Published April 04, 2014

The Volcker Rule and You: What’s Your Bank Doing with Your Money?

Dear Reader,

What happens to your money when you put it in a bank?

I remember when I was five years old, watching in awe from the passenger seat of our family station wagon as my mom put my dad’s paycheck into the plastic capsule at the automated teller. She’d place the capsule in the vacuum tube, press a button, and presto: the capsule would be whisked away, Jetsons style.

A minute or so later, the capsule would return with something for everyone: cash for my mom, a lollipop for me, and a biscuit for our cockapoo. Banks were awesome!

As a Casey Research reader, you probably know that (A) banks aren’t awesome and (B) banks don’t keep your money in a vault for safekeeping; they invest it. The much-awaited Volcker Rule that took initial effect on April 1, and will continue to phase in over the next couple of years, changes what banks are allowed to do with your money.

The Intent

The rationale behind the Volcker Rule goes like this:

Banks are FDIC insured—meaning taxpayers are ultimately responsible for any business-threatening losses a bank incurs.

Since banks receive this generous public subsidy, they should stick to activities that benefit the public—like collecting deposits, lending, managing the nation’s payment system, and other low-risk activities that grease the wheels of capitalism.

Therefore, banks should immediately stop engaging in exotic and risky activities—like trading with customer funds—because doing so allows them to rake in profits when their trading strategies work out and to stick taxpayers with the bill when their strategies blow up.

The case seems sound, and the logic has a certain linear appeal. Though I would vehemently argue that FDIC insurance is the root of the problem. Eliminate it, and depositors would have to (gasp!) learn about a bank before entrusting it with their money. Reputation would stop banks from making risky or fraudulent investments. Just like your dry cleaner doesn’t need a law to tell him not to loan out your jeans to another customer, banks that want to retain customers would treat your property with respect.

But I realize that the FDIC ain’t goin’ nowhere... so let’s analyze the Volcker Rule with that reality in mind.

The Volcker Rule aims to force every financial business to make a choice—to be a bank that collects deposits and makes loans, or to be an “other” financial entity that makes riskier investments. You can’t be both.

Economic history buffs will recognize the Volcker Rule as similar to the infamous Glass-Steagall Act, which separated traditional banking from investment banking. Contrary to popular belief, Glass-Steagall was not repealed by Bush, but was whittled down to impotency over several decades and finally put out of its misery by the Clinton Administration in 1999.

The Volcker Rule aims to reinstate some of the principles of Glass-Steagall by restricting what banks can do.

Proprietary Trading

Prop trading is when a bank tries to profit by trading with its “own” funds. I put “own” in quotation marks because the bulk of any bank’s funds is actually customer deposits.

Bank traders’ performance is often the stuff of legend, in no small part because they know what their clients are buying and selling, which gives them an unmatched view of the market. This, arguably, is why Bank of America, JPMorgan, and their ilk can generate hundreds of millions of dollars from trading in a quarter without a single day of losses. Their traders aren’t cut from superior cloth—they simply have more information than you and I do.

But everyone makes mistakes, and bankers have made some doozies. Like when the “London Whale” of JPMorgan lost a whopping $6 billion trading derivatives in 2012. That’s the kind of reckless stuff the Volcker Rule is supposed to prevent in the future.

Easier said than done. Banks aren’t going to stop investing—that’s their business model. They take customer deposits, invest them in securities, pay customers a portion of the proceeds as interest, and keep the rest.

That being the case, the Volcker Rule’s challenge is to separate “sound” investment from “speculation.” Its solution is to prohibit banks from “short-term” trading, which it defines as holding a financial instrument for less than 60 days.

A decent idea on its own—but the evil is in the exceptions.

Exception #1 is that the Volcker Rule permits short-term trading if it hedges risk. So, as long as a trade offsets risk from elsewhere in the bank’s portfolio, it’s A-OK.

The problem is that one man’s speculation is another man’s hedge. Imagine your banker is short $100 million worth of Russian rubles. Ralph the regulator catches wind of it and says, “Hey, stop speculating!” To which the banker will reply, “I’m not speculating. I have a $100 million loan outstanding to a Russian oil company. If the ruble tanks, that business tanks and won’t pay my loan back. My ruble short is a prudent hedge.”

