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The Global Investor Newsletter - Fall 2013

Welcome to the Fall 2013 edition of Euro Pacific Capital's The Global Investor Newsletter. Our investment consultants are standing by to answer any questions you have. Call (800) 727-7922 today!

Emerging Market Dollar Accumulation
By: Peter Schiff, CEO and Chief Global Strategist

Lessons from India
By: John Browne, Senior Economic Consultant

Five Questions for Adrian Day
By: Marlon Varsace, Vice President of Investments, Westport

China's Free Trade Zone
By: Andrew Schiff, Director of Communications & Marketing

Dividends May Be a Cure for the Permanent QE Blues
By: David Echeverria, Investment Consultant, Los Angeles

The Asian Ascendance
By: Myer Rickless, Investment Consultant, Los Angeles, David Echeverria, Investment Consultant, Los Angeles, and Neeraj Chaudhary, Investment Consultant, Los Angeles

The Global Investor Newsletter - Fall 2013


Emerging Market Dollar Accumulation

By: Peter Schiff, CEO and Chief Global Strategist 

In the movie "All the President's Men," the informant Deep Throat advised Woodward and Bernstein that to find the truth, you must "follow the money." In today's global economy the big money is not hard to follow, and the story that it tells is not a pretty one. In particular, much can be learned by watching the growth of U.S. dollar denominated foreign reserves held by emerging market economies. This massive cache of funds can be looked at as the growing dust pile that has been swept under the global economic rug for decades. If current trends hold, the pile will soon turn into a mountain that no rug will be able to conceal.

Recent decades have seen near constant escalation of a global currency war that has been "fought" in order to maintain currency exchange rates in the face of the massive flood of dollars unleashed by the Federal Reserve. To keep pace, countries have created ever greater quantities of their own money and have continuously added to the stockpile of dollars that they hold in reserves. And while the trend has been inexorably upward, there can be seen clear patterns of rapid expansions that lead to periods of relative stasis. The turning points have been global shock events.

The past 20 years have seen two events that have broken the dollar accumulation cycle: the Asian Currency Crisis of 1997 and the Market Crash of 2008. Both episodes were preceded by multi-year periods of above trend dollar accumulation, and both were followed by similar periods of below trend accumulation.

In 1996 and 1997 emerging market dollar accumulation expanded briskly, by 19% and 16% respectively. But when global fears led to a de-leveraging of risk, emerging market currencies sold off drastically. In order to try to stop the free fall, emerging market banks stopped accumulating dollars, and for a short time actively sold them to repurchase their own currencies. As a result, reserves dropped by 1% in 1998.

But after the crisis passed, accumulation began again, albeit at a slower pace. For the following four years, dollar reserves expansion averaged just 6.4% per year. But by 2003, as the memory of the collapse faded, accumulation had risen again to the 19% level. The next three years saw unprecedented levels of accumulation: 25% in 2004, 23% in 2005, 28% in 2006, and a staggering 50% in 2007. For many, the steep ascent of the rise could only be taken as a harbinger of bad news. They were right.

In 2008, just as it had a decade earlier, falling currencies and a surging dollar led to a nearly complete cessation of dollar accumulation in the emerging markets. But after the dust settled this time around, the buying resumed at a much stronger pace than it had before. From 2009-2012 (four years), dollar reserves in emerging markets increased by an average of 8.6% per year, a pace that is 34% steeper than the 6.4% average in the four years after 1998. Apparently the markets are now much less inclined to stay cautious for too long.  But the trend is much more dramatic when you consider how the base of dollar reserves is so much larger now than it was then. In raw terms, emerging market banks accumulated a total of $74 billion in the four years after the 1998 crash. This is only 16% as much as the $472 billion in the four years following the crash of 2008.

So this begs an essential question of what comes next.  If the pace of accumulation expands like it did in 2007, we may see a similar blow off top. But even to get to the 25% level (half the pace of 2007), emerging markets would have to accumulate more than $425 billion in one year (based on the $1.71 trillion they currently hold in reserves). This may be beyond anyone's capacity.

