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Simon Black On Sovereign Relative Value, And Why Ecuador Presents A Great Post-Money Valuation
In today's letter from Argentina, Simon Black reminds readers that often times the best way to look at countries is like stocks: over/undervalued, and, of course, distressed: "It doesn't really matter how high or how low the price of a stock is, or what the market capitalization is... what makes a company attractive to buy is when it is significantly undervalued relative to its earnings, assets, and potential. I value countries in the same way. Brazil, for example, is like a company with a very large market capitalization that is trading at roughly net asset value, neither significantly overvalued nor undervalued. Morocco, on the other hand, is a small cap company that is trading at a premium to its net asset value and earnings-- sure, it's cheap, but it's a total disaster. Ecuador, in my assessment, is like a deeply undervalued mid cap company. It is not without its own problems and challenges, but price level here is substantially lower than the level of its well-developed infrastructure and amenities." We wonder how, if at all, the US would rate on this continuum of sovereign forward multiples of valuation (in)solvency.
Date: December 29, 2010
Reporting From: Buenos Aires, Argentina
Looking back over the year's dispatches is like a walk down memory lane for me-- I usually remember exactly where I was and what I was doing at the time when I sat down to write to you, and that constant journey has taken me across dozens of countries this year.
One of them, a particular favorite of mine due to its scenic beauty, healthy living, and rock bottom prices, is Ecuador. They literally give away land for free (see below), and it costs nothing to live quite well in the major cities. Though Ecuador had a few blips this year, the country still has solid prospects.
I originally wrote this letter to you from Cuenca, Ecuador on April 21, 2010:
------------------------
Last night I ate at one of the fanciest restaurants in Cuenca. Everything except for the Chilean wine was locally grown and absolutely delicious, right down to the banana flan for dessert.
The total bill for my beautiful companion and I rang in at $40.02, including 3 courses with wine.
For lunch, I ate at a local cafe-- another 3-course meal with a chicken soup to start with, beef loin on a bed of rice, small dessert, and fresh squeezed juice right out of the fruit. That meal set me back a whopping $1.75.
I gave the waiter $2 and he literally followed me out of the cafe trying to give me my $0.25 in change back because apparently the $1.75 already included a 10% gratuity.
I'm telling you this because I'm trying to impress upon you how cheap Ecuador truly is, and how much value is in the price.
I think of countries like publicly traded shares on a stock exchange. Sometimes the market gets out of hand, and companies trade for an unjustifiably high multiple of their earnings and assets (think Amazon.com during the tech bubble).
In some instances, though, companies trade at a discount to their net asset value-- we saw this in the first quarter of 2009 when many of the junior mining companies were trading at less than the value of the cash they had in the bank.
It doesn't really matter how high or how low the price of a stock is, or what the market capitalization is... what makes a company attractive to buy is when it is significantly undervalued relative to its earnings, assets, and potential.
I value countries in the same way.
Brazil, for example, is like a company with a very large market capitalization that is trading at roughly net asset value, neither significantly overvalued nor undervalued.
Morocco, on the other hand, is a small cap company that is trading at a premium to its net asset value and earnings-- sure, it's cheap, but it's a total disaster.
Ecuador, in my assessment, is like a deeply undervalued mid cap company. It is not without its own problems and challenges, but price level here is substantially lower than the level of its well-developed infrastructure and amenities.
I'll give you a few real estate examples to help paint the picture:
Here in Cuenca, I'm looking at a particular property near town that's on about 10 acres with a 3,400 square foot main house (roughly 300 square meters) of quality construction. The asking price is about $150,000.
If you calculate the construction costs at $500 per square meter (which is extraordinarily cheap, roughly the same cost to build a no-frills garage in North America), then the construction cost of just the home is $150,000. You get 10 acres of land for free.
Another place I'm looking at is in the mountains on 20-acres of prime property. The main house has over 350 square meters of quality construction that's almost brand new, and the owners are asking $375,000. You can do the same math and see that they're basically giving away the house at cost, and giving away the land for nothing.
You see my point.
As for taxes, local property taxes are a joke... most of the owners around here complain if their taxes go up from $52/year to $55/year.