Returning to our London Whale for a moment, JPMorgan claimed its $6 billion losing trade was actually a hedge gone wrong. So would the Volcker Rule have even prevented that disaster—which remains the fifth-largest trading loss in history?

The unsatisfying answer is, “Maybe.” The Volcker Rule narrows the definition of a hedge by requiring bankers to specifically identify what risk a hedge will mitigate, demonstrate the inverse correlation, and monitor its efficacy.

That’s no doubt a hurdle to bank speculation—but one that a determined banker should be able to clear. Banks have gargantuan investment portfolios—if an unscrupulous banker wants to bend the rules, he need only identify which of the bank’s hundreds of thousands of investments has a sufficient inverse correlation to the trade he wants to make.

Voilà. What was a speculation is now a hedge—and is therefore allowed under the Volcker Rule.

Market Making

Exception #2 is market-making—which is when a bank maintains an inventory of securities for customers to buy and sell.

Think of it this way: your grocery store is a market maker. If you’re craving cornflakes, you can go down to Whole Foods and a box will be waiting for you in the cereal aisle. Whole Foods doesn’t wait until you get to the store to call up Kellogg’s to order a box.

Banks do the same with stocks and other securities: they anticipate client demand and buy enough securities to meet that demand—which facilitates liquidity and lowers transaction costs.

Market-making is perfectly acceptable under the Volcker Rule as long as it doesn’t “exceed reasonably expected near-term demands of clients, customers, or counterparties.”

Whenever you see that big “R” word in legislation—”reasonably”—you know there’s some serious wiggle room. Who decides what’s reasonable? What happens if a bank overestimates demand? Did it do it on purpose? Can you prove it?

All unanswered questions that open up opportunities for banks to trade what they want, then justify it later.

The net effect of these loopholes is that regulators will have to judge whether each of a bank’s umpteen-thousand trades per year is a hedge, market-making activity, or “speculation.” Good luck with that. Regulators should be able to catch the most egregious violations, but the bulk of activity will occur in a gray area, where judging a trade’s purpose comes down to intent.

Short of hooking up traders to lie detectors, the Volcker Rule looks almost impossible to enforce.

Who Loses?

The “Big 5” Wall-Street banks—Goldman, Morgan Stanley, Bank of America, JPMorgan, and Citigroup— generate $44 billion in trade revenue per year. Goldman Sachs makes 48% of its revenue from trading, Morgan Stanley 27%, and the other three less than 10%.

We know the Volcker Rule will hurt all of their trading businesses—we just don’t know how much. Several banks have responded by spinning off their prop trading businesses into separate hedge funds. And there are signs of an exodus from banking, with talented executives leaving for the less-regulated world of hedge and private equity funds. The highest-profile exec to jump ship so far is James Cavanaugh, who was supposed to be Jamie Dimon’s heir apparent at JPMorgan, but decided to join private equity firm Carlyle Group instead.

That both businesses and bankers are fleeing Wall Street banks is a good indication that the Volcker Rule isn’t completely toothless. But only time will tell exactly how much it will hurt big banks.

One more thing for those of you wondering why behemoths like Goldman Sachs and Morgan Stanley are subject to the Volcker Rule even though they don’t act as traditional banks. After all, no one I know has a Goldman Sachs debit card or a Morgan Stanley checking account.

The answer is that only certain types of entities were eligible to receive bailout money from the US government during the 2008 financial crisis, and Goldman and Morgan didn’t qualify. So they became bank holding companies to suckle at the taxpayer teat. Now they have to follow the rules for banks.

What Exactly Is the Point?

The bad joke here is that the Volcker Rule wouldn’t have prevented the financial crisis. Proprietary trading losses may have contributed to the crisis, but the primary culprit was mortgage-backed securities (MBS) that turned out to be much riskier than bankers expected.

The Volcker Rule discourages banks from making risky investments… but the MBS that destroyed several institutions were rated AAA, meaning they were supposedly the safest investments around. Some bankers who bought them were trying to invest conservatively—otherwise they wouldn’t have invested in top-rated securities. Other bankers knew the MBS weren’t as safe as advertised. Either way, the Volcker Rule doesn’t solve the problem. I think Mr. Volcker’s face says it all:

The real question is: Is your money safer in the bank with the Volcker Rule than without? There’s no concrete answer, but given that the loopholes are big enough to drive Jamie Dimon’s private jet through, I would say no.

