How I Intend to Survive the Meltdown of America

Dear Reader,

It is with a troubled heart that I sit down to write today, there being reports of casualties in new fighting in eastern Ukraine. I worry, of course, about my friends and students in the country who may well be in physical danger soon, if the conflict escalates. But that’s personal; as an investment analyst, it’s the financial war the Russians seem quite willing to wage that really has my attention.

It should have yours as well.

As one of the experts in our just-released Meltdown America video noted, the Kremlin had already made moves to dethrone the US dollar as the world’s reserve currency before the renewed East-West tensions of this year. Putin has openly threatened what amounts to economic warfare as a response to sanctions placed on Russia after its Crimea grab.

Now bullets are flying—can Putin’s financial ICBM be far behind?

Mind you, the US and global economies are on such shaky ground, they could come crashing down without any help from Gospodin Putin.

One of the things that really struck me while watching Meltdown America was the way the writing was clearly visible on the wall in past cases of financial collapse and hyperinflation—but no one wanted to believe it.

That’s the way I see the US today. Life seems so normal and there’s so much wealth even in poorer regions, it’s hard to believe the cracks in the foundation could really bring down everything built on it. And that’s exactly why the cracks never get fixed; people don’t want to see them, and politicians do everything possible to deny they exist. So they widen and deepen until the collapse becomes inevitable—and I believe we have already passed the point of no return.

It’s just a matter of time now.

Gloomy thoughts indeed, but I’m not here to depress anyone. Hopefully, I can help deliver a wake-up call, as per our Meltdown America video. Perhaps even more useful, I can tell you what I’m doing about it.

As you probably know already, precious metals are a key part of my strategy. As Doug Casey likes to say, gold is the only financial asset that is not simultaneously someone else’s liability. It’s solid value you can hold in your hand, and come what may, use to store and protect wealth, as well as to make payments when all other systems fail.

Again, as Doug says, I buy gold for prudence and gold stocks for profit. If I’m right about the economic trouble ahead, gold will protect me, and my gold stock picks will make me a fortune. This is why we focus so much on precious metals and related mining stocks in these Metals & Mining Monday daily dispatches. Fear not; we’ll have plenty more relevant ideas and actionable information in future editions.

But Doug also says that our biggest risk today is not market risk; it’s political risk. He has moved to rural Argentina to get out of harm’s way. He’s picked a beautiful place, and I had intended to move to Cafayate myself, but then I got married… and plans changed. Specifically, I need to remain in the US for some years to come.

So instead of expatriating, I’ve moved to Puerto Rico, a US territory that is rapidly becoming the only tax haven that matters for US taxpayers.

People keep asking me why I chose Puerto Rico and if I’m happy with my choice, so I’ve decided to skip writing about metals this week and write instead about my move here. It’s a break from tradition, but one I hope will provide as much value as anything I could write about rocks at this time.

Sincerely,

Louis James
Senior Metals Investment Strategist
Casey Research

How I Intend to Survive the Meltdown of America

As I type here in my new home office, I glance up and see waves of Caribbean blue crashing on the palm-lined beach. Surfers are out in force. Scattered clouds add to the already amazing variety of colors in the ocean. I wonder if I will have time to go for a swim before dinner—and I’m amazed yet again to think that it was a shot at lower taxes that brought me here to Puerto Rico.

It seems almost unnatural for me to be able to enjoy so much beauty while saving money, but that’s exactly what I’m doing.

The view from my new home office.

You see, the economy here never really recovered from the crash of 2008. This is very bad news for long-suffering Puerto Ricans trying to make ends meet. When I first came here with my wife to check the place out, locals kept asking us why we were thinking of moving here; jobs are scarce, and something of an exodus is taking place in the opposite direction (Puerto Ricans are US citizens and can travel and work freely anywhere in the US).

But I wasn’t coming to Puerto Rico to sell hot dogs. My income doesn’t depend on the local economy, so its woes are an obvious opportunity for a contrarian speculator like me.

Take the most simple and basic asset class one can invest in as a Puerto Rico play: real estate. The market has been so devastated that million-dollar condos are selling for half price. When we closed on our new place, the seller came up short, and we had other options, so we weren’t willing to pay more. The real estate agents involved were so eager to keep the deal from falling through, they kicked in with their own money to help the seller out.

Personally, I’m not a big fan of gated communities, but for people who are concerned about possible social unrest in the future, it’s good to know that you can buy properties in some of the most posh and secure communities on the island with no money down.

