The Canadian dollar (FXC) and the Australian dollar (FXA) are two more strong currencies. The governments are both fiscally conservative and have, until recently, been running surpluses instead of multi-trillion dollar deficits. They’re also commodity based economies, rich in natural resources with strong ties to the rest of the world. In a situation of high inflation, commodity-based currencies should hold up better than the US dollar.

With China being Jim Rogers’ favorite place, the Chinese yuan (or remnimbi) is a another alternative. As their internal economy grows, maintaining a stronger currency will make imports of raw materials cheaper. Of course, this is probably several years in to the future but with millions of Chinese rising out of poverty, its a likely scenario. Also, China has publicly said that they’re looking to diversify out of the dollar and are considering buying gold as one option. You can invest in Chinese yuan through Everbank.

Disclosures: I own gold, silver, Australian CurrencyShares ETF (FXA),  and a basket of currencies CD with Everbank.

Why Do Most Small Businesses Fail?

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If you’ve ever been interested in working for yourself, or starting a small business, you’ve heard the statistic that most small businesses fail within the first 5 years. Why is that?

The most common reasons given are:

  1. Lack of experience
  2. Being under-capitalized (running out of money before you achieve profitability)
  3. Poor location
  4. Poor inventory management (Not having enough of an item, or having too much which may suck up all your capital)
  5. Poor money management (poorly structed business loans, co-mingling of finances)

But I think the most basic one is lack of any business sense whatsoever!

I went to get a smog check for my car registration and I called up several smog check test centers within a 10 mile radius. I got quotes that ranged from $37 to $70.  The fact that the highest quote was 89% higher than the lowest quote was quite interesting.

I decided that instead of driving 9.5 miles to pay $37, I could drive only 2 miles and pay $39.95. That’s a good compromise between time spent and money saved (especially in Los Angeles where it takes forever to get anywhere).  However, I decided to stop at the first one I saw and ask if they’d do a price match, especially since the store was completely devoid of any customers. I asked them how much it would cost and was quoted a price of $65. I told them the store down the street quoted me $40 and the manager said that he knew the owner of that place and they indeed offer a $40 price, but he could afford to offer that price because they did a higher volume and made money on repairs too.  The best he could offer was $55.

I tried arguing with him that they probably did higher volume precisely because the price was lower, and that his costs were fixed and the marginal cost of performing an additional smog check were significantly lower than $55 or $40 or even $20. When you consider that you have idle staff and idle machinery, the cost of running a machine for 20 minutes is just the cost of electricity which couldn’t have been more than a dollar. By price matching price-conscious customers, you’re engaging in a perfectly legal form of price-discrimination which allows you to attain your optimal profit levels. After wasting 3 minutes, I realized he wasn’t going to budge and he was perfectly happy to see me go 1/2 mile down the street to his competitor, which incidentally seemed to be running at 75% capacity.

So if you’ve ever wondered why some small businesses fail its because they’re run by incompetent morons who lack knowledge of finance, marketing, consumer behavior or sometimes just plain common sense.

The Sun Sets On Dollar Supremacy

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According to a quote in the Telegraph, HSBC has issued a new report stating that the Federal Reserve’s ultra-loose monetary policy is forcing China and other emerging countries to create a new global currency “order”. According to David Bloom, HSBC’s currency chief, the dollar looks like the sterling did after World War I.

For those a little dusty on their history, the British pound sterling (so called because it’s value was backed by sterling silver) was the world reserve currency until the 1930’s. After that, the sun set on the British Empire and the sterling was replaced by the US dollar. Now it seems the dollars time in the sun has come to end as well. The Telegraph article states:

Crucially, China and rising Asia have reached the point where they can no longer keep holding down their currencies to boost exports because this is causing mayhem to their own economies, stoking asset bubbles. Asia’s “mercantilist mindset” of recent decades is about to be broken by the spectre of an inflation spiral.

A monetary policy of near zero rates – further juiced by quantitative easing – is completely incompatible with circumstances in most of Asia, the Middle East, Latin America, and Africa. Divorce is inevitable. The US is expected to hold rates near zero through 2010 to tackle its own crisis.

Mr Bloom said regional currencies would emerge as the anchor for their smaller trading partners, with China, Brazil, or South Africa substituting the role of the US. Australia is already linking its fortunes to China through commodity ties.

This is nothing new, but it is the first time a major bank has openly stated this. But the important question hasn’t been answered.

What does it mean to the average American?