And that’s without even touching on the bigger question of whether legislation is effective in the first place. Do teenagers drink less because of the 21-and-older law? No. But we can save that can of worms for another day.

Keeping on the banking theme, I’ll now pass the baton to Andrew Wagner, an analyst at Mauldin Economics, who sees smaller community banks as an interesting investment opportunity. Then you’ll find a fun and entertaining article from Alex Daley about why he moved to Puerto Rico.


The Community Bank Comeback

Andrew Wagner, Junior Analyst, Mauldin Economics

It’s been more than five years since the passage of the controversial Troubled Asset Relief Program (TARP) bailout package that handed out more than $200 billion to over 700 financial institutions. Since then, business has been good for America’s big banks. Last year, the banking industry posted a record $154.7 billion in profits. Wells Fargo & Co.—the most profitable US bank—raked in more than $20 billion by itself.

Life isn’t as good for the small fries. In the first half of last year, 566 banks lost money, and 96% of them have less than $1 billion in assets. Likewise, 166 banks have more bad loans than capital, and 96% of them have less than $1 billion in assets too. Of the 24 banks that failed last year, the largest was the $3.4 billion First National Bank of Edinburg, TX. All other failed banks had less than $500 million in assets.

We can see the disparity by comparing the KBW Regional Bank ETF (KRE) with XLF, an ETF that measures the performance of the biggest financial institutions. As the chart below shows, big banks have blown small ones away:

Why the chasm? First, many regulations designed to rein in too-big-to-fail banks apply to all banks. Small banks usually must comply with the same rules as big ones, even though the former pose nowhere near the threat to the financial system as their behemoth counterparts. Big banks have big budgets, so they can absorb the costs of compliance much more easily. Not to mention the fact that community banks don’t get the benefit of taxpayer-funded risk protection like TBTF ones do.

Second and more importantly, low interest rates hit community banks especially hard. Because of their focus on traditional lending and deposit gathering, community banks derive 80% of their revenue from net interest income. By comparison, non-community banks—which have a more diverse range of revenue generators—earn about 65% of their revenue from net interest income. So when interest rates are low, as they have been for the past five years, community banks find it more difficult to pass on those low rates to their deposit customers.

The Community Bank Advantage

With interest rates still near record lows, it’s an inevitability that they’ll rise. When they do, investors should look long and hard at community banks.

Consider this: community banks that have been in operation for more than 25 years have a better return on assets than non-community banks over the same time period. Further, community banks can afford to offer better rates and better service for small businesses, because they tend to be more “relationship” bankers and less “transactional” bankers.

What that means is that community banks usually have specialized knowledge of their local community and their customers. Because of this expertise, they can base credit decisions on local knowledge and nonstandard data obtained through long-term relationships, rather than numbers-based underwriting. That’s a significant advantage community banks hold over their larger counterparts.

The average size of a community bank is about $165 million in assets and less than 40 employees. They’re often privately owned and locally controlled. But even when community banks have public shares, they are usually not traded on major exchanges.

What does that mean for you as an investor? That you might be able to find excellent investment opportunities in community banks by looking in your own backyard. And if you look in your backyard and don’t find any good candidates, here’s a list of the best-performing community banks of the last three years. Be sure to do your own due diligence, if any of them pique your investment interest.

Top 10 Community Banks and Thrifts Ranked by 3-Year Average ROE
Rank Institution Ticker Location Total
Assets
($M)
Market
Value
($M)
3-YR
ROAE
Avg. (%)
1 Citizens Financial Services OTC:CZFS Mansfield, PA 915 160 17.8
2 Penns Woods Bancorp NASDAQ:PWOD Williamsport, PA 1,212 231 15.8
3 Southern Missouri Bancorp NASDAQ:SMBC Poplar Bluff, MO 950 116 15.4
4 Access National Corp. NASDAQ:ANCX Reston, VA 847 175 15.1
5 Hingham Institution for Savings NASDAQ:HIFS Hingham, MA 1,226 164 15.0
6 Minster Financial Corp. OTC:MTFC Minster, OH 377 46 15.0
7 American Bank OTC:AMBK Allentown, PA 504 44 14.6
8 Cass Information Systems NASDAQ:CASS Saint Louis, MO 1,287 641 14.6
9 Malaga Financial Corp. OTC:MLGF Palos Verdes Estates, CA 705 61 14.6
10 Merchants Bancshares NASDAQ:MBVT South Burlington, VT 1,725 203 14.6

Why I REALLY Moved to Puerto Rico, and You Should Too

Much fuss was made yesterday when my colleague Nick Giambruno released a report outlining the incredible tax benefits to be had, by Americans no less (the only people in the world to be taxed back home even when we leave), in Puerto Rico.