The biggest issue with taxation is on rental income-- if you buy a property and rent it out, a tenant must withhold a flat 25% on rental income, which means that yields are not as high as in neighboring Colombia or Panama.
Overall, I really think Ecuador has substantial value. Using my "10-year rule" and looking out into the future, I'm not convinced that the country is on a very steep upward trajectory like Peru or Cambodia... but even if it stays exactly the same, it will still be a great place to spend some time and even retire.
Like any real estate market, from Vancouver to Vanuatu, there are traps to watch out for in Ecuadoran property; there will always be sharks waiting to take advantage of the uninitiated, which is why I recommend for people who are seriously considering expatriation to rent first, or deal with an absolutely trusted advisor.
A trusted advisor can be difficult to find-- foreigners tend to rely too heavily on Google and Wikipedia (which I regard as the black hole of accurate information). It takes a lot of time on the ground-- I've spent years running all over the world building quality contacts while burning through crooks and incompetents.
Ecuador has been no exception. More to follow.
Until tomorrow,
Simon Black
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Ok, all stocks are overvalued and all countries are distressed. Now what?
I don't look good in multi-colored blankets.
Help a cat out, and buy my 1031s the Bernank has thrown in the terlot.
Frikkin goobermint forces me into 1031s, or pay extortionate taxes, then tanks them.
Forces you into 1031's ... you signed the paper work, they didn't. You just guessed wrong about the direction of real estate ... we need to whine about things over which we have no control.
Asswipe, it was 10 years ago, and perfectly rational. Dumcit voters, like you, messed it all up.
are you implying that signing paperwork to avoid having a large chunk of money taken from you is a voluntary choice?
do you work for the mob?
Doug Casey says we are in a weird twilight zone where seemingly nothing is a screaming buy.
You could look at jim rogers favorite of rural agricultural real estate and partner with someone trustworthy who would work it, but thats a part time job and possibly a headache.
I know someone who used 1031s to put their money into a type of fund that was purportedly for real estate, but 1/2 to 2/3 of the money was never invested in real estate for long periods of time because they said they were in the process of looking. As the money was sitting, they had it in the stock market, but I'm guessing it could have also been in gold or silver as well, or something of your choice thats better. not sure how taxation works when you sell...
sorry, not sure if this is helpful at all.
Doug Casey says we are in a weird twilight zone where seemingly nothing is a screaming buy.
You could look at jim rogers favorite of rural agricultural real estate and partner with someone trustworthy who would work it, but thats a part time job and possibly a headache.
I know someone who used 1031s to put their money into a type of fund that was purportedly for real estate, but 1/2 to 2/3 of the money was never invested in real estate for long periods of time because they said they were in the process of looking. As the money was sitting, they had it in the stock market, but I'm guessing it could have also been in gold or silver as well, or something of your choice thats better. not sure how taxation works when you sell...
sorry, not sure if this is helpful at all.
I've looked at them all. Paraguay to Mexico.
The three best are Ecuador, Nicaragua, and Paraguay.
Buy farmland. Farm it. Keep the money in the home country.
You will be glad.
Yes! And farming land can be done by the locals in exchange of goods, food and shelter.
Until it is expropriated by the government. Ecuador is beautiful... very inexpensive to live and nice weather....but be careful Correa's idol is none other then Hugo Chavez and if you know anyhting about that Hugo is expropriating successful agricultural operations and redistributing.
I have property in Nicaragua. Should be there now but tending to business here.
I love it. I'll be down in couple months.
Can I bring my guns ?
What is the agro tax rate in each of those countries? If it's over 1-2%, it seems it would be better to create a Cayman corp to sell your crop to (at a nice cheap price), which would then act as a reseller.
As a minimum, you will be in a perpetual spring climate especially in the higher elevation towns. I am not sure about the US dollar being the official currency there and how it's going to play out.
The coins are local though and made by the Ecuador government. Since many poor people only use coins, an abundance of them favors inflation.
Careful here though when you talk to your American kids, as they think........Door to Ecua? You know the kids that think that Botticelli and Modigliani are pizza toppings! and the definition of holly water is: H2-Oh!mygod!
Mango season at the moment, just heaven.
