Recent messages have looked at the growth potential of Ecuador real estate.
We have been at this area in Cotacachi where this dirt road is being paved…seeing its rapid progress.
We’ll see more of the progress below. First let’s look more at the process of how I search for Cotacachi real estate… or actually property anywhere.
The principle of the search is vital because many people who thought of retiring will not be able to do so. Those on fixed incomes are always those who fare worst during economic upheavals.
The US dollar is at considerable risk due to high US debt. So too is Social Security.
In addition corporate pension are not looking good. In the late 1990s our messages voiced a lot of concern about how corporate pensions were dramatically
Then the stock market recovery in the mid 2000s eased this problem. 2002 was a low point for America’s pension funds. The top 500 corporations had a combined pension deficit exceeding $200 billion. Thanks to a boom in the global economy which allowed catch up contributions and strong stock market gains, this combined deficit turned into a combined surplus of $60 billion by the end of 2007.
The 2008 market and economic crash destroyed this surplus. It is estimated that the combined pensions of these same 500 company pensions have lost almost $265 billion in 2008. The estimates are that 200 of these 500 pension funds are now less than 80 percent funded. They have less than 80 cents for every dollar of benefits promised.
The puts corporations between a rock and hard spot. because The Pension Protection Act of 2006, passed due to a string of big corporate bankruptcies and pension failures in the early 2000s forces companies to fund pensions on a regular schedule.
The funded ratio s important because the 2006 law forces companies to bring their plans up to 100 percent funding in seven years, starting in 2008. They have to be t 92 percent funded this year, 94 percent next year etc. That’s the rock.
The hard spot. There are tow. The pensions values are way down due to stock market collapse and profits are now low or non existent.
Companies are asking Congress to excuse them from having to replenish the required amounts now and this is likely to happen. The business reality is you cannot extract blood from a turnip nor make a corporation to pay money it does not have into a pension.
Forcing pension funding on man corporations will simply push the firms into bankruptcy.
Some firms will be bankrupt anyway and the federal government will have to insure their plans through the Pension Benefit Guaranty Corporation. This insurance is limited so people can lose benefits. Yet even the limited benefits are more than America can afford. This puts added pressure on the greenback thus reducing purchasing power of the pensions even more.
Yet what is the choice? If companies are required to put new money into pensions they will not have the cash to keep business going.
This is a serious concern for some firms like NCR Corporation, I.B.M., Rockwell Collins, the ITT Corporation, Northrop Grumman and the Pactiv Corporation. Their pension obligations are five or six times larger than their next biggest liability.
In short pensions are millstones dragging these corporations down. How can these firms grow and prosper in today’s competitive atmosphere when a huge chunk of their income is sucked into pension obligations rather than growth?
The bottom line…pensions lose. History suggests they always have. Logic says they always will.
So what does one do?
#1: Most important… stay fit… body and mind. You’ll have to keep earning your keep and you cannot do this without energy. Do not just rely on the expensive pharmaceutical solutions either. This is why our upcoming courses have a health element. See Beyond Logic.
#2: Diversify currencies. Usually the way pensions are ruined is through currency destruction rather than non payment.. Social Security and the Pension Benefit Guaranty Corporation will make sure you get exactly the dollars promised. the only problem us that the dollars will by less. Maybe much less.
#3: Diversify in global shares. History shows this is always the best long term investment.
Here is an excerpt from yesterday’s multi currency lesson on why diversifying into global shares now makes sense.
“We have not seen anything like this since the end of the 40s: dividend yields of 5 percent and more, while 10-year US government bonds offer yields of only 2.5 percent!
Will investors be emotionally able to take advantage of the stock market crash of 2008, or will recent losses make them succumb to a bear market psychology? Are there lessons to be learned from historical parallels to today’s markets?
Book value growth is the most important component of long-term stock market returns. It comprises not only the annual earnings growth but also the change in value of a company’s net assets. If the valuation of a stock does not change, book value growth and stock price performance are identical. However, as a rule, stock prices fluctuate much more strongly than the underlying book values due to changes in valuation.
The irrational investor comes into play here, driving prices up during times of euphoria or, as is currently the case, driving prices down during times of pessimism.
As a result, the first decade of the new millennium threatens to provide a negative return — during the first nine years, the return was – 1.7 percent per year!