In order to obtain the necessary financing to fund the multi-trillion dollar stimulus/bailout package the government needs to sell bonds. Traditionally, the Chinese and other foreign governments have used their excess reserves of US dollars to purchase these bonds. If we switch to some other currency (or mixture of different currencies), the amount of US dollars held by foreign governments will decrease and the demand for US treasuries that yield next to nothing will decrease substantially. In order to entice the buying of these treasuries, the interest rates will have to jump substantially higher. And when this happens, the cost of the US government’s debt will start to rise. As will the cost of borrowing for US citizens and businesses. The government already pays nearly a billion dollars a day in interest payments (hat tip: Silver Bars Direct: Why $1,000 gold is now significant). If this cost were to double, and we add in the additional $9 trillion in debt the white house has admitted it is likely to borrow, we’re looking at over a trillion dollars a year in debt payments.

In order to repay this interest (and maybe the original principle too), do you think the government is likely to raise taxes or just print more money? If it prints more more, its just fueling the debt spiral which will lead to Zimbabwe-type hyper-inflation.

So what should you do?

Invest in hard assets that have been proven to keep their buying power during inflationary times.  Along with gold and silver bullion, buy some cheap land to either farm, hunt or bury your precious metals! And if you’re one of those people who think buying gold and silver is useless then hold on to your dollars and watch them become even more worthless. Since 1900, when the dollar coin actually contained silver, the dollar’s purchasing power has dropped to only4 cents. This trend is only like to get worse.

Purchasing-Power-of-the-US-Dollar-1900-2005

Disclosure: I own gold & silver bullion, numismatic coins and mining stocks.

Investing For Sustainable Dividend Yield

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The following is a guest post by Saj Karsan. Saj regularly writes for Barel Karsan, a site dedicated to finding and discussing current value investments.

Stocks with higher dividend yields do outperform the market. Having said that, however, it’s important to be able to determine if a company’s dividend yield is sustainable.

Consider World Wrestling Entertainment (NYSE: WWE). CEO Vince McMahon’s antics are well known, both in the boardroom and as an entertainer himself! For those unfamiliar with his antics (or those who enjoy re-living WWE moments), a video example of McMahon in action is portrayed below:

WWE pays a dividend yield above 10%. However, the following chart demonstrates why you can’t choose a stock on dividend yield alone:

wwe

Clearly, WWE has been paying out more than it has been earning! Over the last four fiscal years (“2006 T” representing an 8-month transition year to a new fiscal year-end), WWE has paid out $1.06 more per share than it has earned!

How does it do it? Balance Sheet strength! The company has virtually no debt, and more than $2.80 of cash (including short-term investments) per share. That means it could continue to pay out cash over and above its net income by 25 cents per share for the next 10 years!

Does that make it a buy? Not quite. At a share price of $14, even if management immediately paid out that entire $2.80 to shareholders, one would still be paying $11.20 for a company that earned 62 cents / share last year, representing a P/E of 18.

When a dividend yield looks appealing, make sure it’s not too good to be true!

Disclosures: None

If you enjoyed this article, consider subscribing to Barel Karsan.

The Recession Is Over, Unemployment Expected To Rise

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Almost a year after the historic collapse of Lehman Brother, Fed Chairman Dr. Ben Bernanke announced that the worst recession since 1930 is finally over!

recession next exitHowever, this is only from a “technical perspective”, and unemployment for 15 million Americans (officially 9.7%) will continue, if not get worse. In fact, it may stay this way for nearly 4 more years according to other economists.

So what does this mean? The operation was a success but the patient still died!

Apparently pumping a trillion dollars in to the economy will create a technical expansion even if the net benefit to society is negative. What happens when the government pulls the plug on throwing money at the ecnomy? Won’t the GDP decline again, pushing us back in to a double dip recession?

And what happens if our lenders make this decision for us? Supposing China and Japan no longer want to buy our 30 years bonds at a measley 3 or 4%. What if the interest rates go up to 8%? Will we be able to afford $1 trillion dollars a year in interest payments? Will we start issuing notes for the interest payments? Nah, we’ll just devalue the currency and let inflation help us out of this mess. Either that or the government stimulus will continue indefinitely, aka monetary policy Zimbabwe-style! Oh wait, isn’t that the same thing?

What You Need To Know About Being Sued

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Personal Finance blogger Lazy Man & Money is being sued by a multi-level marketing company called MonaVie that sells a very expensive juice. The crux of the matter is that Lazy Man is highly skeptical of the claims the company makes about the product and the company is trying to shut down his freedom of speech on the basis of a very flimsy trademark infringement case.

While I am no lawyer and the extent of my legal knowledge is limited, I have been sued, involved in lawsuits and have been sent threatening letters that required legal opinion. Did I say I was sued – that’s only partially correct. The company I had a minority ownership stake in was sued.  My friends and I started an internet telephony company together to sell prepaid calling cards and pinless dialing services. When we started it several years ago, we were tired of paying outrageous per minute fees for international calls and we just wanted to make free telephone calls. We also wanted to make some money off of it and after raising about $30,000 and co-signing $75,000 worth of loans for telecommunications equipment we realized we didn’t have any money left for marketing. So we deliberately decided to infringe on an existing trademark of a foreign company that does not do any telephony or telecommunication business in the USA. We knew we were going to get sued in a year but since we didn’t have any money left we didn’t really care.