I am in Peru at the moment travelling south. happy new year to all my mates at ZH.
Ecuador? Yes just do it.
Happy new Year.
Whoop, they haven't had a coup since 1972
No coup, just a communista, or drug lord or two.
OT but regional...anyone been watching the Colombian peso over the past week? As of yesterday at 2037, some 20% off its peak although bounced back today, almost 5% - these are more like silver movements! You want undervalued? More dollar buying tomorrow could see the peso back into the 2000s with maybe a c.10% correction by mid Jan. Now where is my sell dollar forward man when you need him...
I have a miner in ecuador that has been lagging...needs to get the lead out and for Black to be right
So which country gets to be Enron?
USA homegrown. Do I get a cigar?
Red World: Ecuador: President Correa advances neo-communist coup with support of broad leftist coalition; cozies up to Caracas, Beijing; harbors FARC
Communist government:
1) Presidency of Rafael Correa with support of Proud and Sovereign Fatherland Alliance (socialist), January 21st Patriotic Society Party (left nationalist), Ethical and Democratic Network (leftist), Marxist-Leninist Communist Party of Ecuador/Movement for Popular Democracy, Socialist Party-Broad Front (merger of Socialist Party of Ecuador and Broad Front, formerly front for Communist Party of Ecuador), Pachakutik Plurinational United Movement-New Country (left indigenous), Democratic Left Party (social democratic), and Citizens' Power Movement: 2007-present
2) Presidency of Lucio Gutiérrez with parliamentary support of January 21st Patriotic Society Party, Pachakutik Plurinational United Movement-New Country, and Marxist-Leninist Communist Party of Ecuador/Movement for Popular Democracy: 2003-2005
3) “Glorious May Revolution” presidency of populist José María Velasco Ibarra with support of Ecuadorian Democratic Alliance, including Communist Party of Ecuador, Socialist Party of Ecuador, Revolutionary Socialist Vanguard Party, ex-members of Ecuadorian Radical Liberal Party, and conservatives: 1944-1947
Moscow-Beijing-Havana-Caracas Axis political/economic/military presence: The neo-communist regime in Quito is nurturing a growing economic and political relationship with Beijing. Russian influence, however, if present, is clandestine. In August 2003 representatives of China and Ecuador signed a contract to explore oil deposits in the latter country. The representing parties were the state-run China National Petroleum Corporation and Ecuador’s Ministry of Energy and Mines. Present at the signing ceremony in China was Ecuador's previous leftist President Lucio Gutierrez. In September 2005 China's two largest oil companies, China Petrochemical Corporation and China National Petroleum Corporation, combined their financial resources to purchase the Ecuadorian assets of Canada’s EnCana Corp. for US$1.42 billion. The previous month, violent demonstrations in Ecuador curtailed oil exports. Protesters demanded that petroleum companies invest more money in the countries where they drill. Ecuador is the second-largest South American oil exporter to the USA after Venezuela.
In March 2007 Li Changchun, senior pointman of the Communist Party of China (CPC), traveled to Quito where he met with leftist Ecuadorian President Rafael Correa in Quito. Li affirmed that China intends to continue “equal and mutually beneficial” cooperation with Ecuador, while Correa insisted said Ecuador wishes to “advance bilateral cooperation in all fields on the basis of sticking to the one-China policy.” Ecuador’s neo-communist president added that “the ruling party of Ecuador is also willing to make more contacts with the CPC and learn from China's successful experience.” Contrary to the coverage of the People’s Daily Online above, the Correa regime does not feature a ruling party as such but, rather, a coalition of leftist parties, some with and others without parliamentary representation, that support the president.
http://once-upon-a-time-in-the-west.blogspot.com/2007/06/red-world-ecuad...
Investing in Communist Party dominated countries carries the risk of nationalization of your assets without prior notice.
http://thefinalphaseforum.invisionzone.com/index.php?showtopic=44
yes, this is my understanding of Correa and Ecuador as well...the miners down there, one of them is Dynasty, are all under threat of capricious permitting and potential nationalization.
I dunno wtf Black is babbling about, given the nationalization we saw a few years ago there and Bolivia of OXY's assets. In one day, OXY lost 7% of its global reserves and 3% of annual production just by nationalizations in these countries.
