Agora Financial’s Rude Awakening

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Laguna Beach, California

• Send your dollars on a holiday and watch them return with interest,
• How much does the rest of the world care about the feelings of
  Americans investors?
• Avoiding the snares of the over-gimmicky marketplace and more…

Eric Fry, reporting from Laguna Beach, California…

“As international investors wake up to the relative weakening of America’s
economic power,” The Economist recently remarked, “they will surely question
why they hold the bulk of their wealth in dollars…The dollar’s decline
already amounts to the biggest default in history, having wiped far more off
the value of foreigners’ assets than any emerging market has ever done.”

To us Americans, The Economist’s unflattering analysis may feel a bit harsh
and unfair. But the rest of the world is starting to care less and less about
how we Americans feel. The rest of the world despises losing money, just as
much as any American. So when foreign investors watch their dollar-
denominated investments tumble in value, they become a little grumpy. And if
they become really grumpy, they sell their dollar-denominated assets and take
their capital elsewhere.

They take their capital to jurisdictions and asset markets that treat their
capital more kindly. They take it to places where the profits are larger and
the deceptions are smaller.

American-style capitalism has evolved into a bizarre marriage of financial
gimmickry and governmental coddling. Very few companies produce much of
anything, other than derivatives and press releases. This situation would not
be so bad if the derivatives possessed a bit of value and the press releases
possessed a bit of truth. Instead, the U.S. economy lurches from greed to
deception to disaster, and back to greed, without ever eliminating all the
flaws and the felons that cause all the problems.

When we should be lopping off heads (so to speak), we dispense multi-million
dollar severance packages; when we should be marking to market we mark to
mark-up; when we should be allowing idiotic speculations to fail we devise
new ways to finance idiotic speculations.

But the path to economic salvation and rejuvenation is not so complicated; it
begins with truth-telling and real-world pricing.

Just yesterday, for example, HSBC Holdings, Europe’s largest bank by market
value, agreed to absorb $45 billion of assets from the structured investment
vehicles (SIVs) it controls. (For more on this topic, please see the following
edition of the Rude Awakening, SIV-Positive). In other words, the big bank
agreed to take responsibility for $45 billion worth of questionable asset-
backed securities (ABS).

By contrast, Citigroup has refused to assume direct responsibility for the
$83 billion of questionable ABS that it controls inside its SIVs. Instead,
America’s largest lending institution has concocted an elaborate “Super-SIV”
ruse, the purpose of which is to dump the detritus of its ill-conceived
financial gimmickry into a vehicle where the floodlight of full disclosure
and accountability will never shine.

“I like what HSBC has done,” says Ed Ketz, associate professor of accounting
at the Smeal College of Business at Pennsylvania State University, “It’s a
very simple solution. It’s one that’s transparent. We can see the promise of
liquidity. That’s something that, to me, would create a feeling of trust.
Citi could go a long way in following this example.”

Jack Ciesielski, publisher of the industry newsletter The Analyst’s
Accounting Observer, concurs: “With someone like HSBC throwing in the towel,
going for transparency… it makes Citi and the other parties look
conspiratorial at this point if they don’t ‘fess up and do that.”

But Citi’s maneuvers-to-date reflect no inclination to “fess up.” To the
contrary, Citigroup devotes itself to creating deceptions and securing life-
lines. Late yesterday, Citi agreed to sell part of itself to the Abu Dhabi
Investment Authority for $7.5 billion – a recapitalization deal which,
conveniently, admits to no crisis, acknowledges no error, eliminates no
executive positions, reduces no executive bonuses and solves absolutely no
problems. The deal merely perpetuates the status quo – the same inept and
broken status quo – a system that nourishes corrupt mediocrity, while
squandering shareholder capital and crowding out legitimate economic
endeavors.

To the extent that Citi’s gimmicks and theatrics succeed, America’s economy
fails. No first-world economy can thrive on the power of price-fixing,
bailouts and deception. The largest bank in the land should not be colluding
with the Treasury Secretary to conduct a game of “hide the toxic waste.”

Instead, it should be acknowledging its errors quickly, writing down its bad
loans, and leading the crusade to restore liquidity to the financial system.

But Citigroup has not embraced HSBC’s ethos. Citigroup has opted to obscure,
rather than confess; to deny, rather than to deal. Citigroup, like so many
other American corporations and institutions, knows all about rolling dice,
but nothing about landing “snake eyes.” The big American bank, like so many
other American corporations and institutions, knows all about million-dollar
options grants and compensation packages, but nothing about adversity or
crisis, or how to prepare for either one.

The American economy may be facing a crisis it is not prepared to meet.

And because the American economy is not prepared for crisis, confidence in
the American economic system is waning, confidence in the American economy is
withering, and confidence in the American dream is waffling. The land of
opportunity is losing is allure…just like the dollar.

Perhaps that’s why an increasing number of Americans are shifting their
assets overseas. Are these “early adopters” showing the way to the rest of
us, or are they just “traitors” and “quacks?”

Let the readers decide…and after deciding, let the readers please send us
their perspectives on the topic. We suspect this topic will draw an
impassioned response from both sides of the ledger. And we’d love to publish
these impassioned views in upcoming editions of the Rude Awakening…

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Exit U.S.
By Mike Muehleck

One and a half million U.S. households are preparing to move out of the U.S.
The vast majority of émigrés are in their 20s, 30s, and 40s. And some may not
ever return.

