On Target 2021.08.14

In this issue: 

  • Buying a property
  • Vaccines
  • The emerging boom
  • The Yuan
  • Inflation
  • Winners without profits
  • Coal
  • Supply chains
  • Canada
  • Moonshots

Before You Commit to Buying a Foreign Property

Do you wonder if it’s time to take the plunge and buy property in another country, especially if you’re an expat already living there?

Peggy and Chad Creveling, who run their Private Wealth Advisory business in Thailand, say owning overseas property can be a rewarding experience, but it can also have a major impact on your finances. Here are things to consider before buying, they say…

How long will you live there?

Expatriates tend to live transient lifestyles, so if you’ll live in the home for only a few years, you may want to reconsider whether buying property makes sense. Thinking that you’ll rent out your home while being absent may not be the best plan financially.

There are costs involved in being a landlord and most single units do not make sense as stand-alone investments. Even if you expect to sell when you eventually leave, you may find unfavourable market conditions depressing prices to below what you paid.

You’ll also need to plan for transaction costs in both buying and selling. They’re more expensive to absorb for short-term purchases.

What legal protection do you have as a foreigner?

Many expats are surprised to find out how much laws and their enforcement differ in their newly-adopted country versus their homeland. For example, local laws may not shield you against breach of contract, late delivery, cost overruns, developer insolvency or false advertising.

In some places you may not be allowed to own land, and there may not even be escrow accounts to protect your down payment until the purchase is complete.

Even where the laws are clear and fair, enforcement can be an issue. Time spent protecting yourself is well worth it – hire a good lawyer if needed.

What taxes are involved?

To make a good decision, you’ll want to understand how you may be taxed on any income or gains on your property, both in your country of residence and in your home country.

If enforcement of tax laws is lax or ambiguous, don’t count on this remaining the case forever. Remember also that tax laws change, so if you do decide to buy, you’ll want to keep abreast of current laws as they apply to your situation.

How developed is the market for used homes when you’re ready to sell?

The market for newly-built houses may be hot, but the secondary market may be extremely illiquid.

Most buyers expect their property’s value to go up before they sell, yet in certain markets there’s a “used car” discount that needs to be factored in, especially if the unit is in a condo and the other project owners haven’t been paying their maintenance fees.

For price comparisons between “new” and “used,” check out the secondary market and talk to expats who have completed a sale of their unit.

Remember that real estate agents are salespeople, not advisers

Being a salesperson is an admirable profession, but problems occur when you depend on one for advice.

Brokers cannot be counted on to provide reliable information or analysis in fair-market property values, ownership or tax laws, future zoning changes, or market supply and demand. These are areas you’ll want to check out independently and take responsibility for.

Your broker isn’t getting paid to take an interest in your long-term welfare.

Renting can be cheaper

While there’s a cost to renting, there are also costs involved in ownership. These can include borrowing, maintenance and insurance, taxes and legal, broker and common-area fees.

The opportunity cost of having a deposit tied up in a property where the overall return underperforms other investment options is sometimes overlooked. You may find yourself tied to a given location that no longer suits your situation, simply because you can’t afford to sell.

If you’re planning to buy-to-let, do the numbers first

When you evaluate a property as an investment, you’ll want to calculate an expected internal rate of return (IRR) based on the estimated net income after tax over the time frame you expect to own the property.

Consider all income – and all costs. Err on the pessimistic side when you factor in costs like vacancies, maintenance, management fees and insurance..

Your estimated IRR should be higher than the expected return for other investments you might overwise make. Be sure to factor in an illiquidity premium because, unlike the stock market, you can’t simply sell one share of your investment property if you need to raise funds.

Don’t forget to check for estate planning pitfalls

Here I have added my own piece of advice to the Crevelings’. You may be well aware of property ownership restrictions in the country where you plan to buy, without being conscious of less obvious risks. For example, it’s important to have your and partner’s wills updated before you contract to buy.

In Thailand, for example, inheritance laws can have unexpected and unpleasant consequences. A widower can find himself seventh in line to inherit.

Sensible estate planning can be very important.

The Crevelings are Thailand-based CFAs who advise expats on personal financial planning. To learn more, visit their website www.crevelingandcreveling.com.

Some Bad News About Vaccines

One news item of note that has been ignored by mainstream media is evidence from Israel that the Pfizer vaccine has no lasting-power as a defence against the Covid-19 virus. The Ministry of Health reported on July 22 that the efficacy of Israelis fully vaccinated in January faded to only 16 per cent after six months.

This suggests that booster shots may be required every six months or even more frequently, not once a year as in the case of flu vaccine.

