Lessons from a 30-Year Veteran (Part 2)

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Category: IM Interviews

Published on Wednesday, 11 January 2012 09:35

Written by International Man

Last week, Olivier Garret, CEO of investment research organization Casey Research and a 30-year veteran of international diversification shared with us some practical insights from his experience living and working an international life for the better part of three decades.

In today's issue, we'll conclude our interview with a discussion on why Canadians might want a bank account in the US, how to diversify in a rush if needed, as well as some useful due diligence questions one needs to ask before using any service or product provider.

[In case you missed Part 1, you can read it here.]

Lessons from a 30-Year Veteran of Internationalization (Part 2)

International Man: You mentioned that if you were Canadian, setting up a bank account within the US would be a logical first step, but it almost seems that would be like jumping from the frying pan into the fire... Do you have any comments on why there would be some value in a Canadian running across the line and setting up an account in a US bank?

Olivier Garret: First of all, whether it's in the US or in Canada or anywhere else, if you truly have a worldwide financial crisis, there are still some risks. The Canadian banks are better capitalized, but I don't think they are out of reach at all.

There are some regional and local banks in the US that have good financial strength. At Casey Research, we're in the process of putting out a report on safe places to store your money, but there's also the FDIC insurance [federal insurance that protects you against loss from a bank failure], which is the same thing you have in Canada. In the US, it's $250,000. If you're under $250,000, you should be able to get your money out of the bank if it's in a checking account or a liquid account. If it's invested, that's a different story.

IM: Would the FDIC apply to anybody who keeps funds in an American bank, not just American account-holders?

OG: Yes, it does as long as the foreign person keeps funds in a FDIC insured financial account.

IM: The CDIC is the Canadian equivalent to the FDIC and only guarantees up to $100,000, but then again the banks are, if not explicitly written, at least implicitly backed by the Bank of Canada.

OG: In the US, you can do a variety of things to expand the amount of coverage you are entitled to. If you open bank accounts in several banks, you can multiply that $250,000 several times. You can also multiply coverage in a single institution with accounts held for different family members, companies, trusts, IRAs. There is even a way to invest in CEDARS-CD and hold up to $5M in insured funds while dealing with one single bank (who will manage on your behalf $250K tranches with up to 20 different institutions). Finally, through the end of 2012, the FDIC offers unlimited coverage on non-interest bearing accounts held with a number of participating financial institutions.

IM: Hypothetically speaking, if one of our readers had to get out of Dodge relatively fast - say within two to three months, with an unknown chance of return, and they hadn't yet diversified themselves in any way - what could do? Or, is it really too late at that point?

OG: As much as I see some negative changes in the US and in Europe, my hope is we have a little more than two or three months; at least a year or two in front of us. But who knows?

Hypothetically speaking, having a funded bank account outside the country is probably the best start. Then, if worse comes to worse, you can cross the border and have something to start somewhere else. It's hard to open bank accounts internationally for a US citizen. The only country where it's still relatively easy is Canada. And it can easily be done within the two to three months timeframe.

The next step would be to buy and store gold internationally at places like the Perth Mint or Global Gold, which allows you to store gold securely in Switzerland through Viamat. Your website as well as Casey Research's Big Gold publication provides excellent choices of suppliers to help readers diversify their gold holdings internationally and most options can be set and funded within a couple of weeks.

While the window is closing, Americans can still take these actions legally, so long as they do the reporting correctly. And it can all be done in a short period of time.

Anything else like establishing residency and acquiring another passport is going to take a lot longer than two or three months.

IM: A few moments ago, you mentioned Casey Research, which leads perfectly to my next question. Obviously a big part of your position within that organization is doing due diligence on new products and services. What are some of the important factors that you consider before doing any business with a potential supplier?

OG: There is one principle I've applied consistently to all my business ventures: if a product or a service is too complicated for me to understand on first read, I avoid it. I always focus on companies that have easily understandable products and services, as well as clean balance sheets.

When I will look at the financial statements of a potential supplier, I always go quickly to the notes at the end. If I see a lot of notes related to derivatives and other off-balance sheet structured products - that's a very strong warning signal for me.

In today's world, this is critical. I've had many discussions with professionals in senior positions of major financial institutions that have told me unofficially that at this point, nobody in their organization truly understands the risks involved with their off-balance sheet liabilities. They simply have no idea of their exposure to derivatives.