Now, as much as I like a contrarian bargain, and as much as my wife loves the tropical weather, what really brought us here were the new tax incentives the government of Puerto Rico enacted to make the island more attractive to investors and employers.

The critical point here is that Puerto Ricans are exempt from US federal income taxes, even though they are US citizens. They pay Puerto Rican taxes, of course, and those have generally been similar to US taxes, so the island has never been seen as a tax haven before. That all changed in 2012, when Puerto Rico passed Acts 20 and 22.

Act 22

Act 22 is basically a 100% capital-gains tax holiday designed to attract investors to come live in Puerto Rico. Exactly what is included or excluded is beyond the scope of this article, but for me, the important thing is that it covers the stocks I already owned when I moved here on January 1, 2014. Given that the market bottomed at almost the same time, I have no gains to be taxed on for 2013, and will not be taxed for the gains I make going forward—all the way to 2036.

This alone was worth the move to Puerto Rico, in my opinion.

Happily, the application process was simple. My wife downloaded the form and filled it out. I signed it, and a couple weeks later, we got an official tax holiday decree in the mail—no questions asked. I had to accept the conditions of the decree in front of a notary and send in an acceptance form with a $50 filing fee, and that was it. Didn’t even have to hire a lawyer.

This tax break is not available to current residents of Puerto Rico—it’s designed to attract wealthy people to come live on the island, after all—but it’s available to all others who move here, including but not limited to US taxpayers.

Act 20

Act 20 is a tax break on corporate earnings designed to incent job creation in Puerto Rico. The idea is to persuade US employers who might set up call centers in India, or create other similar jobs abroad, to do so closer to home, by offering them a 4% corporate earnings tax rate.

My fellow Casey Research editor Alex Daley has moved to Puerto Rico as well, and we’ve formed a company here that exports writing and analytical services to Casey Research in Vermont. This is the basis of our application for Act 20 tax benefits, which has not been approved yet, but which we understand is close.

If we get our Act 20 decree approved, we’ll still have to pay regular income taxes on our base salaries, but the lower tax rate applied to our corporate income will result in a drastically lower total income tax rate for us as individuals.

I’ll be sure to let readers know when we get our Act 20 decree approved.

All 100% Legal

The beauty of this is that Puerto Rico’s tax breaks are not shady tax dodges set up by entities of questionable legality or trustworthiness, but perfectly legal tax incentives within the US.

Act 20 and Act 22 benefits are available to non-US persons, but they are especially important to US taxpayers because, unlike almost every other country in the world, the US taxes its serfs citizens whether they live in the US or abroad.

In other words, while a Canadian can get out of paying Canadian income taxes by moving out of Canada, a US person cannot escape US taxes by moving to Argentina, or anywhere else—anywhere besides Puerto Rico.

It’s like expatriation without having to leave the US, truly a unique situation.

And it’s a win-win situation; people like us bring much-needed money, ideas, and energy to the island, while getting to keep more of what our crisis-investing strategy nets us. We create jobs, rather than take them. We are part of the solution here, and we’ve been made very welcome.

Is It Safe?

So that’s why I’m here. Whether or not my Act 20 status gets approved, I’m so happy about my Act 22 decree that I’m convinced we did the right thing moving here.

When I tell people what I’ve done and why, most get immediately excited by the idea—and then they balk. The first question they ask is usually: What about crime?

Puerto Rico isn’t a large island, and a good chunk of its three million inhabitants are clustered in and around the capital city of San Juan. Of course there is crime here, as there is in any large city. There are places I would not walk alone at night—just as there are in New York City.

Mexico City, Buenos Aires, La Paz… the capital of any other Latin American country or Caribbean country I’ve been to is much larger, more polluted, and more dangerous than San Juan. In my subjective view, San Juan, with its old Spanish fortifications and amazing beaches, is more beautiful. And you can drink the water here.

Sure, it might be cleaner and safer in Palm Beach, Florida—but it’s a lot more expensive there, it has less charm, and there’s no Act 20 nor 22. It’s a matter of priorities.

When I say this, most people remain skeptical; they read about the economic problems Puerto Rico has and the financial trouble the government is in, and they wonder if things could get worse.

Of course they can—but if Doug is right about The Greater Depression about to envelop the whole world, things are going to get worse everywhere.

Here at least, people are already used to massive unemployment. It won’t come as a shock; it’s never left since 2008.

Another way of looking at it is that since tropical storms hit the island from time to time (southern Florida is much more prone to major hurricanes than Puerto Rico, but they do happen), people here are more prepared for disasters than in many other parts of the US. The better apartment buildings and hotels have their own electricity generators. Nobody can freeze to death here, anyway, and fruit trees grow all over the island.