A more serious concern, raised by the head of America’s Centers for Disease Control & Prevention, Rochelle Walensky, is that the world could be “just a few mutations potentially away” from a virus that is vaccine-resistant.

A study by Austria’s Institute of Science & Technology concluded that the risk of vaccine-resistant strains rises when more than 60 per cent of a population is vaccinated and other precautionary measures such as mask-wearing and social distancing are lifted. So the closer a population gets to achieving herd immunity, emergence of a resistant strain is greatly increased.

Could the global programme to vaccinate become so effective that it’s eventually so successful promoting mutations that we just have to abandon the fight and reconcile ourselves to living with death risk that’s generally no worse than a nasty flu?

The Emerging Boom: Fast, Furious… and Fragile

An exhilarating boom is in full swing as economies rebound from the pandemic. The oil price has soared. Restaurants and haulage firms are struggling to hire staff. As listed companies signal that profits will hit all-time highs this year, stock markets are on a tear. But can the most unusual recovery in living memory be sustained?

Beneath the surface there are three fault lines, says The Economist:

► The division between the jabs and the jab-nots. Only countries achieving high vaccination rates will be able to tame Covid-19… the condition for shops, bars and offices to reopen permanently, for customers and workers to leave their homes.

Only one in four people around the world has had a first dose of vaccine and only one in eight is fully protected.

► The second fault line runs between supply and demand. Shortages of microchips have disrupted the manufacture of electronic devices and cars just when consumers want to binge on them. The cost of shipping goods from China to America has quadrupled.

Even as these bottlenecks are unblocked, fresh imbalances will emerge. In some countries people seem keener to go for a drink than to work behind the bar. House prices have surged, suggesting that rent rises will follow.

► Stimulus policies will be withdrawn – indeed, go into reverse. Rich-world central banks have bought assets worth more than $10 trillion. They’re nervously considering how to extricate themselves without causing a crisis in capital markets.

Emergency government-aid schemes such as unemployment-insurance boosts and eviction moratoria are beginning to expire. But the politicians are focused on other reasons to spend.

So far economies have largely avoided a wave of damaging bankruptcies, but nobody knows how well firms will cope once emergency loans come due and workers can no longer be furloughed at taxpayers’ expense.

It will probably be a year before the fault-lines are reconciled. The Economist says pessimists worry about a return to 1970s-style inflation, a financial crash, or that capitalism’s underlying energy will be drained by state handouts. Such apocalyptic outcomes are possible, but not likely.

The Yuan’s Challenge to the Dollar

The benefits the United States enjoys from its dollar being the international reserve currency are considerable. Back in 1965 the French government described them as an “extraordinary privilege.” It resulted in an “asymmetric financial system” where foreigners “see themselves supporting American living standards and subsidizing American multinationals.”

Half-a-century later America’s emerging superpower challenger, China, sees the dollar as perhaps the most potent symbol of its global dominance, as a target to be challenged by its own currency, the yuan, or renminbi.

It has a long way to go.

To be an international reserve currency requires three characteristics. It must be widely used as a medium of exchange in global trade, as a store of value, and as a unit of account.

China’s economy matches, even exceeds America’s, in size. Just prior to the pandemic it accounted for 16 per cent of global output. It was delivering a third of economic growth. And in purchasing power terms it had already overtaken the US.

Yet only about 2 per cent of international trade is done in yuan. Although China’s capital markets are huge – bond holdings run to $15 trillion – foreign investment is small. Central banks keep most of their foreign reserves in dollars. For diversification they prefer euros, even mid-scale alternatives such as the Australian dollar.

But several factors are starting to shift fundamentals in favour of the yuan’s emergence as an international reserve currency.

One is the Americans’ decision to weaponize its currency – use the dollar’s dominance as a trading currency to punish its enemies and force its allies to comply with geopolitical sanctions. This is very effective, but incentivizes countries to reduce dependence on dollar assets in favour of other currencies, gold… and the yuan.

Russia has completed the exit of its $190 billion sovereign wealth fund from US dollar assets. The fund now has 40 per cent of its assets in euro-denominated securities, 30 per cent in Chinese yuan, 20 per cent in gold and 5 per cent each in British pounds and Japanese yen.

China has made a bid to encourage global trade in natural resources, usually denominated in dollars; to instead use the yuan, introducing futures contracts in commodities and gold.

It has made great strides in invoicing its trade in renminbi. The security/geopolitical rationale for holding assets in the currency has become stronger through measures such as financing the Belt and Road Initiative.