Even the much smaller amounts that they have bought in recent years have unleashed a wave of problems. Emerging markets need to create their own currencies in order to accumulate dollars. This can create destabilizing inflation in their economies. Rising prices have led to riots in Brazil and have become major domestic issues for both China and India. 

Widespread expectations that would the Fed would begin tapering this year had put downward pressure on emerging market currencies as traders prepare for tighter monetary policy and a stronger U.S. economy.  However, as the Fed repeatedly fails to deliver any actual tapering, and as the U.S. economic outlook darkens, expect those tendencies to ebb. When the open-ended nature of the QE program becomes more widely understood, emerging market bankers will face a hard choice: prepare for another massive increase in purchases or look to wind down this pointless currency war. My guess is that foreign central banks may not be as quick to repeat their past mistakes. Perhaps they will balk at the volume of dollars they will be forced to swallow. Instead of accommodating these flows, they may allow their currencies to appreciate instead. Stronger currencies will put a natural break on hot money flows while allowing their citizens to benefit from the higher standard of living that comes from enhanced purchasing power.  

In fact, the Chinese may finally be getting the message. In early October, as the debt ceiling farce gathered steam in Washington, China's state run news agency issued perhaps its most dire warning to date on the subject: "it is perhaps a good time for the befuddled world to start considering building a de-Americanized world."  Their sense of urgency may have been heightened by the recent release of currency reserve data that that China's coffers have swelled to $3.66 trillion. At a time when most analysts had assumed its accumulations had been slowing, it added $163 billion in foreign reserves in just the last quarter (the biggest quarterly increase in two years - see chart above.) Perhaps these amounts will compel China to finally seek a rational cease-fire in the global currency war. But as the dollar would likely fall as a result, America could actually achieve the "victory" of lower currency valuations. But it will come at a high cost to average Americans who will lose purchasing power and will have to adjust to lower living standards.

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Lessons from India
By: John Browne, Senior Economic Consultant

In September of this year the Reserve Bank of India (RBI) inaugurated Raghuram Rajan as its 23rd Governor. The former IMF economist came to office at an extremely critical juncture. The falling value of the Indian currency, the rupee, had become the most important economic issue facing the nation. The nation demanded action. Just three weeks into his tenure Rajan raised the Bank's key lending rate 25 basis points to 7.5%. The rate hike was not received well by the Indian markets, but the new governor seems to show particular resolve in restoring a sounder currency. Although this is a step in the right direction, it may not be enough.

The conventional wisdom that has fueled the global currency war argues that countries should prefer weak currencies. And so India, which had long staked its growth trajectory on the backs of cheap exports, had taken mighty efforts to dilute its currency along with the dollar. These efforts have forced the Reserve Bank of India (RBI) to borrow massively.

According to the RBI, India has total external debt of about $390 billion, a 12.9 percent increase from 2012. Of this, 57.2 percent was denominated in U.S. dollars. Furthermore, India has 96.7 billion in short-term debt, comprising about 25 percent of its total external debt. If this is added to her maturing long-term debts, India will have, according to The Hindu,some $172 billion of debt maturing before March 2014. Coming on the back of a current account deficit of $88 billion or 4.8 percent of GDP, this represents a serious liquidity challenge. Meanwhile, since May of this year through August, India has lost some 5 percent of her foreign exchange reserves.

In May of 2013, Fed Chairman Ben Bernanke began hinting that tapering of its $85 billion per month QE program could begin by the 3rd Quarter of 2013. In response, the rupee fell by some 20 percent by August 20th. The decline made it particularly difficult for the RBI to finance these borrowings. The liquidity crisis then added to the vicious cycle, placing more downward pressure on the rupee.  

Indians may be poor, but they are not stupid. When the rupee fell dramatically, many correctly perceived a threat to their own personal fortunes. They rushed increasingly to gold. As recently as August, the price of gold was hitting all-time highs when measured in rupees. In 2012, Indians imported some 845 tonnes of gold, which is 52% more than all the gold currently held by the RBI. From an American perspective, these figures approach the surreal. 

