Escaping America & Europe:

Saving Yourself From Deranged Economics

By John Schroder - August 23, 2016 

About 20 years ago a gentleman by the name of Mr.. Roger Gallo wrote a book titled Escape From America: Why The Best And Brightest Are Leaving.  Mind you we are talking about two decades prior to today, before the Nasdaq stock market crash of 2000, before the so-called economic crisis of 2008 (that is still with us) and before the immigration issues we are seeing at the moment.  I had the pleasure of knowing Roger personally and he often used to tell me, if you think things are bad now just wait five more years to see how much worse it gets.  Roger is not a pessimist by nature but he knows all too well the banality and stupidity (not to mention the often corrupt nature) of politicians.  That is why he made that statement.  And by the looks of things today, he was right.

Of course back then the demographics, taxation, underfunded social welfare liabilities and the beginning of manufacturing relocating abroad all lead to paint a bleak picture of what was possible to come if left uncorrected.  And now, on top of all that, we have an eight year long economic crisis and insane central banking policies.  In addition, never mind about public ponzi scheme pension programs, private corporate pension funds are reportedly now underfunded by almost US$400 Billion in 2016.  If you have ever worked for (and are expecting a pension check from) one of the following companies, I would be concerned: General Electric, General Motors, Boeing, Exxon Mobil, AT&T, Lockheed, IBM, Delta Airlines, UPS and 15 more - http://www.zerohedge.com/news/2016-08-22/top-25-underfunded-corporate-pension-plans-are-225bn-underwater

Central banks are now actually targeting policy to produce inflation (also known as currency devaluation or debasement).  And now once again in August 2016, the US Federal Reserve is talking up US$4 Trillion Dollars worth of new QE yet again (http://www.federalreserve.gov/econresdata/feds/2016/files/2016068pap.pdf).  In addition, the largest bank in Ireland, the Bank of Ireland, has recently announced they will be joining the negative interest bandwagon, charging negative interest to it's larger depositors.  They are in good company as the UK's RBS (technically now nationalized and a taxpayer owned financial institution by default) announced the very same thing as well.  Although these policies only effect larger corporate depositors for now, individuals citizens and small businesses are eying all this nervously.  All this comes on the heels of the European Commission ordering 11 EU nations to adopt the Bank Recovery and Resolution Directive (also known as Bail-In framework) which they insisted be put into place by now, August 2016.  Austria already passed legislation in April 2016 removing the state 100,000 Euro bank deposit guarantee for retail bank depositors, so state protection for Austrians is now kaput (they claim they will set up a banking insurance fund instead, but is this really a viable idea now in the middle of possibly the worst potential banking crisis in recent European memory?)


Are you so surprised?  Who in their wildest thoughts 20 years ago would actually believe a central bank in a modern, developed, well educated country would pro-actively engage in such things?  This is economic and central banking policies of so-called third world banana republics, not the modern developed world.  And yet here we are.  Indeed many things have changed over the past few decades and not for the better.  The value of currencies, capital and basic sound economics are being intentionally destroyed (they already know it does not work, just look at Japan).  And incredibly enough, even though these various central banks claim they are fighting deflation, negative interest and bank bail-ins are in fact deflationary.  It is like giving someone stimulants and depressants at the same time.  What kind of lunacy is that?  We have stopped asking why because it really does not matter anymore, they will do what they want to do regardless (you should read the Wall Street Journals August 21, 2016 article about the ECB, via the Bank of Spain, now giving money directly to Repsol and Iberdrola via private debt placements - Spain's former fascist leader Francisco Franco must be grinning ear to ear where ever he might be).  However, as we have mentioned in another prior article, one needs to wonder if the fascist economic government model is being revived?      