China has been opening its markets to foreign investors. Non-residents can more easily buy and sell stocks and bonds on the mainland’s markets.

The planned effort to dethrone the dollar is based in large part on China’s technological prowess. It is banking that the development of the necessary financial infrastructure, the country’s world-beating mobile payments systems, and the successful launch of a digital version of the yuan – now being trialled in two dozen Chinese cities – will make the currency easier to use and promote the currency internationally.

The central bank is working with its counterparts in Hong Kong, Thailand, the United Arab Emirates and the Bank for International Settlements on introducing a digital ledger system of transactions that is distributed among counterparties.

The biggest obstacle to the yuan’s rise as an international reserve currency is its central bank’s tight controls over capital movements. The ruling dictatorship prizes control and won’t easily give up those powers.  However, the stronger the yuan becomes, the more relaxed Beijing will become.

Update on Soaring Inflation

Rising prices are frightening. In the three months to May inflation in the US reached 8.3 per cent on an annualized basis. But central banks argue that there’s nothing to worry about as the forces driving up prices are transitory.

Perhaps they’re right. But laid-back policies – keeping interest rates ultra-law and buying lots of bonds to keep their yields low – are risky.

Current sky-high prices of shares, bonds, houses and even cryptocurrencies rest on the assumption that interest rates will stay low for a long time. That assumption makes sense only if central banks do not feel forced to raise them to fight inflation. “The financial edifice that has been built on years of low inflation could lose its foundation,” warns The Economist.

The factors pushing inflation higher are three-fold…

► A boom in demand for goods such as cars, furniture and household appliances set off by consumers splurging on things that made lockdown homes nicer and life outdoors more enjoyable.

► Disruption in the global supply of some of those goods. A shortage of micro-chips, for example. Is severely curtailing the supply of cars.’

► A rebound in the prices of services. Consumers are returning to restaurants, bars, hairdressers and other in-person businesses faster than the workers are.

Some of the shortages will persist for some time, as will some of the consequences. High demand for hotels, transport and restaurant meals means lots of companies need workers – and they are getting pricier. Wages in America’s leisure and hospitality jobs are nearly 8 per cent higher than in February last year,

Oxford Economics, a consultancy, says there’s a 10 to 15 per cent chance of the US economy’s shifting into a “high-inflation regime” of price rises permanently above 5 per cent.

Winners Without Profits

Here’s a trick question: Would you invest in a company which reported ten consecutive years of losses? If you said No years ago, you would have missed out from becoming a billionaire now in Amazon or Tesla.

In America, reports Baruch Lev, during the booming decade prior to the pendemic, almost 50 per cent of publicly-listed companies reported annual losses. Among high-tech and science-based enterprises such as those in pharma and biotech, the loss frequency was a staggering 70 per cent.

Lev, professor of accounting and finance at New York’s Stern School of Business, says the 1980s saw a surge in companies characterized by major investment in intangibles such as research and development, information technology and brands.

Until then accounting practice clearly differentiated between expenses such as salaries and interest payments, and investments such as buildings and equipment. Expenses are payments for past services and therefore charged against revenues in the earnings (income) calculation. Investments generate future benefits and are therefore reported among assets on the balance sheet… not treated as charges against income.

Intangibles are clearly investments expected to generate future benefits. But accountants treat them as regular expenses – reducing earnings. Lev says “the absurd result” is that the more innovative the enterprise, the higher its losses in accounting terms.

Many of the companies that seem to be “losers” are in fact successful growth drivers. But investors fixated on reported earnings don’t realize this.

In a study done at the Stern School “we undid accountants’ folly” by capitalizing and amortizing research and development, infotech and brand enhancement. The result: a full 40 per cent of companies that reported they had traded at a loss would have been profitable without the expensing of intangibles.

Firms that are “losers” in accounting terms are investing heavily in new products and services, file many more patents, and are granted substantially more valuable patents than apparently profitable rivals.

Coal Prices Rocket

One of the best ways to make money is to invest in things that are most out-of-fashion. For example, instead of the renewables, whose promotional publicity swamps the columns of the financial media, you would do best in the world’s least-liked and most-ignored commodity, thermal coal.

It’s burnt in power stations to generate electricity. Since the start of the year the price of high-energy Australian coal has climbed 80 per cent to about $146 a tonne. Its South African rival is also trading at its highest levels in more than ten years.

Several factors have combined to drive up prices in the 900-million tonne export market. China is the world’s biggest coal consumer but a drought knocked out hydroelectricity supply while tough mine safety rules crimped domestic coal production. Floods and rail/port disruptions have constrained supplies from Indonesia, South Africa and Russia.