We were able to use the goodwill of the foreign company to bootstrap our small outfit to the point where we hired about a dozen people in India to do all the back-end work.  A year later the company sent us a cease-and-desist letter and we complied and changed the name. However, I didn’t know that the main partner re-inserted the company in to the website after a month or so. About 6 months later, the company came back and sued us for trademark infringement, all our domain names, $50,000 and 30% royalties on all income.  When you fight a legal battle against people with deep pockets, you usually lose! Especially when you are wrong. Long story short we lost our domain name and we settled for $1,000. Was it worth it? In terms of return-on-investment, yes. There’s no way we could have gained that sort of traction with a $1,000 marketing budget. But would I do it again – definitely not. However there is a lesson here, the same lesson I learned from working for Michael Robertson a few years ago – you should never back down from a good fight.

On to the next story. A few years ago, I had put down a deposit on a spec home in Florida. It was a small deposit and it was pure speculation. If the home prices increased, I would close on it else I would walk away from it and my deposit. Unfortunately for the builder, the market turned sour and it seems everyone was walking away from their deposits. So I got a letter in the mail saying that if I didn’t close on the home he would sue for damages on various technical aspects of the contract.  I showed it to my lawyer and he said its a shake-down. His advice was to ignore the letter since the cost of pursuing this line of reason was too expensive for the builder.  He was right. Unfortunately, I found out the hard way that this goes both ways. Someone I know embezzled money from me and some investors by arranging  a sale of assets to an out-of-state entity. He set up a dummy corporation with the same name and deposited the check from the buyer into that account. He was then nice enough to wire us some of the money but then he skipped town with the rest. After talking to lawyers and the DA’s office in that town we realized that it would probably cost us between $25,000 and $50,000 to get a judgment against him, and if he’s spent the money, we’re out of luck! The lesson here is that suing people can get to be very expensive.

The third story is about me and a group of investors suing a group of real estate developers for deliberately misleading investors on an investment. The gist is they lied and withheld materially important information. Obviously we formed a group and sued them all. 1 of them settled for a third of the amount owed (plus interest and legal fees), 1 of them went underground and the 3rd is claiming she has no assets. The legal cases involved the last two are still underway so I can’t really say much about it except that suing people really does get very expensive, especially when you’re paying an attorney $375/hour to fly to another city and take a deposition!

So what’s my 2 cents on Lazy Man’s case? I don’t think MonaVie has a strong case and they know it too. Otherwise they would be wasting time with multiple cease-and-desist letters, they’d just sue him. Secondly, I think its just going to create more bad publicity for the company as multiple bloggers write about this and link back to Lazy Man’s site (boosting his rankings in the search engine for the search term – MonaVie is a scam). However, they’re obviously well capitalized so they’ll probably take this a lot further than they should. If it was me, I’d just pay Lazy Man to advertise on his site. That would just make him lose credibility in the eyes of the “faithful” MonaVie followers.

Please go visit Lazy Man’s site and try to link to it with the word MonaVie in the anchor text! Or if you want some entertainment, go visit Help You Sue.

Guess Who’s Betting On Inflation!

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Gold Dinar Coin

If you’ve been reading the popular press for the past 6 months, there’s been a slew of articles talking about deflation. I’ve been somewhat skeptical of the long term probability of deflation and have been investing in gold and commodities in anticipation of inflation. Looks like I was a little early to the game (which, on Wall Street is just the same as being wrong!).

Now however, it looks like we are warming up the printing presses and gold has hit $1,000 twice in a week in anticipation of future inflation. Legendary hedge fund manager John Paulson, who made $2.5 Billion last year from his trades, has been betting heavily on gold and his fund has nearly 50% of its assets in gold or gold-related investments like gold mining stocks and ETFs. The gold ETF, GLD reportedly makes up 30% of his fund! He has also taken a large 12% stake in AngloGold Ashanti (ANGJ.J) making him the largest shareholder. According to Reuters, this is not a bet on the company being acquired but rather a bet on inflationary pressures pushing up the price of gold. As opposed to the popular theory of rising prices being a cause of inflation, I like to consider it as an effect of inflation, which is caused by printing money, a side-effect of fiat currency. If you’re unaware about the effects of inflation and how it can ravage the economic (and social) structure of a society, I strongly recommend watching the excellent videos on hyper-inflation.

Another fund which has done well with the gold mining ETF is David Einhorn’s Greenlight Capital, which picked it up at the lowest point of last year and which has more than doubled its investment so far.  They both join China in being bullish on gold. Between Paulson’s bullion dollar gold ETF purchase and China’s multi-billion gold bullion purchase, it’s no wonder gold prices have been trending upwards.