India has a long history of currency turmoil (the country was hit particularly hard by the 1997 Asian currency crisis). It is no accident therefore that a reverence for gold as a symbol of lasting wealth, and even as a sign of divinity, have become deeply embedded in Indian culture. Although not a rich nation, India has some 557.7 tonnes of gold, ranking it tenth among nations, with holdings far larger than those of any other developing nation and ahead of the European Central Bank, Saudi Arabia, the UK and Australia. In June 2013, this comprised some 8.8% of India's national foreign exchange reserves. More importantly, India is the world's largest consumer and importer of gold. 

In response to the frenzied buying from rank and file citizens, the Indian Government has tried to crack down on the importation of gold. Despite these efforts, some citizens have gone to great lengths to break the blockade (a news report told of one man who attempted to smuggle gold into the country through a cell phone). The crisis seemed to enter a new phase when the government recently began pressuring Hindu temples to report their gold holdings. India's ancient temples have accumulated and displayed gold for millennia, and the request was met with deep mistrust by a great many devout Hindus. Many suggest that the government should tread lightly with such sacred cows. But in any event, such alarming news has only renewed the stridency with which Indians seek the security that precious metals can provide. 

The gold accumulation has added further to India's balance of trade deficit and is putting further downward pressure on the rupee. Put in perspective, gold imports, second only to oil, now form some 50 percent of India's current account deficit.

To stop the rush into gold, the Indian Government has raised the tax on gold imports first to 6 percent in January 2013, then to 8 percent in June, and eventually to 10 percent in August. But these measures have had little impact. Meanwhile, in March 2013, the Finance Minister, P. Chidambaram, 'urged' Indians not to buy so much gold. However, on August 31st, the RBI dismissed rumors that it would sell any of its own gold. On September 17th, the import duty on gold jewelry was raised to 15 percent to protect some 400 local jewelry fabricators.

In further efforts to stem the fall in the rupee, the government has considered a radical plan to direct the banks to buy gold from ordinary citizens and divert it to domestic refiners to lessen gold imports.

The dire situation in India should provide Americans with some indication of what could happen in the United States if the dollar were to ever fall in a trajectory that mirrors the rupee. The United States may have more wealth than India, but in many ways our currency is built on a foundation weaker than the rupee. When the gloves come off, we may find ourselves in the same boat.

In the meantime, I wish Mr. Rajan the best of luck. He will likely need it.

After clicking the ad above, you will  be directed to the website of Euro Pacific Precious Metals, LLC. Neither Euro Pacific Capital nor any of its affiliates are responsible for the content of such website. Euro Pacific Capital is not affiliated withthis company , however, Peter Schiff is CEO of Euro Pacific Capital, Inc. and CEO of Euro Pacific Precious Metals, LLC.

Precious metals are volatile, speculative, and high-risk investments. Physical ownership will not yield income. As with all investments, an investor should carefully consider his investment objectives and risk tolerance as well as any fees and/or expenses associated with such an investment before investing. The value of the investment will fall and rise. Investing in precious metals may not be suitable for all investors.

5 Questions for Adrian Day

By: Marlon Varsace, Vice President of Investments, Westport

Recently, Marlon Varsace, V.P. of Investments in the Euro Pacific Capital office in Westport, sat down with ADRIAN DAY, founder of Adrian Day Asset Management. Mr. Day has spent many years as a financial investment writer, where he gained a large following for his expertise in searching out unusual investment opportunities around the world. He has also authored three books on the subject of global investing: International Investment Opportunities: How and Where to Invest Overseas Successfully, Investing Without Borders and Investing in Resources: How to Profit from the Outsized Potential and Avoid the Risks. 
1. How do you account for the current strength in the U.S. dollar? 

There are many reasons why the dollar is up but none has anything to do with the dollar being attractive in its own right. It is primarily because there is currently less faith in the alternatives to the dollar. I see the dollar rally of the last two years as an indictment of the euro and the yen rather than an endorsement of the dollar.

