Ed’s Daily Notes for October 11th   7 comments

Bloomberg: Obama Says Real Boss in Default Showdown Means Bonds Call Shots

President Barack Obama knows who is the boss: the bond market.

“Ultimately, what matters is: What do the people who are buying Treasury bills think?” the president told reporters this week, when discussing measures he could take to end the threat of a historic default on the nation’s debt.

From an economic perspective, Obama is correct with this statement. Keep this in mind: In the entire world, the single investment which is considered the ultimate safe haven is the U.S. treasury. We can argue all day long about why this shouldn’t be, but it is regardless. Even in places where gold is valued, like China, they have literally billions of dollars worth of U.S. treasuries. Even when the U.S. government is acting like a dysfunctional family, treasuries still rule the world’s investment landscape.

Business Week: How to Build a Supercomputer on the Cheap

The article above is a good start for a discussion about socialism. Don’t believe me? Consider the story of a Danish startup company:

Asetek is the brainchild of André Eriksen, a self-described speed freak (in the good way) from Denmark. About 15 years ago, Eriksen spent his spare time tweaking computers to make them run faster. The key to this kind of thing is cooling the main processor so it can perform more and more calculations without overheating—a practice known as overclocking. “I built a compressor into the computer that could freeze the chip down to minus 40 degrees [Celsius] and run the whole thing at about twice its normal speed,” Eriksen says. Quite often, hardcore gamers do this to push their systems to the limit, but Eriksen just did it because he likes things that go fast. “I spent all my money on hardware to see if I could benchmark software running faster than anyone else,” he says. (Who hasn’t done this?)

Soon enough, his hobby started to look like a business. In 2003, Eriksen decided to start selling a cooling kit that people could install in their PCs to improve their performance. “It’s kind of weird to found your own company in Denmark,” he says. “With the social welfare system, people wonder why you would create more work for yourself. But that’s exactly what I did.”

Under a social welfare system, there is actually an anti-productive culture created among the people, whereby productive work is frowned upon. Someone like Eriksen who wants to create a business is looked at as abnormal. I wonder how many people with good business ideas decide against trying them due to social pressure? How many great business ideas are lost this way in socialist economies?

CNBC: Where are the ultra-rich finding their next home?

I find it fun to think about things like this (I know, I’m weird):

The French Riviera hasn’t lost its cachet, topping the list of prime residential enclaves for the ultra-wealthy, according to research from Savills.

Cote d’Azur ranks highest on the Prime Enclave Index, ranking properties on average prices of luxury properties and hotels as well as exclusivity and global draw, according to research produced by Candy & Candy, Savills World Research and Deutsche Asset & Wealth Management.

“This sought-after region is the ultimate and most expensive leisure enclave for home transactions among the ultra-wealthy, attracting buyers from across Europe, North America and most actively at present, from the Middle East and Russia,” the report said.

…A typical five-bedroom luxury property there costs around $28.5 million, outstripping nearby Monaco, which ranked fifth on the list with a $25.0 million price tag on a similar property, the report said.

Rounding out the top twenty places the ultra-rich want their next home are many of the usual haunts, such as Aspen in the U.S., St. Barts in the Caribbean and Italy’s Venice as well as a few off the beaten path, such as the Seychelles, the Maldives and Emirates Hills in Dubai.

Most of the ultra-high-net-worth individuals hail from North America, but they tend to stick closer to home, primarily doing their extra home shopping in the Caribbean and North American hot spots, the report said.

Like their North American counterparts, the Middle Eastern ultra-rich also tend to buy their extra homes closer to home, looking in Dubai and Abu Dhabi, although they’re also beginning to nibble in the Mediterranean, according to the research.

…But the one growing group of ultra-rich you won’t find high up on the list are the Chinese.

Chinese home buyers tend to focus on cities, and the chances for capital appreciation are generally weighed carefully, said Paul Tostevin, an associate at Savills World Research, in the report.

“Current cultural norms mean that indoor leisure pursuits are favored over sun and sea and, as a consequence, Chinese buyers have been found to seek a different product to those from the West,” he said, although he noted Hainan, an island in the South China Sea, part of which has been dubbed the “Chinese Riviera,” has been an exception.

Asian buyers in general tend to consider additional home purchases as part of an investment portfolio, the report noted. “A number of our clients have looked into buying properties in France and backed out at the last minute because they weren’t comfortable with the tax and legal systems – they’d rather just stay in a beautiful hotel when they are in Paris,” Mahesh Satya, Deutsche Asset & Wealth Management’s Head of Lending in Asia Pacific, said in the report.