Globally, demand for electricity is expected to grow by 5 per cent this year.

Building Resilience into Supply Chains

Shortages of many kinds have been driving up prices in America. Part of the problem is that the pandemic caused factories to shut down. Another is that manufacturers and retailers have become so addicted to chasing efficiency and price reductions that they eroded any buffers in supply chains.

Businesses have been streaming their supply chains in a way that seemed optimal, and safe. But that has concentrated activity on a handful of nodes.

It seems sensible that computer chip production is concentrated in Taiwan, for example. That develops economies of scale and clusters of expertise, benefitting customers. But it is dangerous for the system as a whole.

Consequently management consultants are now promoting the idea of supply chains that have resilience, not just efficiency; a “just-in-case” philosophy of contingency planning is edging out the “just-in-time” mantra.


No spending spree: Americans have chosen to spend only about a third of the massive pandemic stimulus payments made to them by the government, saving or paying down their debts with the rest.

There are opposing forecasts about what’s going to be done about the high savings rate.

One is that following the precautionary increase in savings. they will stay high because people will continue to insure themselves against the possibility of a trauma to the pandemic. The other view is that savings aren’t going to be sustained because everyone has learned that the government can step in and bail out individuals – there is no need to save.

Camera drones: Those developed by the Pentagon are more expensive and less capable than the Chinese aircraft they were meant to replace, according to a US government memo. At an average price of $2,100 apiece, they cost between eight and 14 times more than those the department was previously able to buy from the Chinese.

The Pentagon has spent years and millions of dollar working with private companies to develop five drones. But at least four still contain a large number of Chinese parts.

Politics in Business: Unilever has stepped into a hornets’ nest by announcing that its Ben & Jerry icecreams will no longer be sold in Israel’s occupied territories. Israel’s government is furious, as are its supporters in America and elsewhere. Its critics are delighted.

Executives cannot completely avoid political implications of running a business. Gratuitously inviting them is another matter. Having a fight over distribution of icecream is simply ridiculous, and pointless.

Shutdowns: Some of the world’s biggest footwear, garment and automotive companies are struggling to maintain output in their Southeast Asian factories as their labour forces are hurt by Covid-19 resurgencies.

The pain is especially acute in Vietnam, where officials have taken drastic steps to ensure that plants can continue operating. In some instances companies are having workers sleep overnight on site.

Treasury bond yields: Why have they been plunging at a time when inflation is rising more than it has for a decade?

One explanation is that investors have been coming round to the view that the Federal Reserve will be less tolerant of inflation than previously expected. Its officials have started planning to cut back its $120 billion monthly purchases of Treasuries and agency mortgage-backed securities.

Batteries: There’s explosive growth in electric cars this year force-fed by government policies. Volkswagen, the largest car maker, says its sales of electric cars rose 165 per cent in the first half; China’s BYD reported a 154 per cent increase.

Investors are betting that the electric revolution will drive rapid growth for producers of batteries – they’re a third of the cost – and of battery materials such as lithium. The Solactive Global Lithium index has risen 32 per cent this year to a record high.

Japan: The world’s leading private equity players are increasingly focused on the country “as the ultimate opportunity in terms of cheap valuations, excess cash on balance sheets and general restructuring potential, says Jefferies’ Asia-based global strategist Christopher Wood.

Japanese companies now have “the healthiest balance sheets in the world,” says Tim Price of Price Value Partners. Dividend yields have roughly tripled over the last six years.

Micro-chips: The Dutch company that makes the machines that make the most advanced micro-chips, ASML, is now Europe’s most valuable technology firm. Its shares have a market value of $300 billion. Its photolithographic machines use light to etch integrated circuits on to silicon wafers at miniscule scale.

The lab-leak: Hostility to China is a bi-partisan viewpoint in the US, but the difficulty about dumping the blame on China for starting the global pandemic by leaking the Covid-19 virus from a Wuhan laboratory is the uncomfortable fact that America funded the research into making bat viruses more dangerous.

Combatting the pandemic: Governments’ response was money printing 30 times the size of the Marahall Plan that re-energized Europe after the Second World War.

Priorities: The European Union plans an interesting exemption for elite travelers from its new anti-carbon tax on aircraft fuel – private jet flights.

Drug deaths: The US government reckons the number of deaths from overdoses of opioids soared by 30 per cent to 93,000 last year.

Greenhouse gases: Carbon dioxide emissions are 10 billion tons a year by China, compared to just 3 billion by Europe, 5 billion by the US.


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The most terrifying words are:

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Ronald Reagan.