Fundamentally it strikes me that the era of U.S. monetary dominance should be nearing its end. The U.S. is highly indebted both internally and externally, and has engaged in a massive expansion of its money supply, its military commitments around the globe, and its entitlement state. At the same time its political class has shown a complete inability to address these issues. This is not something that international investors can tolerate indefinitely. 

2. How should investors consider the current volatility in gold?

I don't see (physical) gold as inherently speculative. It's volatile, but volatility and risk are two completely different concepts. Historically, gold has real value and has a very strong long term track. But it is not speculative like a new business venture may be. Despite the volatility in gold, one could argue that there are very few sectors that have the potential to give the kind of returns that gold stocks can. Gold and gold stocks have a place in a portfolio. It all depends on your circumstance, tolerance of volatility, and what the rest of your portfolio looks like. 

3. What are the most important criteria you look for in evaluating mining companies?

When I look at individual stocks, I'm not looking at the geology of a particular deposit. That obviously plays into it, but I'm not a geologist. That's not my area of expertise. I'm looking at companies more as businesses. Do they have good management, good balance sheets? Do they have a good track record? Do they have a good business plan?

Mining, whether you are a major producer or an exploration company, is a very difficult business. It's often said that Murphy's Law works overtime in mining. Anything that can possibly go wrong, can and will go wrong in a spectacularly big way. That is why I favor the royalty companies as they are able to mitigate these risks by avoiding production costs and locking in gold purchases at a fixed price.

I also like prospect generators. These companies have business plans that mitigate risk. They generate prospects and then farm them out to bigger companies that spend the money on what is a very high risk exploration business.  

4. How hard is it to identify strong mining companies?

I believe gold and other resources probably require more expertise and more watching than any other sector outside of biotech. By nature, I am a long term investor, and I tend to focus on the smaller companies where I believe the real untapped value exists. In general, I am a long term investor who favors a buy and hold approach. However, you cannot always do that in the mining sector because stories change so quickly. You have to be more active. I have noticed that the more successful investors in the gold sector actively manage their portfolios.

5. Given the significant sell off we have seen in the sector, why shouldn't investors take a "wait and see" approach?

To be successful in this space you have to be willing to buy when others won't. I view the last couple of years as simply a mid-cycle correction in a secular bull market. I like to remind people that in 1975-76, gold declined 47%. And that was in the middle of a long-term cycle.

To me the gold market has grossly over-reacted to the tapering talk. I think we should keep focused on the money creation, which has continued unabated. In the gold sector, if you wait until things look stronger, you may find prices far higher. Moves from the bottom in gold stocks tend to be remarkably strong. You have to position yourself early. Don't ask is this the bottom? But rather ask if this a good price? I think the answer to that is yes.

Adrian Day is portfolio manager of the EuroPac Gold Fund (EPGFX) and Adrian Day Asset Management serves as a Sub-advisor to Euro Pacific Asset Management, LLC. Euro Pacific Asset Management, LLC is a related company of Euro Pacific Capital, Inc.

Opinions expressed are those of the writer, and may or may not reflect those held by Euro Pacific Capital, or its CEO, Peter Schiff.

This is not a recommendation, or an offer to buy or sell or a solicitation of an offer to buy or sell any security or instrument.

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China's New Free Trade Zone

By: Andrew Schiff, Director of Communications & Marketing

In late September China's State Council, the government's top policy-making body, released a set of rules that will create the China (Shanghai) Pilot Free Trade Zone, a nearly 11 square-mile group of docks, hangars and warehouses in Shanghai's harbor district. While the zone will be just a dot on the vast map of China, the importance of the experiment can't be overlooked. The zone, which will be set in China's historic commercial capital, could become the country's boldest experiment yet with truly free markets. The change is framed by some economic historians as the most important reforms since Communist leader Deng Xiaoping, the architect of China's transformation to a market economy, designated Shenzhen (on the border with Hong Kong) a special economic zone in 1980.