As you may have seen, that report was based in large part on my personal experience relocating to the island, a process I started in earnest last October. And, yes, I am here, writing you at this moment from beautiful Palmas Del Mar—if you ask me, the most beautiful piece of coastland on the island, but only just being rediscovered after a long hiatus from the spotlight.

What can I say, I love a comeback story, especially when it looks like this…

Yes, my decision to move to Puerto Rico was influenced by the tax incentives. But they were only one contributing factor. Why I chose to land in Puerto Rico is much more nuanced than that.

It all boils down to one thing: Opportunity.

Everyone likes to save on taxes. That’s a given. But if I’ve learned one thing in my short business life thus far: it’s that it’s always better to make $4 than to save $2.

No disparagement intended to Ben Franklin, but a penny saved is not a penny earned. Not if, in the time and effort saving it took, you could’ve created two or four or eight more pennies for yourself.

I’m here in Puerto Rico because I believe it will provide me with the opportunity to make many more pennies.

Here’s why.

Infrastructure and Convenience

Unlike many other low-tax jurisdictions, Puerto Rico is in the unique position of having been a US territory for a century now. That means all sorts of things, from familiar legal systems to easy travel. But one of the most surprising implications is that US companies and even certain US government agencies have a presence down here.

My town is a few miles down the road from the world’s fourth-busiest Walmart. There is a Costco here. Closer, in fact, than the one we had in Vermont. There’s also a Cartier—I’m not much of a jewelry buyer, but you get my point. Many if not most of the conveniences of the US are to be had here.

And the same goes for far more than shopping. The highways across the island are much like in the US, including, unfortunately, the traffic into and out of the big city. But I’ll take that any day over the frightening, windy back roads that litter Jamaica, Grenada, St. Kitts, the Caymans, and many of the other places considered before settling on this place. And gas here is just a tiny fraction more expensive than back in the States.

Of course, roads rarely matter for me since I work from home, where my simple Internet connection is at least 10 times faster than the one in the office in Vermont—courtesy of Liberty cable. My cell phone, on AT&T, works much better here too.

What’s not the same here (they have the FBI, DEA, etc.) is at least comfortingly familiar (courts, MPH speed limits, and AutoExpreso, i.e., EZPass). But most importantly, it’s fully developed. There’s no grass hut customs office, no lack of a UPS store—the entire infrastructure needed to run a business well is here.

We tend to lose power often, yes. A few times each month for a few hours at a time. And electricity rates are about twice as high as in the States, though we use so much less of it here without any need for heat and barely any for AC. Still, the power bill can be a drag. But not everything can be perfect, even when the weather is:

86 and sunny. All year. ‘Nuff said.

Though my belly says differently, I like to exercise. I spent the last decade of my life split between some of the rainiest and snowiest locations in the US. And I hate gyms.

Since coming here, I’ve lost 14 pounds and counting, just from getting outside to swim, walk, golf, and play tennis—activities that have been closed (to me) most of the year, and that apparently constitute enough caloric burn to make up for my awful, airport-heavy diet. I have more energy, I feel better.

Many people are looking for that same lifestyle. Which, ironically, makes it far easier to recruit talent to the island than to many mainland destinations. I’ve already convinced a handful of people to make the move, and I’m not even actively hiring down here just yet—I’m waiting for some red tape to clear.

If you’re thinking of starting or expanding a business, think carefully about whether it will be easier to recruit people to the tax-free (state tax-free only, mind you) zone in Albany, NY, to the expensive and tiny island of St. John, or to a country bigger than Rhode Island or Delaware with year-round sunshine.

But it’s not like I need to recruit that many people here. There are already plenty here.

