Peter Macfarlane & Associates

“Money isn’t the most important thing in life, but it’s reasonably close to oxygen on the ‘gotta have it’ scale.”

Zig Ziglar

Australia: Where the Beer Is Great and the Bonds Are Better

By Andrew Gordon

About a year ago, my father invested in a Merrill Lynch bond. I looked it over… noted its high rating… and saw nothing wrong with it.

Not long after that, I was speaking to a vice president of Bank of Nova Scotia. I asked him about the bank’s exposure to the subprime crisis. He said it was negligible. I then asked him about the GMAC loans it had recently bought. He said they were fine… the defaults lower than they had projected. So I added the bank to one of the portfolios I recommend to my subscribers.

The Merrill Lynch bond has since plunged and then rebounded. And the Bank of Nova Scotia’s shares are almost exactly where they were when I made my recommendation. That’s much better than most North American banks have done over the past year.
 
No harm, no foul?

I’d be the stupidest guy on the planet if I thought there were no lessons to be learned just because those investments didn’t turn to mush.

Fact is, my assumptions have changed.

Had I known then what I know now, I would not have touched that Merrill Lynch bond with a 10-foot pole. And I wouldn’t have cared if a high-ranking bank official swore to me they weren’t exposed to the U.S. subprime mortgage market. I wouldn’t have believed him. I definitely would have put off investing.

The housing bust, subprime mess, credit crunch, and resulting financial crisis have done more than just bring the market down. They’ve led to a stunning collapse of confidence that has infected the entire investment world. Banks don’t want to lend to each other… institutional investors no longer know what’s safe… and retail investors don’t believe anything anymore.

How can they? The rating agencies have proved beyond a shadow of a doubt that they do not understand derivatives. Their ratings are worthless.

And the brokers and analysts who follow every twist and turn the market makes? The last year must have made them so dizzy that they can’t see the forest for the trees. They’ve been making one bad call after another.

A few months ago, for example, Buckingham Research estimated that Bear Stearns had $35 billion in liquid assets and borrowing capacity, enough to operate for 20 months. Turns out it had enough for three days. This is one of dozens of examples I could cite.

There’s so much uncertainty in the investment world that we can no longer fall back on our long-held ideas of what makes a safe investment.

Munis? Sorry. Thanks to the shaky status of the monoline insurance companies (which insure munis), they’re no longer the safe investments they used to be.

Money market funds? They’ve been hit too. Some brokerages are covering losses with their own money rather than pass them on to those who invested in these supposedly safe havens. Good move. I don’t blame them.

What’s left? Oh, yes. How could I forget U.S. government bonds? Okay, they’re still safe… but are they really investments? I mean, can anything you get a negative return on be considered an “investment”?

I don’t think so - and that’s exactly what you’re getting with them. A 10-year Treasury note would give you a 4.01 percent yield. Meanwhile, inflation is running at 4 percent, and that excludes food and energy prices. The real rate of inflation would be much higher.

Investing in U.S. bonds is worse than giving the government a free loan. Instead of the government paying you for the loan, you pay the government for the privilege of loaning it your money.

Do you feel honored? Or cheated? Well, I can’t speak for you. But this is the kind of honor that could land me in the poorhouse. I’d say cheated.

So… is there any investment that is truly safe?

There sure is. Australian government bonds have never looked better than they do right now. And this is the perfect time to jump into them…

Not only because Australia has one of the strongest economies in the world. Unemployment is at a 33-year low. And prices of its two big exports - coal and iron ore - are at historical highs. It doesn’t hurt that around 66 percent of Australia’s exports are commodities.

And not only because Australia is effectively shielded from the problems we’re having in the U.S. They trade mostly with fast-growing Asia. In fact, 60 percent of their exports go to Asia.

The biggest reason the timing couldn’t be better is because the Aussie government has been raising its key interest rate to stave off inflation. They’ve raised it all the way to 7.25 percent. They’re at or near the top of their rate-raising cycle.

Other interest rates, including bond rates, feed off this basic government rate. If this rate is more than twice as high as the U.S. benchmark interest rate, then most of the other rates will be too - including Australia’s government bond rates.

Sure enough, the Queensland 10-year government bond pays a nice 6.99 percent interest. That’s not quite twice as high as the equivalent U.S. government bond rate, but it’s close.

What’s more, you can buy these bonds for a discount. And the discount isn’t going to get any better.

Here’s why…

The Australian government paused its key interest rate hikes three months ago. That means, for now, interest rates have peaked in Australia. The only way they would go higher is if the Reserve Bank of Australia resumed rate hikes. That’s possible, but unlikely.

And if you don’t want to tie up your money for 10 years? There’s another group of Australian bonds that could be perfect for you. I’m talking about corporate bonds, including bonds issued by GE - one of the biggest companies in the world.

These GE bonds are triple-A rated - the highest rating bonds can get - which means they come with very little risk. Usually, the lower the risk the lower the yield. But these highly rated bonds offer high yields of 7.97 percent. (Ask your broker for 8.5 percent coupon February 2011 maturity bonds from GE in Australia.)

Or you might prefer Australian bonds from Nestle, the huge Swiss firm. Its bond is double-A rated and offers a yield of 7.0 percent. (Ask your broker for 7.25 percent coupon January 2011 maturity bonds from Nestle in Australia.)