Simon Black writes:
« ... foreigners tend to rely too heavily on Google and Wikipedia (which I regard as the black hole of accurate information) ... »
Ha! ... Simon Black has that right!
The thing that is most amazing about the American internet control of the world, is that they were basically able to do it with two websites, the CIA-funded Google, and the demonically awful and mis-leading Wikipedia, which has 'administrators' operating out of the intelligence agency computer centres. Even though these things are known, documented, proven (Wired News, interviews with the CIA-Google connections, etc.) the ugly truth is not being faced.
The Americans have got every idiot in the world - and many smart people who should know better - reading whatever garbage has been placed on Wikipedia by US and Israeli government agents, corporate shills, and similar gangsters, who hire IT staff to pose as 'Wikipedia users'.
Incredibly often, you find someone has wrong information "... because I read it on Wikipedia ..."
It is truly a black hole, like he says ... yet few people have the sense to totally avoid Wikipedia, and thus are vulnerable to being systematically mis-informed on topics on which they do not already have some expertise or opinion.
The 'usefulness' of Wikipedia which people find on some subjects, was the method to get people to 'trust' Wikipedia whenever lies are placed there by corporation goons or government agents. Mixing truth with lies is always the best way to sell propaganda.
This is Joseph Goebbels' dream come true ... the Americans must laugh, at how easy it was to control the web, and the thinking of most people, with just two websites (oh, both so user friendly, and 'anyone' can participate!) ...
And for those who don't know, Answers.com is another such 'service', based in Jerusalem and tied to Mossad ... a service to help repeat what the US and Israeli agents put on Wikipedia.
This is somewhat better known in Europe ... France's Jacques Chirac was one who understood the menace involved with the US-led internet 'systems'. He tried to put in place some things to fight it, but even many here are fooled by the Americans' internet game.
@bank guy
Very well.
Would you kindly post a few wikipedia entries which you find to be particularly egregious examples that support your thesis?
Cheers
Doubtful, since 99% of wikipedia is the same old Hollywood PC multiculturalism line...the idea that wiki is filled with israeli propaganda is laughable since the vast majority of the editors are your typical "progressive" UN worshipping, jew-hating, Statism-supporting types.
? multiculturalism is a jewish invention.
Who the hell do you think built the organizations that have pushed it? Who runs the studios that produced movies glorifying it?
Tyler Durden:
When do you intend to ban this racist asshole? Enough is enough.
cite some sources please!
So Simon, you failed to mention how much your "beautiful companion" cost. Inquiring minds want to know.
$40.02 Dinner & Drinks
Renter thrown in for free
Priceless
Companion, room for 3 hours, 1 bottle aguardiente (El Galán), and 2 bottles of coke: $25. Unlisted travel expenses: priceless.
My worry is what will Correa do if QE2, ...3, etc. really does become inflationary and Ecuador starts importing inflation from the US. I'm nut-deep in Quito Real Estate.
well, brazil real estate has bubbled hard lately, so you might do just fine
Can I bring my guns down there?
if you have a boat with big gas tanks you can talk your guns anywhere you want.. driving? flying? I feel like I should post a TSA Video...
what you do is get a boat to the Bahamas... and then fly, privately where ever suits you with whatever fire power you feel will keep you safe.
A good skill set, outside of just guns will do more for your longevity in a 3rd world country... can you bring power and more food for less work to a people who are ignorant? that would do more fo you than a chain gun with a nuke power pack and unlimited rounds.
There are two sides to the question: The first being "What can you leave the US with?", the second being "What can you get into the destination country with?".
If you have a large enough boat... with large enough gas tanks... you can leave (minus the ATF or someone else stopping you before you leave) with whatever you can carry...
What can you get into another country with... in the islands? central america? south america?
well that is a question I will answer with a question... how much gold do you have? thats will be how much you can bring with you.