In general, the reforms for the zone will look to remove the restraints that are imposed on business and will allow for full foreign ownership of companies that in the past could only be owned by Chinese citizens. Although the reforms will impact just about every area of economic life, financial sector changes are at the heart of the experimentation. In general, the financial reform in the zone will look to counteract China's reputation as a difficult place to reliably invest, particularly for foreigners. Among the changes will be provisions that should encourage greater market control of interest rates, and allow for easier private currency conversion and cross-border financing. In particular, the reduction of these financial roadblocks could reduce funding costs for Chinese firms and allow for much greater transparency for previously frustrated foreign investors.

Other financial reforms are aimed at opening the financial sector so that rank and file Chinese can get better returns on bank deposits and find opportunities to invest in domestic and overseas companies.

Regulators also plan to promote the development of a crude oil futures trading market, which China currently lacks. It is likely that the Chinese leadership recognizes that without an active energy marketplace, China will be perpetually at the mercy of Western market pressures. 

One of the biggest changes will be that the free trade zone could allow for duty free import, and re-export, of a variety of products. This alone could quickly establish Shanghai as the premiere port of entry into the world's most populous market.

From our perspective, these momentous moves are in character with the cautious approach that is the hallmark of the Chinese government. They are keenly aware that free markets are vastly superior to state-directed command economies. However, more than anything else, the one-party rulers of China are scared of the chaos that freedom can bring. They will likely take a long and hard look at how the reforms play out in Shanghai before they decide which ones to keep and which ones to abandon. However, it can't be ignored that such an approach does present risks for the Communist party.

The fact that Party leaders in Beijing are prepared to allow a much longer leash to the business interests in Shanghai should serve notice that China is positioning itself for the tough decisions needed to take their economy to the next level. It is surprising that these developments have been so thoroughly ignored in the American-centric media. From our perspective here are the most important highlights of the free trade reforms (grouped by sector): 


  • Private capital can set up joint venture banks with foreign lenders. Chinese banks can conduct offshore business. Non-deposit banks will be permitted in the future.
  • Foreign-funded shareholding investment companies are permitted.
  • Foreign companies can set up credit information firms.


  • Foreign partners will be allowed to hold larger stakes in joint venture global shipping enterprises, up from the current limit of 49 per cent. Foreign firms can set up solely-funded shipping management companies.


  • Foreign companies will be permitted to operate a broader array of specialized value-added telecommunications services.
  • Foreign companies can produce game machines, which they can also sell in China after approval by Chinese censors.


  • Joint venture tourist agencies will be allowed to conduct overseas tourist business, with the exception of Taiwan.
  • Foreigners may own up to 70 per cent of joint venture recruiting firms, while Hong Kong and Macau investors can set up solely-funded recruiting firms. The requirement for paid-in capital for foreign-funded firms will be reduced to US $125,000 from US $300,000 currently.
  • Foreigners can set up wholly-owned entertainment venues.
  • Joint-venture educational and job-training institutions are allowed.


  • Solely foreign-owned medical service institutions are allowed.
  • Foreign health and medical insurance institutions will be permitted to operate on a trial basis.

(Source: Today online, 10/14/13)

Daniel Rosen, an American who is a Visiting Fellow at the Peterson Institute for International Economics and a partner at the advisory firm Rhodium Group, is widely regarded as an expert on the Chinese economy. In a recent interview he outlined why the new policy is significant and what it means to the broader Chinese economy. (Excerpted from 10/8/13 interview, Council on Foreign Relations)

What does the Shanghai free-trade zone (FTZ) represent to you, and what does it say about the Chinese government's approach to pushing economic reforms? 

It means that central leaders know the right policies for the future of China, but need to demonstrate them in a manageably sized area before applying them nationally. This is the same approach to broad policy reform that successive generations of Chinese leaders have employed since commencing reform in 1978-avoid forcing an all-or-nothing referendum on reform for the nation, and instead create demand for liberalization by permitting it in limited locations.

Although many details of what will and won't be allowed in the zone have yet to be divulged, some of the more notable specifics include renmibi (RMB) convertibility, tax-free trade, and fewer restrictions on foreign direct investment. In your view, what's the most important element of the FTZ, and why?