Labor, Services and Networking

The other day, during one of those intermittent power outages, I took the opportunity to swing up to Sam’s Club and pick up a few things—all commercial sites, and most high-end homes, have generators to cope. $400 worth of crap I didn’t really need later, I was waiting in line at the checkout, as the obligatory pile of cash was counted out at the register in front of me (almost no one here uses bank accounts or credit cards, and it’s part of their well-known fiscal troubles…).

While waiting, I told my wife about my struggle finding qualified PHP developers. These are jobs that pay $40-50/hour, i.e., $60K to $100K/year, and way up from there. Yet it takes us months to hire for them. The woman behind me in line must have overheard our conversation, because she started asking me if I worked for Palmas and were we hiring—she’d applied a dozen times already.

She, like many others here, was looking for work. The official unemployment rate is 15%. According to the CIA World Factbook, it’s 26%. The median household income is also a relatively low $18,000/year. That’s double most places in the Caribbean, but still quite low compared to the States. Looked at societally, that’s bad. For a business operator, though, it has distinct advantages.

Yes, with high unemployment comes crime. But the reputation this island has garnered in the States is undeserved. The crime rate in San Juan is about the same as in Baltimore, Detroit, Cleveland, or Atlanta. Any large city has crime-ridden areas. But like those cities, San Juan has wonderful neighborhoods too. And it’s surrounded by some beautiful suburbs. Go into the country, like I did, and it’s calm and quiet and borderline idyllic.

Our community is triple gated (community, development, building), which garners comments from friends and family who visit. But it doesn’t need to be. It reminds me of the much more unsightly seven-foot walls with razor wire and broken-glass tops in Spain’s posher areas, which are 90% to convey status. Once you understand the small cultural differences, not moving here because of crime is like not moving to Missouri because of St. Louis, to Florida because of Miami, or to Tennessee because of Memphis.

When you do go to hire, employment laws are close to the same here as in the States. They have Social Security, Medicare, and worker’s comp. Workers from the mainland can come here without a visa (and vice versa). It’s familiar, yet there is a big labor surplus holding down wages.

I’ve been thinking about starting a call center down here—just searching for the right person to run it (I’ve got a job I love and don’t need another one)—as it’s an ideally suited location:

  • A highly educated population. 94% literacy rate (India is 78%; China 96%). A 67% high school graduation rate (about the same as Florida and Georgia; well above Nevada, Louisiana, Mississippi, etc.). 22% of the working population have college degrees, not far behind the States’ 33% average and well ahead of many of those same southern states.
  • Better average English skills than India or other common call center locations. 50% English-speaking population, versus 21% in India. In reality, I rarely meet anyone who doesn’t speak enough to get along fine with me, a dolt who has yet to learn the language here. But for working purposes, about half the population speaks English.
  • No time zone issues. It’s the same time here as Florida or New York (though here they are smart enough not to observe the idiotic tradition of “daylight savings”—it’s the same amount of daylight here all year round and I never have to go to or leave work in the dark, let alone do both for months at a time).
  • And plenty of available labor to expand rapidly. The population of Puerto Rico is 3.7 million, a number that is slowly shrinking as more and more people emigrate to the US in search of work—something they can do freely as all Puerto Rican citizens are US citizens.

One of these days—hopefully soon—I’ll find that call center operator who will work for sweat equity to get things off the ground, or the bootstrap customer to pay them. But the labor is there.

And not just labor for lower-skilled work, either. The island has a very large skilled labor population, too, thanks to that high college degree rate. There are hundreds of law offices, accountants, engineers, and other professional firms. Investment banks, construction companies, you name it. The colleges here are strong in math and business. And virtually any service provider or knowledge worker you’d look for in any other major metropolitan area can be found here. I’ve even got investment bankers knocking on the door.

Then there are the other entrepreneurs. One of the things that attracted me most to Puerto Rico wasn’t the tax incentives themselves, but the idea of living near and collaborating with so many like-minded people. And that’s proven as good or better than I hoped. Between everyday social activities and organized mixers like the meetings of the “Act 20/22 Society,” there has been a non-stop barrage of new people to meet, all of whom are as entrepreneurial as I am. Business ideas floated around dinner, hiring tips over golf, late-night real estate investment discussions, dozens of emails to share investment ideas—all just this week.