  

Gold Is Money, Everything Else Is Credit - J.P. Morgan




The demographics and unfunded social welfare liabilities are of course still with us.  In terms of demographics, the issue of the baby boom generation now retiring and placing pressure on both the government retirement plans (Social Security in the US) and government health insurance for the elderly have been covered extensively over the last few years in the media.  But one angle not often discussed is housing or real estate in general as demographics play a role.  People with larger multi-bedroom homes nearing retirement are usually going to want to sell their properties and purchase a less expensive and easier to maintain one bedroom property.  And who are they going to sell those properties to?  The Millennial generation is not going to buy them, for they cannot.  Pew Research recently has given us some statistics showing that roughly 30 percent of young adults in the US (aged 25 and above) now live with their parents (even after graduating university).  And this statistic is on the upswing even from just a few years ago (http://www.pewresearch.org/fact-tank/2016/08/11/a-record-60-6-million-americans-live-in-multigenerational-households/)  In Europe that statistic is closer to 50 percent.  So, if today's younger generation (in the US especially) are completing higher education and cannot find work, are saddled with university debts of US$50,000 or more and find themselves earning lower wages on average (compared to the older generations previously, after adjusting for inflation), they certainly are not going to be buying real estate anytime soon in the near future.  Only twenty nine percent of the Millennial generation make more than $100,000 per year, in contrast to fifty two percent of the baby boom generation and also fifty two percent of the Generation X cohort that earn more than US$100K per annum.  (http://www.thedailybeast.com/articles/2016/08/05/the-unsexy-truth-about-millennials-they-re-poor.html). 


Dominican Republic: A Better Economy



In contrast to this and using the Dominican Republic as one example (and a country we know the best) it used to be the case that younger people, even after graduating university, lived at home with their parents until they married.  This was for three reasons.  One is perhaps cultural.  The second was the cost of purchasing their first property (when you graduate university and are just starting out, one is not exactly financially flush) and third, it was almost impossible to find a new one bedroom condominium for sale.  Which is to explain that in the past, almost ALL new condominium projects featured more costly 2 and 3 bedroom units only.  That has changed in recent years and now builders are reserving a percentage of one bedroom units in newer projects.  This tells me that either builders are waking up to this untapped market and or the younger people can now afford such properties, and are desirous for independence.  The average cost for such one bedroom units in a wealthier area and with better amenities (such as elevator, doorman, off street parking and even gym facilities and swimming pool in some cases) is about US$120,000 (and in general costs to purchase in such higher end construction projects will average about US$1,000 per square meter if you want to figure out costs for 2 and 3 bedroom units).  I want you to keep these numbers in mind both for the retired or nearly retired attempting to escape the high real estate costs of many US and European cities and younger people starting out as well (if you get a job as a regional traveling sales representative for a company, does it really matter if you live in Miami, New York, Santo Domingo or Quito?).  Earn as much as you can, live as best and as cheaply as you can (or in the case of the retired on fixed incomes, live where your monthly pension check will take you the farthest).

All of this leads me to touch upon the commentaries that the world is now intertwined in a global economy and that financial contagion unavoidable (not to mention the we are all in this together rhetoric nonsense).  Yes it is true we live in world with multinational companies, cross border trade and investment.  But is it really true that a bank failure in say Austria, Italy or New York will wipe out the banking sector in say Ecuador or The Dominican Republic?  Certainly the larger money center banks globally are so entangled with derivatives contracts that the failure of one can and will directly effect many of their peers.  But is that really the case for some smaller emerging or developing markets that are NOT embroiled in such things?  Case in point, the 2007 – 2008 real estate asset bubble deflation in the US (and the second latest one now in 2015 – 2016).  While real estate values plummeted by anywhere from 20 to 45 percent in some regions of the US back in 2008, the local real estate market in the Dominican Republic was untouched (the real estate market in tourist areas another matter, which is dependent upon the economic situation of foreigners and why I am not a huge fan of considering property in a tourist area as investment).  In fact, many of our clients that have bought real estate in the Dominican Republic 15 years ago have seen their real estate double and triple in value in some cases.  However, for the most part these purchases involved higher end condominiums in Santo Domingo, building lots and farmland.  Why?  Because the increase in real estate values was NOT caused by a cheap money boom and that still is the case today (interest rates for mortgages in the Dominican Republic previously ran about 20 percent and today they run anywhere from 12 to 15 percent or so).