It signals clearly what Beijing thinks the new end point for regulatory conditions should look like. This is not a vision of a pseudo-market future, but of a full-blown, efficient marketplace. As the changes get underway, the most important practical innovations are likely to be the whole set of reforms that permit service sector firms-especially in financial services-to operate more freely in the same way that the Special Economic Zones of the 1980s enshrined the rules liberalizing manufacturing investment.

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Dividends May Be a Cure for the Permanent QE Blues
By: David Echeverria, Investment Consultant, Los Angeles

Now that ultra-dove Janet Yellen has been officially named the chairwoman of the Federal Reserve and Tea Party Republicans have retreated in their bid to limit federal debt accumulation, investors should understand that we are likely to be living in a world of permanent QE and near zero short term interest rates. In such an environment it may be increasingly difficult for income seeking investors to find assets that provide a reasonable rate of return that justifies the investment's risk and opportunity cost. We have already seen how this reality has pushed some hedge funds into risky territory of residential real estate management.

Put bluntly, the actions of the Fed that are likely to be continued and expanded under Yellen's guidance, will punish savers (creditors) and reward borrowers (debtors). Currently, 10-year government bonds, which could lose value if interest rates were ever to rise modestly, and could be hit with partial defaults if congressional negotiations break down, offer a pre-tax income of just 2.60% annually. These are paltry returns by any calculation. Although municipal bonds from cities and local government entities offer slightly higher yields (and more tax advantages) than Treasury bonds, investors are justifiably spooked by the recent high profile bankruptcies of Stockton, San Bernardino, and Detroit. Given the poor finances of many cities, we believe that many more such bankruptcies are yet to come. In this type of environment, what is a conscientious, income-oriented investor to do?

Rather than fight the Fed, the best course of action is to understand the cause and effects of Fed policy. Since the Fed will be structuring policy to benefit debtors, it's best to try to invest accordingly. In many ways corporations have adapted to this environment, and should offer investors the income opportunities that the fixed income market no longer can.

If you can't beat 'em, join 'em

One way to take advantage of QE Infinity and to earn income is to accumulate a portfolio of dividend paying stocks with strong balance sheets. Traditionally, such features can be found in mature companies in defensive industries with consistent revenue streams. The predictable income streams that such companies distribute to shareholders help cushion against volatility and market corrections. More importantly, because income can no longer be found in traditional asset classes like CDs and Treasuries as it once had, dividend paying stocks might become a popular alternative for retirees looking to supplement their incomes.

Amazingly, the population of seniors over the age of 65 in the US is projected to double from 39 million presently to over 89 million in 2050. The baby boomer generation not only represents the largest wave of retirees in American history, it also comes at a time when people are living longer and life expectancy in the US is at an all-time high. The average life expectancy for people turning 65 today is an additional 20.4 years for women and 17.8 years for men. Couple this with the fact that the average baby boomer has saved far too little for retirement and it becomes easy to see why dividend paying stocks should remain attractive for many years to come.

Large capitalization multinationals, in a variety of sectors, are taking advantage of the low interest rates to borrow cheaply, using the proceeds to buy back shares and increase dividends. High profile corporations such as Apple, Unilever, Texas Instruments, Walt Disney Co., Roche and Microsoft have all raised debt at unprecedented levels since 2009 (Euro Pacific does not specifically recommend investments in these companies). To a large extent they are finding buyers. According to Merrill Lynch's Global Corporate Index", by April 30 of 2013, investment-grade debt worldwide dropped to a record-low 2.45 percent, down from 3.37 percent a year earlier.

Earlier this year, the telecom giant Verizon stunned investors by issuing $49 billion in new debt. The 10-year maturity portion of this issuance priced at a yield of 5.2%. However, Verizon's common stock is currently yielding 4.5%. Verizon has consistently raised its dividend over time, with increases averaging 3.2% per year for the past 10 years. If those trends were to continue for another 10 years (and of course nothing is certain), a buyer of Verizon common stock today would see an effective yield of approximately 6% by the time the company's 10-year bond matures. And unlike bondholders, equity investors are generally considered to have some protection against losses due to inflation (company share prices and revenues can rise to keep pace with inflation, bonds are static).