Because these bonds mature in 2011, they would tie up your money for less than three years. To get in before prices go higher (and yields go lower), you should buy Australian bonds NOW.

Buying international bonds is pretty easy… as long as you go to the right place. You can always go to a full-service brokerage specializing in international bonds. But many of the bigger brokerages are able to trade them, too, so call a few and find out.

You could also call up your broker. Ask him to recommend someone who does overseas bonds. Or you could call my colleague Richard Panchookian. (He’s with International Assets Advisory - telephone number: 800-432-0000, ext. 514.) He has several Australian and Queensland bonds to offer.

This article appears courtesy of Early To Rise, the Internet’s most popular health, wealth, and success e-zine. For a complimentary subscription, visit http://www.earlytorise.com.

How many times have I said that when trying to set up a confidential structure, don’t be lazy and go for the next door tax haven? I certainly wrote that, for example, in my comments on the Liechtenstein case targeting Germans. Another example is the Brits who were hiding their money in Jersey, or the Americans in the Caribbean. Now, Australians with secret structures in Vanuatu are being targeted… according to an article on tax-news entitled Vanuatu Must Hand Over Evidence To Australia In Tax Probe.

If you are looking for offshore banking confidentiality, even in this internet age, putting distance between you and your offshore structure is a big help.

For more information please refer to my Q Practical Offshore Banking Guide 2008. 

I’m losing count now, but I think these are respectively the sixth and seventh US banks to fail this year. Well, technically they didn’t fail. What happened was in one fell swoop, the FDIC lost $862 million, and First National Bank of Nevada and First Heritage Bank NA of California will reopen on Monday as branches of Mutual of Omaha Bank.

Well,I don’t want to spoil your weekend. If you want to read more about the above, here’s the link.

If you want to do something about reducing your own exposure to US banks, here’s the link. 

If you want to visit Panama City in November and discuss this in person with like-minded individuals, and work out strategies to profit from the current chaos, here’s the link. 

U.S. banks’ direct primary credit borrowing from the Federal Reserve rose to the highest level ever this week, reflecting the growing need of the banking sector to rely on the central bank, according to analysts quoted by Reuters.

On the day of July 23, banks’ primary credit borrowings rose to $17.68 billion, the highest borrowing since September 12th 2001 when banks borrowed $45.5 billion in a single day.

After all, “Who else is going to lend to them?” said Howard Simons, strategist with Bianco Research in Chicago, reported by Reuters. “The financial sector, everyone whose business is essentially lending money is now a ward of the state. They could lend to each other but they don’t trust each other. They can’t raise money in the equity market. There is nowhere else to turn,” Simons said.

I already wrote back in April about how international banks no longer trusted each other and were falsifying reports to LIBOR to hide their desperation: read the article here.

It is just a matter of time until the next US bank or brokerage goes belly up. At that point gold should be able to decouple from the current commodity complex, and be viewed as a safe haven rather than a commodity. Now looks like a great time to buy gold and get out of the USD altogether!

The US Department of Justice recently filed papers in a US Court seeking to allow the IRS to ask for what is known as a John Doe Summons, otherwise known as a ‘fishing expedition.’

They claim a violation of US law migt have occurred and are thereforeasking the court to let them get into Swiss bank records, violating bank secrecy and completely disrespecting Swiss law, to find any guilty party. In this case they are looking for possible tax fraud for by unknown parties that are US citizens.

The IRS is trying once again to make a foreign sovereign state comply with a requirement that would destroy the integrity of their banking system, built up over centuries. All so that maybe a handful of people can be convicted for tax fraud.

The Swiss have some bad tax treaties with the USA. The things that UBS did were apparently stupid - and worst of all, they did them inside of the USA at that which gives the USA jurisdiction. It appears as if Germany started a chain reaction when they obtained data stolen from a bank in Liechtenstein. For a regular person that would be a crime – possession of stolen property - but the Germans consider themselves to have an exemption from criminal statutes regarding possession of stolen property even when they knowingly buy the stolen property.

The Swiss Banks provide excellent service, but their jurisdiction (Switzerland) is faulty and has been faulty for some time. It was years ago that Bill Hill, of PT fame, wrote that Swiss banking secrecy had “more holes than Swiss cheese.” We have been warning people about the lack of real secrecy and privacy in Switzerland for years.

USA citizens, when accepted at all as clients by Swiss banks, have been asked to provide their social security numbers for some years, alongside signing a disclaimer and waiving bank secrecy rights. Other serious offshore banks never ask for this information. It is all based on the underlying tax treaty calling for cooperation in the instance of a person failing a false tax return by intentionally understating income on the tax return.

The use of the “John Does Summons” is unlikely to work with the Swiss authorities, which will reduce the case to a few individuals who the USA may have specific information about. The John Doe Summons does, however, serve its intended purpose which is to scare US citizens into full compliance. The mainstream media does not accurately report the facts, nor do they discuss the law. What the USA courts say or do still has little effect if any on what the Swiss government allows. This simply contributes to the atmosphere internationally making it very difficult for Americans to get offshore accounts in their own personal names. This makes IBCs and foundations more popular, and drives productive American citizens towards renunciation of citizenship and acquiring a second passport.