I like companies where management has a sizeable ownership stake in the success of their business. Obviously, one problem with large financial institutions is that it's very difficult to find. You usually find that in smaller banks and financial institutions - managers that are playing with their own money and have a vested interest. When we look at companies in the resource sector of Casey Research, that's always one of the principal considerations. If management has a stake in the action, they're not going to take unwarranted risk.

The problem with a lot of the "too big to fail" banks is that management has a huge incentive to take risk if there's the probability of a high return; they get the benefit if they're successful. On the other hand, if they're not successful, they walk out and the shareholders lose money. They don't lose much money and certainly no money they actually invested. Their maximum loss is having worthless options and losing there job, but there is always another company for them to move to and if they win they can win big.

At Casey Research, we will never recommend a company unless we feel it's personally good enough for us to invest in. We select financial institutions internationally. We select some suppliers - I mentioned Global Gold, for example. That's a company I've done a lot of due diligence on. I personally have an account with them. If it were not good enough for me to invest money there, then it should definitely not be good enough for me to recommend to our readers.

In summary, our due diligence process is: we look at the balance sheet, we interview the people, we make sure we have a good sense of their professional ethics. And then we use our network of contacts to run a full due diligence with people that have done business with them for many years. We also interview some of their customers.

Services like International Man and Casey Research have built a strong network. We always know somebody that knows something about a new company. Our referral network is very strong, so if the company passes the other tests, we then use our network to make sure there are no "ghosts" in the closet.

IM: What about selecting the right structure? That is a relatively common question that we get, and a relatively complicated one as well. There are a lot of the so-called "best ones" sold to those looking to internationalize, regardless of the fact that many are a waste of time or even potentially dangerous from a legal point of view.

For our readers, many of whom are American and looking to establish an appropriate structure for their needs, what should they be looking for? What are some of the criteria and what kinds of questions should they be asking service providers before they put down any money?

OG: I'll refer back to what I said first when we talked about due diligence. When you do due diligence on a service provider and they propose a structure - whether it be a foreign annuity like a Swiss annuity program, or some trust, or some international company - if it seems too complex, don't do it. Just like investing, diversification is most effective in small steps; steps you understand.

Start simple, and as you gain knowledge and become more educated, then take the next step. Don't rush as that's when mistakes are most likely to be made.

Keep in mind that much of diversification is about reducing risk, not increasing it.

IM: Final question. As someone who carries multiple passports - including that of the US - you have a unique perspective. What do you think is coming up for the average American, both from a financial point of view, as well as personal? Is it going to get worse, and if so, is there anything else that our readers can do to prepare?

OG: As somebody who grew up in Europe (and travelled into what was then the USSR and the Eastern Block at age 14), I know that when a situation gets desperate, governments do terrible things. In the 90s, I also traveled and did business in Yugoslavia six months before the civil war there started, something that neither I, nor any businessperson I talked to then, saw coming.

For those that don't know, Yugoslavia was run very irresponsibly and it went bankrupt. The government tried to deflect attention away from its failure and started this civil war.

It's a very common thing.

It's what Argentina did when they went into the Falklands against Britain. They had problems internally, and they deflected them by launching an idiotic war.

When I look at the situation in the US today, there's clearly no question that our government is bankrupt. When you think that they cannot get an agreement to save $10 trillion dollars over the next 10 years with the budget deficit running over $1.5 trillion a year, it doesn't make you feel very good about the prospects.

There's a lot of concern that as the financial situation of the US deteriorates, the government is going to take desperate measures, one of which will almost certainly be capital controls.

I also think it's very likely that at some point in the near future, there will be another major terrorist event on US soil. "When" is more of the question than "if". Clearly, we haven't made a lot of friends around the world, and at that point I think the trend we've been seeing since 9/11 - the restrictions on freedom, the surveillance of private citizens - is going to turn into something nastier. Drawing the comparison very carefully, it might progress in a way similar to 1930s Germany with the rise of Hitler. There are some strong warning signs.

Democracies work very well when there's a lot of wealth to spread around. The problem is the American middle class is getting poorer, the government is bankrupt, and this is potentially a risky situation.

I think the chance for civil unrest and a crackdown in the US is very high, as is the chance that the government will try to raise taxes on people that have wealth, as well as actively attempt to prevent money from leaving the country.

This is a situation I would never have considered possible 30 years ago when I first left France, but I am afraid we are in a different world and I can no longer ignore the possibility. I hope that the crisis will not last long, but there's no way to know. Eventually, the world will go on and progress will continue - those that were prepared to deal with the potential crisis will be fine.

IM: While not the cheeriest way to end the interview, some important considerations for our readers. Thank you.

OG: You're welcome.