The one thing that really stuck with me when I read Rich Dad, Poor Dad many years ago was the part that if you don’t hang around with the kind of people who talk about money and how to make money, then you’ll never learn how or find opportunities to make more of it. In life, I have always looked for those kinds of communities, and every place I’ve lived I’ve found small pockets of like-minded people. But here, it’s like I just struck pay dirt.

Ease of Starting and Operating a Business

The same factors that make hiring in Puerto Rico easy make starting a business simple here too.

I fully intend to learn Spanish—it’s good for me, and good for the kids too. But I cannot be expected to do so in a matter of months, and certainly not as a prerequisite to doing business. Thankfully, that’s not been an issue at all.

All federal laws and forms are available in English, for one. Just about everyone you deal with in the business and government world speaks enough English to help you, and the majority, especially the younger population, speak it very well. Unlike farther-flung Spanish-speaking countries like Belize and Panama, running into someone at the local government office who cannot speak enough English to help you rarely happens here, except far outside of the cities. When it does, there are lawyers and accountants everywhere to help.

LLCs, partnerships, corporations, and all that other stuff is effectively the same here as in the US. Payroll services can be had from US companies like ADP or from local ones. Same with insurance for your business, cars, health, and more. Banks are a little slower than in the US, but offer the same services like ACH, wires, credit lines, online access, etc. It’s familiar, simple, and not overly burdened with red tape—you can even set up a corporation online in a few minutes.

Sure, there are some tough parts about starting a business here. For one, they’ve yet to come to terms with virtual work, and the idea is at direct odds with one of their most stubborn bureaucracies: the town office permit folks.

On the US mainland, at least anywhere I have lived, you do not need any special permit to use your home as an office, only as a retail business. Want to found an Internet startup from your garage? No problem. Want to sell antiques from your front lawn? Problem. In Puerto Rico, the model is backwards. To set up an office, you must register it with the town. The towns inspect your office to make sure it is real. They contact your neighbors to make sure they are OK with it. And they come back regularly to do it again and again.

That struck me as odd at first. But the more I considered it, it’s not much different than in the States: to own a business in Vermont, I needed half a dozen forms from half a dozen offices and paid a fee for each one. I didn’t have to pay a fee to get a sales and use tax permit in Puerto Rico, though. They don’t want to get in the way of my ability to pay taxes, as so many US agencies seem to want to. Instead, they are focusing on a different set of problems. Ones unique to a largely urban island with high unemployment. Like trying to stop the streets from looking like a Turkish bazaar as they do elsewhere around the Caribbean—something they’ve managed very well here.

The quirks are just different from the quirks many of us grew up with, because the circumstances are different. But it’s the big things that matter—things like tax policy, access to smart people, services, technology, and more. And there, Puerto Rico scores very highly.

And, Yep, Lower Taxes

I work hard for my money. I work hard to find great investments that translate into profits. And I work hard to run my businesses. And the more of each I get to keep, the more I earn next year by investing it further.

Hopefully, growing up, someone taught you about the magic of compounding interest (I got it from my dad, who more than once said, “Hey, read this article on mutual funds in Esquire.”) Well, one of the things almost none of those lessons include is the effect of taxes. When you pay taxes on your investment income, it decreases dramatically over time. The longer you can defer taxes, the better for your pocket book. If you can reduce them or remove them entirely, the benefits are huge.

For instance, say you invest $100,000 in a 5% CD that compounds yearly. If you pay 35% tax on the interest each year, and reinvest the rest, then at the end of 20 years you’ve earned $89,583 in interest. Not bad for an incredibly conservative investment.

However, take those taxes on interest down to 0%, which Puerto Rico’s new tax incentives provide, and you earned $165,329, or 85% more income. That’s a pretty big tax penalty the US imposes, and that many more years you have to work before you can retire.

If you live in California, where the combined tax rate for some is now in excess of 50%, the effect is even more dramatic. You would have only earned $63,861, losing out on over $100,000 in earnings. That’s enormous!

Yes, you could earn $165K inside an IRA thanks to tax deferral. But then try withdrawing it. At 39.6%, federal taxes chip it right down to $99,858. Get stung by that California 50% and you’re even worse off again.