Moreover, low borrowing costs have allowed these corporations to maintain their offshore cash reserves, delaying any need to repatriate capital to the US and face the high corporate tax rate. Ironically, QE Infinity has helped multinationals avoid the long arm of the IRS. And unlike creditors who have to pay taxes on interest earned, these multinationals actually get to DEDUCT their interest expense, making their effective interest costs even cheaper still! As a result, QE Infinity has effectively turned some large cap multinationals into income producing machines. This has led to additional buying from dividend-orientated mutual funds and income ETFs.

For investors seeking income, the key is to strike the right balance between traditional dividend paying stocks and growth dividend stocks. In such equities it is important to look at historical revenues, payout ratios, and dividend histories to determine whether the current dividend yield is sustainable. It is not wise to blindly select stocks with the highest dividend yield as a high yield may actually be a sign of financial difficulty and reduction in dividends to come. The history of dividend payout growth may actually be more important than current yield. In other words, it's not the income you get now, but the income you are likely to get in the future.

In selecting these dividend payers, look for increased growth coupled with a proportional increase in the dividend yield. If corporate management has continually demonstrated that they are committed to increasing the dividend along with growth in earnings, over the long haul this can result in a higher yield to cost. Thus, while the yield may remain at say 3% over time, the yield relative to what was initially invested may be 6% if the market value of the stock has doubled since invested. With QE Infinity going into its second year, look for the dividend strategy to garner more attention.

Of course, at Euro Pacific we add another layer to this strategy by seeking dividend paying stocks that earn money and pay income in non-US dollar currencies. This step offers protection from a potential fall in the U.S. dollar.

It might also be worth noting that under the Jobs Act of 2013, qualified dividends for the lowest income earners will be taxed at a rate of zero, while middle and high income earners will see rates of 15 and 20 percent, respectively. In contrast, interest income from bonds will continue to be taxed as ordinary income. So while you might be paying upwards of 28% on pitiful 1.5% annual CD income, you may pay far less on a much higher dividend income stream.

Dividend yields change as stock prices change, and companies may change or cancel dividend payments in the future.

Securities issued by firms in foreign countries present risks not associated with investing solely in the U.S., such as currency fluctuation, political risk, differences in accounting standards and limited information. The fluctuation of foreign currency exchange rates will impact your investment returns.

This is not an offer to buy or sell or a solicitation of an offer to buy or sell any security or instrument. 

The Asian Ascendance: An Interview with Kishore Mahbubani
By: Myer Rickless, Investment Consultant, Los Angeles, David Echeverria, Investment Consultant, Los Angeles, and Neeraj Chaudhary, Investment Consultant, Los Angeles

Kishore Mahbubani is Dean of the Public Policy School at the National University of Singapore. He is a widely regarded expert on the development of the pan-Asian economy and its integration within the larger world economy. A former Singaporean diplomat, Mr. Mahbubani served as Singapore's permanent representative to the United Nations and ultimately served as President of the United Nations Security Council. He is the author of a number of books, including "The New Asian Hemisphere: The Irresistible Shift of Global Power to the East". He recently spoke from Singapore and Dubai with Myer Rickless, Neeraj Chaudhary, and David Echeverria, investment advisors with Euro Pacific Capital, Los Angeles branch. In the conversation Mr. Mahbubani elaborates on why the current Asian industrial revolution is likely to remain the dominant theme in the global economy. This interview was conducted prior to the US government shutdown.

Myer Rickless: In your work you discuss a 'transformation' which is taking place in Asia today. Can you elaborate on this for us?

Mahbubani: The Asian economy is enriching and uplifting the lives of hundreds of millions of people (The total population of Asia is 4.25B). Today Asia has a middle class population of around 500 million, but by 2020 that number will increase to 1.75 billion. The world has never experienced such an economic uplifting of mankind in such a short amount of time. This transformation is the biggest story in the world today.

Neeraj Chaudhary: You've noted that your own life story is a testament to this economic transformation. How so?