No, we are not talking about the next major deployment of National Guard
units to the Middle East. In fact, none of the emigrants are government
workers or corporate employees leaving for temporary overseas assignments.
These folks are malcontents or adventurers. They consist entirely of private
citizens and their families packing up and leaving the good ol’ USA solely at
their own initiative.

This news comes from a Zogby International poll of 115,000 Americans
conducted over the past two years. Bob Adams, CEO of New Global Initiatives,
commissioned the poll when he realized that no reliable database tracks the
movement of Americans out of the country. A recent Barron’s article, written
by Bob Adams, breaks down the Zogby/New Global Initiatives data as follows:

· 1.6 million (U.S. households) have already made the decision to leave
· 1.8 million are seriously considering and likely to leave
· 7.7 million are somewhat serious about leaving and may do so
· 3.0 million are seriously considering purchase of non-U.S. property
· 10.0 million are somewhat serious about purchase of non-U.S. property

Adding it all up, some 10% of all U.S. households are looking to leave the
country, while another 11% are considering living outside the U.S. at least
part time.

“That Can’t Be Right”

“Incredulous” is the word that best describes the reaction of people when
they hear Adams’ conclusions. I brought the subject up the other night while
barbequing and drinking beer with some American business people I know here
in Bangkok. Even this well-traveled group greeted the poll results with
skepticism. They asked, “How did he get thes data? Who did they interview?”

Maybe I was missing something, I thought to myself. So I decided to give Bob
Adams a call. I reached him one evening at his home in Panama. “It’s
happening,” Adams insisted, when asked about this new wave of emigration.

“And we really can’t say exactly why.”

While Adams’ survey includes destinations all over the world, the survey’s
findings corroborate Adams’ first-hand observations in Panama. Adams says the
recent American immigrants to Panama are different from previous ones. Ten
years ago, the typical American ex-pat in Panama was likely to be a retiree
who had previously been in Panama. Perhaps they had been on a military
assignment or with the Canal Zone administration. These folks tended to live
in “American only” enclaves for social and security reasons and had fairly
little interaction with the local population. These older ex-pats frequently
used the words “tropical paradise” to describe why they moved to Panama.

But today’s immigrants tend to be a lot younger, professionally employed, and
more likely to meld into the international community than earlier
transplants. These folks generally say they moved to Panama for adventure, a
lower cost of living, or to escape the growing intrusiveness of the American
political and legal systems.

Adams’ interest in the topic of American emigration is the result of
serendipity. Having lived and worked overseas for four decades, Adams decided
it was time to settle down. He identified Panama as the best candidate. As he
was preparing to move, he noticed the poor quality of Web sites catering to
potential immigrants to Panama. So he set up his own site,
RetirementWave.com. He intended to create an impromptu guide to assist like-
minded people in the decision to move to Panama. But it quickly turned into
an unpaid job responding to inquiries from interested parties worldwide.
Adams realized he could reach an audience that extends beyond Central
American real estate investors.

Why Do People Emigrate?

Why do people leave home for strange foreign lands? While a handful might
claim to leave for political or religious reasons, most seek greater economic
opportunity. All of my grandparents emigrated from Germany or Lithuania in
the early 1900s. My wife’s Chinese grandparents, for example, emigrated from
China to Siam in the same generation. None moved to new lands because of a
burning desire to be “free.” They all moved because they wanted to make more
money and thus enjoy a better life.

If you Google the word “emigration,” and you’ll mostly get sites that detail
the emigration from Europe to the U.S. in the 19th and early 20th century.
Google “American emigration” and you get a link to Adams’ New Global
Initiatives Web site and not much else. Most economic oriented sites only
discuss the effects of legal and illegal immigration into the U.S. It’s hard
to find any thoughts about the economic, political, and demographic effects
of younger Americans leaving for greener pastures overseas.

If people emigrate to find economic opportunity, might Adams’ survey portend
bad news for the U.S.? Current U.S. GDP is $44,000 per person versus Panama’s
$8,000. It seems unlikely that people are leaving for immediate financial
gains. Still, Panama is a young country demographically, with a median age of
26. Panama’s GDP grew at an 8% clip last year. It doesn’t have the U.S. baby
boomers’ $55 trillion unfunded pension liability. Neither is it involved in
difficult, expensive Middle East nation-building. So we should not be
surprised if a growing number of 20-to -40-year-old Americans are willing and
eager to abandon the wealth that “has been” to pursue the wealth that “might
be.”

Investors might want to consider a similar tactic.

[Joel's Note: Mike is a regular contributor to one of Agora Financial’s
flagship publications, Strategic Investment. If you are at all interested in
expatriating some of your investments or find yourself questioning the short-
term performance of the American economy, you will certainly be interested in
Strategic Investment’s report…it’s not for the faint of heart. Read On
Here.

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Rude Endnote: If you would like to chime in with an impassioned response to
today’s column, please send your comments to the address below. We’ll whittle
the collection down and publish the very Rudest.

Cheers,

Joel Bowman
Rude Awakening