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Recent messages have looked at ways to protect against inflation. Why? What’s the big deal? There are many reasons to be concerned with inflation….as you can see here, including some that horrify.

Recently I watched the German film (complete with subtitles) “Downfall” the story of Adolph Hitler’s last days in his bunker. The regime was truly horrible. He was truly insane. How could a great nation let that happen? The answer is complex but one thing is clear. Economics had a lot to do with that war. WWII could have been called the “War Started by Inflation”!

Debt created by WWI retribution was so heavy it destroyed the German economy. This created thinkers like Adolph Hitler who grew up in the misery created by this debt.

A clearer picture of what happened is formed at http://www.pasadenapundit.com which says:

“A precursor to the events leading up to WWI was Bismarck, 1st PM of Prussia and later Chancellor of the German Empire. He was consumed by the unification of all German territories and the creation of a German Empire in the later half of the 18th Century, – competing on the global market with the British Empire and others. He achieved the first step by defeating Austria and Napoleon III and the surrender of Paris in 1870. Germany reclaimed former territories and received $1 billion (current $) in reparation payments from the French. This will haunt Germany 40 years later.

“At the conclusion of WWI Reparation (Retribution) Payments and concessions demanded of Germany as stipulated in the Versailles Treaty (also known as the Rape of Germany) would ultimately set the stage for the rise of the 3rd Reich. In addition to the tens of billions of $ paid annually, Germany lost its colonies, industrial machinery, shipping, technological patents, international trade opportunities, severe inflation (the average German’s life savings could not buy a loaf of bread), etc.”

So the first reason for inflation concerns is that inflation leads to the downfall of entire classes of people. These people then become susceptible to dumb politics. Dumb politics eventually lead to really disastrous downfalls.

War repatriations imposed by others created the downfall of the German middle class after WWI. Today the Western middle class has not needed such help. We are creating our own downfall, allowing wars and other government spending we cannot afford and creating mountains of consumer debt!

Who will lose the most and how? The boomers are a handy lot and I think big business believes that they will be the ones to lose the greatest purchasing power. Here is what leads me to this thought.

Matt Thornhill of the Boomer project at http://www.boomerproject.com writes:

“Network TV’s Addiction to 18-49. A year ago CBS announced that they were dumping five TV shows that skewed older in favor of shows that would appeal to the younger end (18-34) of the ‘coveted’ 18-49 demographic. We took them to task and suggested that they would drive more Boomers to other TV options, like cable, since they were offering precious little to hold our attention. We recently came across some data about this past TV season that has illuminated us to the continuing addiction Network TV has for 18-to-49 year olds. It is, in fact, disheartening. A company called Magna Global tracks the median age of TV viewers, which is the age where half the audience is older and half is younger. Since the median age for the U.S. population is 36.2 (Census data) and just about everyone in America watches TV, one might expect the median age of TV viewers to be about the same.

It isn’t. It’s much older. And it helps us understand what CBS is up to. Let’s explain. First, here are the figures for this past TV season:

“Network
Median Age
ABC
46
CBS
52
NBC
49
FOX
39
WB
37
UPN
31
Source: Magna Global USA

“So relative to the population, and to their competition, CBS is indeed the old people network. One can now see why they might be ditching shows for Boomers for shows for younger audiences in an attempt to lower their median age figure.

“It gets more interesting (or troubling) when you see quotes like this, from the Magna Global expert who tracks median age information:

“We don’t really see any of the broadcast networks lowering their median age next year. But interestingly, CBS may still get younger. Sometimes just looking at average median ages can be misleading. CBS has reduced its percentage of age 65+ viewers and increased the percentage of its 50-64 audience. As a result, its average median age remained at 52, but clearly CBS has gotten younger.”

“Yet according to Nielsen ratings, CBS ‘won’ the overall season by attracting the greatest number of total viewers, ages 18 and older. Who might these viewers be?

“Further, looking at the median age for individual shows helps us understand why some shows get cancelled and others survive despite poor ratings. For example, this past season ABC’s ‘Commander in Chief’ with Gina Davis generated good ratings but had a median age viewer of 55. Ratings-challenged ‘What About Brian’ had a median age of 40. Guess which one got renewed for this Fall’s season? (Hint: Not Gina’s)

“The network’s fascination with the 18-49 demo continues unabated, despite the fact that the population as a whole is aging. The median age nationally has gone from 28 in 1970 to 30 in 1980 to 32.8 in 1990 to 35.3 in 2000 to now 36.2 in 2004, according to the Census.

“The bottom line is that all of us trying to market effectively to Boomers have work to do to educate advertisers that Boomers have and want to spend money on their products, and they can more easily be reached by advertising on shows like ‘Commander in Chief’ and not ‘What About Brian’”

This article really started me thinking. Why would business abandon the largest richest demographic group? Could the answer be that we boomers who (as I do) who start to turn 60 this year will become very poor when we start to rely on fixed income Social Security (which I won’t) in as little as six or seven years?