Weekly Round Up Of Interesting Articles

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Here are some must-read articles I’ve read this week. None of them talk about gold breaking a $1000, dividend stocks or things you’ve probably read in the news.

Why Is Gold At A $1000/Oz?

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[St Gaudens Double Eagle 1 Oz Gold Coin]

St Gaudens Double Eagle 1 Oz Gold Coin

Today Gold hit an intraday price of $1005/ounce. While not a record, it’s definitely a historical moment, with this event occurring for only the sixth time in history.

We can only speculate as to why the run up to a $1000 so quick but some of the likely reasons are:

  • The continued monetization of US debt and resulting devaluation of the dollar
  • The ability for 1/6th of the world’s population (the Chinese) to now buy gold
  • The Indian Wedding season is about to begin soon and this is when Indian’s start buying gold jewelery
  • The Chinese government has been buying gold on the sly. Well maybe not so secretly. They even encouraging their citizens to buy silver and gold
  • The Chinese government just agreed to buy $50 Billion of IMF Bonds denominated in SDR (Special Drawing Rights), a mixture of various currencies, which might be a signal that the US Dollar is losing its status as the world’s reserve currency

The only question is whether this rally can last. In the long term, the answer seems obvious, but the short term is anyone’s guess. However, I think $1000 gold is here to stay.

Investing In Tax Liens

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What Every Investor Needs To Know About Tax Liens!

Today’s guest post comes via Blunt Money, an Arizona-based wife and mother, who’s had experience with being divorced, unemployment, under-employed, employed and self-employed!

What are Tax Liens?

Tax liens are liens placed against real estate to secure the debt from unpaid taxes. They are first liens, which means that they (in theory) must be repaid before any other debts that the property might be collateral for. Like everything else regarding tax liens and investments, there are a few exceptions to this — nothing is guaranteed.

The process of investing in tax liens and the amount of interest you can earn from them varies from county to county, so it’s best to get specifics on the exact requirements from the particular county you’re interested in.

My experience is with buying them in Maricopa County, Arizona. Here, the auction is held online once a year in February. The highest you are allowed to bid is 16% interest, and the lowest is 0% interest. If you win the bid and the tax lien is repaid, you earn the amount of interest you bid that was charged during the time you held the lien. If the tax lien is not repaid within 3 years, you have the right to start foreclosure proceedings.

This means that there are two basic ways to think about tax liens: either you hope to end up with the property itself eventually, or you hope to receive interest when the liens are redeemed. I try to split the difference — I look for good properties that I believe would be worth owning if I ended up with them, and I also try to earn a better interest rate on them than I could receive elsewhere. I’ve had several liens o ver the years, all in the 5-7% range. One set of liens got close to being eligible for foreclosure, but was paid off a few months before that date. The rest have all been repaid fairly quickly, usually in under a year or two, which is more typical.

Do Your Research Before You Buy

If you want to increase the probability of you owning the property if the lien is not repaid (and if you want to increase the chances of actually being repaid) you also need to pay the subtaxes on the property for subsequent years. This is handled by calling up the county and arranging to make payment for them once they have become delinquent.

Investing in tax liens requires a commitment because you could end up owning 3 liens at a time on a single property, and you need to watch to see if the current year’s taxes become delinquent. The liens that I’ve purchased have ranged from about $400 to $1500 each, but they go for a very wide range of amounts.

The most important thing when investing in tax liens is to do your due diligence before bidding on a property’s lien. This is a time consuming part of the process, but it’s critical. Be certain of exactly WHAT You are bidding on. Dangers include ending up the owner of a property that requires you to pay for toxic cleanup, or (not quite as bad) ending up the owner of a worthless piece of property that you can’t sell. There’s also the ever-present investment danger of losing your entire investment.

As far as due diligence goes, the satellite view in Google maps is a good starting point. For properties that look interesting beyond that point, I then check the county assessor’s site to find out the property owner’s name. I also generally take a look at the county recorder’s site to see what other properties they may own, and to get an idea of the owner’s general financial shape. I try to judge the odds; and bid lower on liens I feel I’m more likely to end up with the properties on, and higher on liens that look likely to be repaid. Anything that looks bad, has problems, or that I just have a bad feeling about gets eliminated at this point. The next step is to drive out to the remaining properties. I do basic things like make sure that they’re still standing, look decent and are in a decent neighborhood, etc. (Talking to the owners is a no-no.) The last step I take before bidding is to check PACER to make sure that the owners have not started bankruptcy proceedings, as not getting repaid in that situation is also a danger.

From that point out, it’s just a matter of following the bidding proceedings and being certain that I don’t go over budget if I should win all of my bids.

See this page to buy tax liens or learn more about investing in tax lien certificates.

[AffomaticEbay]Tax Lien[/AffomaticEbay]