Now, here’s the real kicker. In order to invest that $100K back home, you already had to pay taxes on it —they don’t let you put nearly that much in an IRA or 401(k) each year. Before you paid those payroll taxes, it was probably $165,000 (assuming the same 39.6% in federal taxes). If instead you earned that income in Puerto Rico at a net effective tax rate of 15%—which can be easily achieved with Act 20 benefits for your business and a 4% tax on earnings—then you would have $147,283 to invest to begin with.

After 20 years at 5%, you’d have saved $243,500 for your retirement—that’s nearly three times what you would have earned in the United States, getting taxed again and again and again. Or about 2.5x what your IRA or 401(k) would have netted you.

It’s not about how much money you have to invest. It’s how much you have to reinvest. And a big part of that is how much you have left over after taxes. Here in Puerto Rico, you could have much more left over, and many more opportunities to invest.

The New Land of Opportunity

To me, this is the new land of opportunity. There is a critical combination here of an underutilized but well-educated workforce, a culture that is obviously changing for the better, and a tax regime that is committed to letting entrepreneurs reinvest more of our money back into our businesses.

Add those three together, and there would be something good going on down here. But there’s another factor: The Internet. With the ability to do many jobs from the convenience of anywhere, thanks to Skype, GoToMeeting, Gmail, Dropbox, and thousands of other tools that finally make the home office a reality, the opportunity is enormous. Computer programming. Asset management. Graphic design. Public relations. Marketing and advertising. Research and development. Information processing. Customer service. The number of service-based businesses that can operate from here is amazing—far more potential than the manufacturing sector ever brought.

Puerto Rico is off to a slightly slower start than its predecessors in India, Singapore, Hong Kong, and even around Latin America in recognizing the value wooing the service economy can bring to its people. However, it is on the right course now and has some tail winds to help it catch up—advantages that no other nation on earth can provide to the world’s largest market of investors and entrepreneurs, Americans.

It’s hard for me to sum up all the things I like about Puerto Rico in a few pages—and there’s no way the editors here will let me go longer, lest I bore you to death. But if you made it this far, then I encourage you to go one step farther. Consider joining me and your like-minded investors and entrepreneurs in Puerto Rico. Join me and the 200 or so other pioneers here in the new land of opportunity. Read my firsthand account of how, right here. And feel free to ask me any questions you’d like—in the comments below, or via email.


Friday Funnies

Two brothers recreated old family photos as a gift to their mom. Here are a few of the best ones… you can see them all here.

Thank You!

A union boss walks into a bar next door to the factory and is about to order a drink to celebrate Obama’s victory when he sees a guy close by wearing a Romney for President button and two beers in front of him.

He doesn’t have to be an Einstein to know that this guy is a Republican. So, he shouts over to the bartender so loudly that everyone can hear, “Drinks for everyone in here, bartender, but not for the Republican.”

Soon after the drinks have been handed out, the Republican gives him a big smile, waves at him, then says, “Thank you!” in an equally loud voice. This infuriates the union boss, so he once again loudly orders drinks for everyone except the Republican. As before, this does not seem to bother the Republican. He continues to smile, and again yells, “Thank you!”

So just to make his point one more time, the union boss once again loudly orders drinks for everyone except the Republican. But, as before, this does not seem to bother the Republican. He continues to smile, and again yells, “Thank you!”

Frustrated, the union boss asks the bartender, “What the hell is the matter with that Republican? I’ve ordered three rounds of drinks for everyone in the bar but him, and all the silly ass does is smile and thank me. Is he nuts?”

“Nope,” replies the bartender. “He owns the place.”


That’s It for This Week

Watch your inbox next week for our world premiere of Meltdown America, a Casey Research-produced, half-hour, documentary-style video that, I think, is extremely eye-opening.

It not only shows the experiences of three men—ordinary businesspeople—in the crisis-ridden countries of Zimbabwe, Argentina, and Serbia. It also drives home the fact that:

  1. these things don’t happen overnight;
  2. most people don’t see a crisis coming until it’s too late; and
  3. it can—and most likely will—happen here, in the good old USA.

Commentators in the film include Doug Casey, former US Comptroller General David Walker, former National Security Advisor to the Canadian prime minister Dr. André Gerolymatos, former Wall Street Journal financial reporter Jeff Opdyke, and more.

The video will be free to watch for you, so make sure you catch our email.

Have an excellent weekend!

Dan Steinhart
Managing Editor of The Casey Report