(d)
Black is correct about Ecuador. However, the problem with Americans like Simon Black is that they really don't think about the problems they create by over-tipping and paying above market value for homes and services in places like Ecuador. It doesn't help the local population to raise the prices and expectations of everything and everyone. It makes the locals disgruntled and actually lowers the standard of living. How? Here's an example. An American expat pays $5.00 an hour to his maid. That's TWICE the going rate. The maid is ecstatic and tells her friends who are making half and they become jealous and start demanding the same rates. But, locals won't pay those rates and now we have a problem. Taxi drivers are already having problems and starting to demand more money because arrogant/ignorant gringos are overpaying some so the others are now starting to overcharge to keep up with their friends and not look like chumps. Americans and other expats need to find out the local prices and customs and follow them instead of ruining one of the main reasons they came to the country in the first place. Pretty soon that $1.75 lunch will be $4.75 because they found out the stupid Americans will still think that's cheap and that will be that for paradise. AMERICANS NEED TO STOP BEING SO F**KING ARROGANT AND ACTUALLY LEARN THE CUSTOMS OF COUNTRIES LIKE ECUADOR SO THEY DON'T RUIN THE PLACE FOR THE REST OF US. I'M AN EXPAT IN CUENCA AND I CAN'T BELIEVE HOW THE AMERICANS ARE STARTING TO COME HERE AND RUIN THE PLACE WITH THEIR BIG TIPPING/HIGH SALARIES THAT ARE COSTING JOBS AND HARDSHIPS FOR MOST OF THE LOCALS HERE. Yes, it's great that we are a generous lot and give to charities here, etc., but it's better to give a gift to your employee than to price the rest of the labor force out of the market by overpaying them. Okay, I'm done ranting....
Point well taken Carl, but calm down. I remember being in Argentina right after the crash and I almost felt dirty with how affordable stuff was. I stayed in a hostel, really just some lady's house, for a week for thirty bucks. Taxi rides usually amounted to 50 cents. I rounded up on everything, because otherwise I felt like I was kicking 'em while they were down. I do see your point though. Especially about buying real estate. Cheers.
Good points. But don't worry, pretty soon gringos won't be able to find $1.75 for lunch any more, once nobody will extend them infinite credit. That will happen when other countries start demanding payment in gold, not [print-em-by-the-trillions] dollars.
What you describe is what ruined the USSA. The price of houses rose 10x because formerly people paid cash to have a house built (or built it themselves and/or with neighbors Amish style). When people only had to have 20% down payments, prices gradually rose about 10x. The price of the house increased 3x, and people typically pay 3 times what the house costs (because mortgage interest is twice as much as the house). Total: 10x change.
Then Greenspasm drove interest rates to absurd low levels AND encouraged totally bogus 3% down payment and adjustable rate scams... which made it possible for people to "buy" even more expensive houses... so the sellers raised prices 2x, 3x, 5x in response. And that was the nature of the housing bubble.
And of course the economy doesn't work now. People were paying their entire income just to pay their mortgage payments. How could they buy "other stuff" that keeps the "economy" going and growing? They couldn't.
So you're totally right, gringos could trash those other countries too... if they take their "infinite debt money" produced by fractional reserve banking travesties elsewhere. This is why the FederalReserve and fractional reserve banking must be terminated with extreme prejudice.
The international ganster banksters are destroying the world... and this is how they're doing it. On the other hand, in a country where people can only buy what they can afford (meaning, "what they have saved"), the "good life" is possible. Keep telling the gringos to leave their wallets (and credit cards) at home, but try to be a bit less abrasive (difficult, I know).
Oh, and most urgently keep the IMF and WorldBank out !!!
on Thu, 12/30/2010 - 01:01
#837260
Black is correct about Ecuador. However, the problem with Americans like Simon Black is that they really don't think about the problems they create by over-tipping and paying above market value for homes and services in places like Ecuador.
Carl LaFong,
It is my money and if I want to throw it out the window to the lil people I will do exactly that... I have spent my life in and out of the islands... along with mex, central and south america... and every little bit helps those people who have nothing.
Just becuase you are a cheap fuck and want to pay nothing prices like a local, your NOT! a local... pay up, cheap ass punk!