Mahbubani: When I was born in Singapore it was a Third World nation with the same per capita income as Ghana. I grew up in a one-bedroom house that lacked indoor plumbing. As a youth I  was malnourished and lived in a neighborhood subject to ethnic riots and other forms of Third World violence.

Today I live in a country which has a higher per capita income than the United Kingdom [and the US].

I believe that what happened in Singapore in my lifetime will be replicated by over 1 billion people across Asia in just the next few years.

Neeraj: How is Asia accomplishing this transformation?

Asian economies are succeeding because they are implementing the same policies which ushered in the West's Industrial Revolution. I call them "The 7 Pillars of Western Wisdom":

  1. Free Market Economics
  2. Mastery of Science and Technology
  3. Meritocracy
  4. Pragmatism
  5. Culture of Peace
  6. Rule of Law
  7. Respect for Education

David Echeverria: In your book The Great Convergence: Asia, the West, and the Logic of One World, you describe that for nearly 2000 years, up to1820, China and India had the world's largest two economies?

Mahbubani: Yes, it's only in the last 200 years that Europe and North America took off. When looking at just the last 200 years of world history compared to the last 2000 years, it's a major historical aberration. Hence the term convergence, as Asia adopts Western ideals.

David: What will be the effect of 1.75 Billion Asians ascending to the middle class in the next seven years?

Mahbubani: Asia will become the world's largest consumer market. In 1990 there were no cell phones in India, today there are over 1 billion. Even the poorest people in Asia have cell phones. And people are moving to bigger ticket purchases including TVs, refrigerators, motorbikes, cars, etc.

A massive amount of wealth is being created in Asia today. The largest number of new billionaires and millionaires are now coming from Asia. Forbes Magazine reported that Singapore had the highest percentage of millionaires of any nation in the world.

Today Asian economies are adopting the very principles which allowed the West to rise to economic dominance generations ago. Once adopted, these principles should have an even more profound impact on the world as Asia commands a population more than five times larger than the populations of the US and Western Europe combined.

Neeraj: Everybody in the U.S. has been focusing on a potential "shutdown" of the US government. How would such an outcome impact the Asian economy?

Mahbubani: The long term trend is not going to change at all. Shorter-term, there's no doubt that the US shutdown will have a global impact. I was in Bali for the APEC [Asia-Pacific Economic Cooperation] meeting, in fact I spoke at the APEC CEO summit. And the sense of bullishness the CEOs have about the region's economic future is still very high. So I don't think that the Asia-South Pacific will suffer too much if there are big problems in the US.

Myer: Do you think that the current debt ceiling debate will have an impact on Asian central banks' reserve holdings of US Treasuries?

Mahbubani: Over time it is inevitable that doubts will arise about whether the US can continue to play the role it has been playing, whether or not we can continue to rely on the US Dollar as the global reserve currency.

David: Do you feel that that's one reason the Asian central banks are accumulating gold as rapidly as they are?

Mahbubani: Asians were shocked by the 2008-09 Financial Crisis. To a large extent this feeling has persisted withAmerica's subsequent experiments with Quantitative Easing. Many in Asia fear that their dollars may someday be worthless. Many have adopted the long term goal of reducing  their dependence on US treasury bills.

Neeraj: It seems that the American mainstream media has a little bit of a myopic view in the US. In 2020, if we look back to our present time, how do you think history will view the United States?

Mahbubani: I think you're being kind when you say there's a "little bit" of myopia. In my view there's massive myopia in the US. I believe that over the next ten to twenty years the world will change more than it ever has in human history. For the first time in 200 years, a non-western economy will be the largest economy in the world. This is a huge shift. Most Americans are not aware, not thinking about it, not talking about it.

One reason I wrote the book The Great Convergence is to let Americans know it's time to wake up and realize the world is changing rapidly and America can adjust too.

Neeraj, Myer, and David: Dean Mahbubani thank you for joining us today.

Mahbubani: Thank you as well.


Opinions expressed are those of the writer, and may or may not reflect those held by Euro Pacific Capital, or its CEO, Peter Schiff.


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