There’s a lot more I could say, but the bottom line is that I think Puerto Rico is a much better place to ride out a global financial storm than Miami, or Anchorage, or almost any city in between. A self-sustaining farm in rural Alabama might be better, but that’s not the sort of place I want to live.

I Like It Here

That last is an important point: if I have to hunker down to ride out an economic storm, it should be in a place where I like being.

Puerto Rico is beautiful and bountiful year-round. I speak Spanish, but most people in San Juan are bilingual, so that’s not really an issue. Our new flat is blocks from the best schools, shops, and restaurants in town—and even the hospital.

I open the window and the fresh air coming off the ocean carries the sound of waves, sometimes laughing children. There’s more noise pollution during the day, but at night, the city calms down, and we can hear the famous Puerto Rican coquí frogs, which my daughter calls “happy frogs.” Ten floors up, the ocean breeze is cool enough that we have yet to turn on the air conditioning.

The beaches are fantastic, and the clear water makes for great diving. I’ve never been a surfer, but the waves here are famous too, so I’m thinking of trying it out. There’s no end of other things to try out, and the neighboring islands have their own charms to offer as well.

Granted, my wife and I try to be smart about what we do and where we go, but we’ve never felt unsafe here—well, apart from the crazy drivers.

We like it here. We’re happy. For tax reasons, for quality of life, and with the potential meltdown of America in mind, we’re glad we made the move.

Find Out More

Doug Casey’s International Man Editor Nick Giambruno, Alex Daley, and I have coauthored a special report on Puerto Rico’s stunning new tax advantages. The report gets into all the details I didn’t have time or space for here. We cover all the specifics of what, why, and how. The report includes links to the forms you need, as well as recommended resources, from lawyers to realtors.

Whether you’re thinking about expatriating or you’re just tired of paying high taxes, I think Puerto Rico is a place you should consider. I know of no better resource to help you get started than our special report.

For your own health, wealth, and enjoyment, I encourage you to get your copy today.

Gold and Silver HEADLINES

Palladium Bulls Prepare for a Run (CNBC)

As we’ve pointed out for some time, this article reminds us that the fundamental reasons for higher palladium prices are in place. Supply is squeezed from both major-producing countries South Africa and Russia, while overall demand is growing, especially automobile demand.

South Africa, which produces about 70% of the world’s palladium, continues to suffer from labor strikes. Russia, the second-largest producer of the metal, has unresolved tensions surrounding the sanctions and may cut its supply.

Meanwhile, the demand for the metal (which is used for catalytic converters in gasoline cars) is poised to expand, driven by robust increases in auto sales in major markets, especially in the US and China.

The ongoing disruption between supply and demand is the reason for our bullish views on palladium.

Dubai Gold Trade Reached $75 Billion in 2013 (Mining.com)

A hefty $75 billion worth of gold, or about 40% of the world’s physical bullion exchanged, was traded through Dubai last year, said Ahmad Bin Sulayem, executive chairman of the Dubai Multi Commodities Centre (DMCC). This is an incredible twelvefold growth, compared to $6 billion worth of the precious metal traded in 2003, when the DMCC started its operations. Global demand fell 15% last year, but Dubai showed near-record consumption demand growth.

Dubai had become one of the world’s major gold trade centers in the past decade, and will increase its trade volumes further, said US-based analyst John Hathaway.

The blossoming of Dubai’s gold trade reveals “a significant shift in the balance of global demand flows”—namely, the shift in demand from the West to the East. There are other reasons for the growth in Dubai, including trade transparency, its strategic location, and a rising number of tourists.

Matchmaking Miners and China’s $7 Trillion in Saving (Mining.com)

Australian media reminds us that Asian investors have huge amounts of cash. In 2013, the Chinese had US$7 trillion in savings. Some of this could make its way to mining and other hard assets.

It’s common knowledge that China is hungry for iron ore and other metals, including precious metals. Just last year, Chinese overseas investment totaled $61.6 billion at the end of September, a 17.4% year-on-year increase. For 2014, China’s authorities expect overseas investment to continue growing at double-digit rates.

In 2013, the worst year for global-mining mergers and acquisitions in nearly a decade, China accounted for nearly 14% of all mining M&A activity by value, outpacing Canada, Australia, and the United States. PricewaterhouseCooper’s latest outlook suggests that Beijing’s share of global mining deals is set to grow again this year.