Kudos to the Chinese! When I look at high-end real estate, one of the top things I consider is taxes. Why have a beautiful estate, only to have your money eaten up by taxes? If you stay there too long, you or your heirs will end up having to sell that beautiful estate.

Some of my favorite places for high-end real estate:

1. Austin/San Antonio, Texas, U.S.: As an American who wants to stay in my home country, Texas is the place to be. With no state income tax, and plenty of cheap land if you want to build your own estate, it is a natural place for the high-end real estate investor. If you want to buy an already-built house, the high-end houses around Austin and San Antonio are some of the best in the world, AND cheap by comparison! In fact, high-end real estate has been coming down recently there, so it is becoming a real steal (if you have more money than you can count).

2. Cayman Islands: While the houses there don’t really rate with the best in the world, you can’t argue with the taxes: none. If you aren’t a picky billionaire, but you like a tropical climate, the Cayman Islands are the place to be.

3. Australia and New Zealand: I put both of these together, because they are similar in a lot of ways. They are really better destinations for the ultra-wealthy who want to build their own, due to lots of available land, even private islands if you are interested in that. Their taxes aren’t too bad either.

4. Europe: For land to build on, forget Europe. For pre-built estates, it is hard to top nearly any country in Europe for architecture. I can look through the listings from Europe for hours, as the Europeans have mastered so many wonderful styles of architecture over the millenia. Unfortunately, the taxes all over Europe are obscene. If you MUST live in Europe as an ultra-wealthy person, I would suggest Switzerland, although their tax system is byzantine. Expect to spend a lot of days working on your taxes there. On the other hand, if you have a means to shelter your wealth from European tax authorities, have at it! I am rather partial to Italy and Spain for their architectural styles.

5. Florida, U.S.: Florida is similar to Texas tax-wise, although it is a lot more humid, and there is the annual hurricane threat problem. Other than that, it does have some very nice houses, mostly around Miami. One key to Florida: Avoid inland areas, where the summer humidity is just intolerable, unless you have a summer home in a cooler climate.

Feel free to suggest your own destinations, for when you suddenly become mega-wealthy.

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7 responses to “Ed’s Daily Notes for October 11th

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  1. Ed – I would have to agree that Austin would be a great area to live. We once looked at land in the Hill Country (my wife is a Texan), but did not pull the trigger. Of course, if you are mega wealthy, some of the items (such as lower taxes or good value for money) do not really count. I used to live in Marin County, north of San Francisco, and that would be a fabulous place to live if money didn’t matter and you did not mind risk of quakes. I see a lot of wealthy people buying in Florida, it is relatively cheap and the 0 income tax is a big draw. I had the opportunity to live in Europe, it is a nice lifestyle but if you like things that are “Americana”, you will miss them or hate the 6 or 7 hour time zone differential.

    • Marshall,
      That was one thing that surprised me in the article. Some of the places they mentioned were not cheap, like the French Riviera.

      As for taxes or getting value, I would imagine “self-made” billionaires would appreciate getting value for their money. Remember Sam Walton’s old pickup truck? Then again, people like that probably wouldn’t go overboard on their homes either…

  2. I actually really like Minnesota. Taxes are a little higher but when you look at the whole package. Real estate, sales, income tax and various user fees, its not that much higher and the quality of life in terms of low crime, theatre, music scene, availability of reasonably priced lake property etc. and emphasis on active life styles in the form of biking hiking trails, open land and lakes for hunting, camping snowmobiling etc. it can’t be beat.

    I’ve lived in several other states including AZ, TX, IL, FLA and I’ve enjoyed and suffered through them all for various reasons. But I’d take the four seasons of MN any day.

    That said, as I get older, the Januarys here are definitely getting to be more of a downside.

    • Jeff,
      That’s what’d kill me about Minnesota. 🙂

    • Jeff,

      I was just in MN last week and noticed some of the trees changing colors. I’m sure the next few weeks will be amazing. I think MN is the best state in the midwest to enjoy all four seasons. Plenty of outdoor activities and enough sunshine and snow for everyone each season.

      My pick would be CO. Just love the state. Since I was younger I always said that’d be where I purchase my 2nd home.

      • mdista,
        I used to work with a guy who was from Colorado, and he always said he would move back there when he retired. He had nothing but glowing praise for the place. It’s a little too cold for my tastes, although I wouldn’t mind visiting.

      • Mdista, Colorado is a great pick. Mountains, alot of outdoor activities. Only problem is not enough water for me

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