Now The Good News: Beyond The BRICS



Continuing with this theme of a safe haven in a world of economic and financial chaos, one must realize that the so-called western developed economics of North America and Europe are not the places to be for growth going forward.  And I hate to say it, but central bank policies in these respective countries are only making things worse.  In fact, recent estimates by the IMF, OECD and World Bank predict about 1 percent GDP growth for Europe and the US on the bright side, and economic contraction of negative one half percent on the down side.  In contrast, positive GDP growth is expected to continue in the emerging markets at a rate of between 4 and 5 percent.  And for comparison the Dominican Republic finished up 2015 with a 7 percent positive GDP growth number (Africa is expected to turn in between 6 and 7 positive GDP growth in 2016 as well).  But yearly returns are like watching the constantly changing positions of sports teams.  The more important issue is the longer term and the fundamentals.  Seventy percent of world growth will come from emerging markets (China and India are said to account for 40 percent of that).  Emerging and developing economies are home to 85 percent of the world’s population (90 percent of this population is under the age of 30) and now comprise about 60 percent of world GDP activityEmerging markets contributed to 80 percent of ALL global growth since 2008.  Think about that.

When many people think of emerging markets, they only think of the the BRIC nations (Brazil, Russia, India, China) but the truth is that there are 50 nations considered emerging or developing markets (and the Dominican Republic is on that more extensive list).  With Brazil having some difficulties and slowdowns in China, there is a wide number of countries to consider, and you should indeed be thinking about some of these places.  According to statistics from 2013, over 3 Billion people lived in Non-Bric Emerging Markets, which represents 3 times the populations of the ALL developed markets (Europe and North America).  And not all these people are poor.  In fact, there has been a rising middle class in many of these economies and that is fueling consumer demand as well.  As the Macy's department store chain in the US announces the closing of 100 stores inside the US, new retail stores have been opening in many of these beyond BRICS markets.   New car sales are another sector seeing growth in such markets as reported here by a August 23rd article from the Bangkok Post:  http://www.bangkokpost.com/auto/news/1069057/emerging-economies-forecast-to-boost-2017-world-auto-sales

Getting back to the Dominican Republic for just one moment, you will find out from the additional article links I have provided below that the Dominican Republic is NOT highlighted on any of the mainstream media beyond BRICS lists, and that is a good thing.  Which is to say even now in 2016, it remains to be one of the best kept secrets in the Caribbean.  However, aside from the GDP growth we already mentioned, the country has some other very positive aspects to it's balance sheet.  For example, Dominican Government gross debt to GDP is a favorable 38 percent ratio (government debt to GDP in the US and many European nations is beyond 100 percent and Japan it is well over 200 percent).  Inflation is down to about 4 percent and has been holding steady at that rate for a few years now.  Dominican Government bonds (and other private fixed income investments) are yielding anywhere from about 7 to 10 percent depending upon issue and maturity (whereas a reported whopping 30 percent of all European sovereign government bonds, an estimated 13 Billion worth, are giving investors negative returns or a guaranteed loss).  Just consider how much better financial shape the private Dominican insurance companies and pension plans are in by comparison to their European and American counterparts as a result of this.  Unemployed rates have been coming down and have been holding steady at about 6 percent since 2012.  Current Account Balances are about flat, which means NO excess but NO deficit either.  All of these figures have been derived from the IMF, which you can access here: https://www.imf.org/external/pubs/ft/weo/data/changes.htm

In summary, the Anglo-Saxon western developed world seems to be on some kind of economic suicide mission.  Central bankers in these countries continue to exponentially worsen an already weak and fragile economy.  Politicians continue to permit bail-in legislation and socially disruptive immigration policies.  Private companies continue to outsource manufacturing and make investments in the emerging markets while contracting operations in the developed countries.  The  positive news is you can so something to better your own situation albeit this involves expatriation to a growing and more economically sound market as the core solution.       


Additional News Articles


An excellent and easy to read research paper about marketing to the new middle class in these beyond BRICS nations by Ms. Sarah Boumphrey and Ms. Eileen Bevis written in 2013 can be accesed as a pdf here:  http://go.euromonitor.com/rs/euromonitorinternational/images/Reaching the Emerging Middle Classes Beyond BRIC.pdf

An article from the March 9, 2016 edition of Forbes titled: The Emerging Economies That Will Shine In 2016 offers a short list of some beyond BRICS nations:  http://www.forbes.com/sites/forbesinternational/2016/03/09/the-emerging-economies-that-will-shine-in-2016/

The World Economic Forum offers up their own list of beyond BRICS markets to consider as well: https://www.weforum.org/agenda/2016/04/worlds-fastest-growing-economies/