Dear Sir,....you failed to read my comment. My main point was that paying twice what the normal wages are to your maid (or whoever) and twice the cab fare creates unreal expectations and envy in the local population. They then start demanding and expecting more from the local population in terms of wages, etc. The locals can't afford this and, because the worker(s) can't accept less than their piers, they actually end up making less money than before the inflated wages began. I believed as you do once until I was lectured by some locals about how I was helping to create more poverty by overpaying and inflating the market. I didn't get it either. Overtipping is no big deal, but when it extends to the average wage and the local population gets priced out of the market, it actually hurts the people. Why don't you think a little deeper about it before you start name calling...you fuckwad.
Having lived in Ecuador, I love the people, love the country, love the food. I just don't want to live there again.
Ecuador has a Marxist government much like Bolivia, Venezuela. Correa is one very bad apple. The reason they use the Dollar is because a previous socialist president created hyperinflation! The sucre went from 25 sucres/dollar to 35,000 sucres/dollar!
I know what its like to live in Ecuador when things aren't so rosie. I've been in earthquakes on both the coasts and in the Andes mountains at least once per year, in a country that doesn't have good building codes to withstand them.
I've seen the riots and the hostage-takings. I have many horror stories. I've been dragged off a bus by soldiers claiming that my papers weren't in order, when they were fine. I've walked home through a town after curfew when no one dared be on the street -- except me, my friend, and soldiers with machine guns who stopped us, frisked us, and planted an automatic rifle against my chest with the end of the barrel just one INCH from my heart!
I've been held hostage for small ransoms on highways in the middle of nowhere, only to pay the ransom and get stopped again just down the highway a few miles further. I've had bricks thrown through my car windows for the sole reason that I was in the wrong place at the wrong time. I've been chased by mobs! I've had rocks and buckets of water thrown at me. I've had people yell, "C.I.A!" at me while I walked down the street.
On one occasion, we heard a knock at the door. It was a very spooked American from NY who begged us to let him in to rest and hide out for awhile and so he could talk to some people from back home. He was traveling through the country on the Panamerican Highway on his bicycle. He told us of being shot at on the highway and hiding to avoid being killed.
I've seen cities -- even relatively small ones -- brought to a standstill with burning tires in every intersection. I saw civil unrest almost every month I lived there for years. All this -- in Ecuador!
I knew an American expat while I was there that had a successful business. After I returned back to the States, I suddenly stumbled across the same guy one day by pure coincidence. He had moved back to the States and was running a tourist shop in Sacramento that imported Ecuadorian and Peruvian goods. Things had degraded so much in Ecuador that he ran for the exits.
I agree with some of the other posters here that would warn Americans that the socialist government of Ecuador is NOT friendly to Americans.
Personally, I would much rather live in Chile. Having lived also in Colombia, I would much rather live there also. The Chileans are much more respectful of private property rights, and have been for quite some time. Price ain't cheap if they take it away from you later!
You can believe Simon Black, a guy who visited and ate a few nice meals there, or you can believe me, a guy who lived there for years!
As I said above about Ecuador: I love the people, the country, the food. It's cliche but I'll say it: Nice place to visit, but... I still wouldn't want to live there.
If all that is true, how can you love the people?
interesting viewpoint. when did you live there? what city or cities did you live in? thx.
Sbernard-
Your experience of almost every S.American nightmare cliche (earthquakes, riots, death squads) happening 'every month' seems like a movie that Steven Seagal should have starred in.
You're sure you have the right country? After all, living on 'both coasts' is quite a feat when there's only one.
I'm astounded you managed to spend so many years living there when it's so lethal.
i have a hard time with "for my beautiful companion and i". "for" is a preposition and its object is always in objective case: "me". (no one ever seems to write "for i".) however "simon black" seems a self-made man so i should just shut up and chill.
im glad you got that off your chest....
I lived in Ecuador ...still visit 1-2 months during the year...we own a home there..It is nice I like it, but Correa worries me and worries many down there. He wishes to follow in the footsteps of Hugo Chavez and is part of the Bolivarianism Movement. Ask the family of Franklin Brito whose farm was successful and therefore expropriated by Chavez. Brito is now dead who died from a "hunger strike" just happened to die in a Military Hospital.
Ecuador is moving closer and closer to following in the same footsteps as Venezuela and Bolivia.
Be careful if you are a Gringo and want to own farmland there you may not own it for long because it belongs to the people of the revolution