This would make it the first decade with negative nominal total returns after the quasi zero return for US stocks in the 30s.
Low valuations and a lack of investment alternatives
Interestingly, these negative returns have yet to reflect poor fundamentals: Over the past nine years, the companies included in the MSCI USA Index had an average annual earnings growth of 4.4 percent, cash flow growth of 6.7 percent, and dividend growth of 6.6 percent.
The decline in stock prices since the end of 1999 is due to valuations falling 50 percent over the same period. Therefore, the problem of low total returns is rooted in the past:
In December 1999, investors were willing to pay 31 times earnings and 5.8 times book value for US stocks included in the MSCI USA Index.
Today’s price/earnings ratio is 13.5 and the price to book value ratio is
1.7. These are not yet bargain valuations in absolute terms. What makes stocks attractive today is the lack of investment alternatives.
In other words, it is mainly opportunity costs, in particular the low yields of fixed-income securities, that make stocks interesting investments today.
The current price/earnings ratio of the MSCI USA Index of 13.5 implies an earnings yield of 7.4 percent (100/13.5). Even if one assumes the depression scenario of the 30s, i.e. flat stock prices over 10 years, and assumes that corporate earnings will shrink 1.5 percent per year on average for the next 10 years, the earnings yield of the MSCI USA Index would still be 6.5 percent at the end of 2018 — 2.6 times higher than today’s 10-year US government bond yields. Such a drastic earnings decline would correspond to the average drop in earnings of the companies contained in the S&P 500 Index during the decade of the depression ending in 1939 — a scenario that is overly pessimistic in my view.
Favorable outlook for US stocks
A more realistic assumption would be for book value to grow in the order of 6 to 8 percent over the next 10 years. Based on this expectation, the Dow Jones Industrials Index stands a good chance of exceeding, over the next 10 years, its previous high of 14,164.53 reached on October 9, 2007.
From the year-end 2008 level of 8,776.39, this would require an average annual price return of only 4.9 percent (which is below the historical average), with a dividend yield of currently 3 percent per annum thrown into the bargain.
The risk of losing money with US stocks over the next 10 years is therefore minimal from today’s perspective, while it is a certainty that investors will not earn more than 2.5 percent per annum with US government bonds over the next 10 years.
You can read this entire lesson and Keppler’s entire conclusion as a multi currency portfolio course subscriber.
#4: Diversify in real estate. History shows this is always the second best investment.
#5: Diversify residences and lifestyles… globally if you can.This is why Merri and I live in North Carolina and Ecuador. Each place has some problems and risks…but we have options as events unfold.
Remember globalization is really the way humanity should evolve. The concept of nations, borders, superior races, cultures and creeds are fictions of the global imagination and liabilities we have inherited from our past. Modern technology means we should deal with whoever…anywhere in the world serves us best.
As the world has evolved we have progressed but bad times hinder this type of growth. This creates opportunity if we stay focused on reality. Invest in globalization. Sell that which hinders globalization short!
Match your living to your investing. Go where you choose. I like Ecuador for its sweet people, great weather, natural beauty, fresh food and low cost living. North Carolina offers small town USA benefits were we can enjoy nature and if necessary even feed ourselves in the worst times. This is why Merri and I are in Ecuador. We love the lifestyle and the real estate opportunity.
We also love the progress here in Cotacachi. Here is that paved road today.
They have turned the road and a great deal of the cross street is cobbled now as well.
Learn more about Ecuador as an Ecuador Living subscriber.
#6: Hold some commodities as insurance. We’ll probably never need it…but it makes us feel better. I keep more than enough gold socked away and expect my children will inherit it. So far it has been my worst investment over the last 30 years until I add in the value of sleeping well at night instead of worrying…”am I guessing wrong”!
#7: Remember that every day of life is a gift! We do not need big cars, loads of shopping and new things and expensive materialism to be happy. Turn your passion into profit and do what you love. The prospect of working, serving and being useful beyond this age that society has determined we can be and should retire should be fun and exciting.
I look forward to sharing this excitement with you.
Join us in Cotacachi this February.
Feb. 13-15 International Business & Investing Made EZ
Feb. 16-17 Imbabura Real Estate Tour