Could it be that business has instead began to focus on building loyalty with the younger people who will have jobs that are a little more inflation proofed?

So perhaps boomers are those who will suffer most from inflation.

How?

The first thing that affects the poor is that quality of accommodations drop. This has been happening for decades.

One example was in a recent message at http://www.spottingtrends.com/investment/investment_philosophy_33.htm

It gave an example where in the 90s if one looked at inflation figures for Miami housing, the numbers did not look too bad. Then Hurricane Andrew ripped through the city and all the houses built after the 70s (wide spread introduction of shingle staple gun) lost their roofs. Earlier built houses did not. House prices between 1970 and 1990 may not have risen that much. But the later built houses (that did something-cost more) were cheaper. This is quality inflation.

We see it in many other ways. Outsourcing of service is another example. You buy a local service (perhaps a computer, internet or phone service) and you have a problem. You call for help and get someone in India or the Philippines etc. who reads to you whatever their computer says about the problem. The helper has no real care, no real problem solving ability nor any local context to truly grapple your difficulties. This is service inflation.

Size of accommodations falls as well. Three of our children live in England, the home of $7 a gallon gas and unbelievable accommodation prices. Our son Jake just shared thoughts on an article entitled “House prices to soar 50% within six years.” This article says the average price of housing is to reach an estimated $500,000 by 2012 – Typical property will cost nine times annual salary. Here is what Jake wrote:

“Hi Dad, look at: http://business.guardian.co.uk/story/0,,1822000,00.html

“Thanks for all the updates. I’ve enjoyed reading them. I saw your piece on inflation and UK housing. Most interesting. The Guardian today is reporting that while UK house prices are high now, ‘You ain’t seen nothing yet!’ According to a report produced by the National Housing Federation and Oxford Economic Forecasting Group, the average house price in the UK is set to rise by over 50% in six years! That means the AVERAGE house will top £300,000 (well over half a million bucks) by 2012 representing nine and a half times average salary. They note that already in over 10% of districts, the ratio is ten times salary. Holy smokes. A related article adds some historical facts:

“The average house in the UK has increased by more than 35 times, from an average price of £4,874 in 1970, to £172,788 in 2004. The biggest winners since 1970 have been homeowners in London who have seen the value of their homes increase by over 40 times. The next largest increase has been seen in the South West region with house prices increasing by 40 times. Keep the postings coming.

I hope all is well in Ecuador. Cheers. Jake”

This is accommodation inflation.

We’ll get to how one solution to this problem is in Ecuador in a moment.

First, let’s ask how bad can this get?

I spent six years living in Hong Kong in the late 60s and early 70s. This city was not so prosperous then. Many people lived with entire families (or even two families) in one room….if they were lucky.

This is happening now in the West. Originally just about everyone could afford a free standing house. Then with inflation they could only afford an apartment or condo of their own. Suddenly free standing houses became popular again…not because people were richer but now two or three or more people were sharing the house each having just a room.

How bad can this get? I think in London the worst has already arrived. See what you can rent for over $1,000 a month!

The cozy one-bedroom flat below is shown at:

http://www.sfgate.com/cgi-bin/object/article?f=/gate/archive/2005/05/25/dip.DTL&o=10

The caption says that “real estate agent Gordon Blausten shows off a London flat that may be the smallest apartment in the world. Its 62 square feet squeezes in a kitchenette, bath and wardrobe. The bed is on a raised platform accessed by a ladder. The rent? Only $247 a week”

This is accommodation inflation at its worst!

So what are the solutions?

Inflation fighting Option #1: Start now where the baseline is better. For example, in Ecuador a wonderful 2,000 square foot house (like the one being built below) could cost half as much as the 62 square foot room above.

Architects Barro Viejo are building homes with incredible style for as little $27 a square foot. Quality inflation has not set in either. I am talking about homes with style, hardwood floors, marble bathrooms, multiple fireplaces and tile roofs not to mention just a few amenities. See www.barroviejo.com

Inflation fighting option #2: Another way to fight inflation is to invest in equities on countries of high growth (ie emerging markets). See http://www.spottingtrends.com/stock_markets/stock_markets_24.htm

Inflation fighting option #3: Buy real estate now with as much debt as you can manage to afford.

Inflation fighting option #4: Invest in non leveraged commodities or leverage such investments as much as you can afford to protect.

Inflation fighting option #5: Start your own global business now. One thing that the film “Downfall” made clear was that the only Germans (especially Jewish Germans) who were not severely affected by the war were those who were economically able to leave their homeland and still earn income. See http://www.garyascott.com/catalog/ibez.html

Until next message, good investing and business to you.

Gary

Join Merri, Thomas Fischer of Jyske Bank and me at our next International Business and Investing Made EZ course in North Carolina. Review where to invest and do business now and learn which markets and currencies may be strong in the year ahead. Meet Steve Marchant, our man in Ecuador, and learn about products to export. Go to http://www.garyascott.com/catalog/ibeznc.html