May 31, 2016
Johannesburg, South Africa
Shocking. Astonishing. Jaw dropping.
There’s just no other way to describe how cheap South Africa is right now.
Between the worldwide decline in commodities prices, and a major crisis of confidence in the national government here, the local currency (South African rand) remains at the lowest level it’s been… ever.
And that’s made nearly EVERYTHING here dirt cheap if you’re spending foreign currency… especially US dollars.
Just doing something simple like eating out at a restaurant or going to the grocery store can be startling.
Once you do the math and convert the prices back to US dollars, it almost seems like you’re missing a zero.
This also carries over into many asset prices, including certain areas in the property market.
Here in Johannesburg, I saw an amazing home for sale in one of the nicest, upscale neighborhoods with an asking price of about $515,000 US dollars.
Now, half a million bucks might not sound terribly cheap-- until you find out what you’re getting for the money.
The house is an enormous seven-bedroom compound of nearly 13,000 square feet.
Pool. Courtyard. Fountains. Private chef’s kitchen. Parking for eight. Separate home for live-in staff. Wonderful neighborhood with top schools, shops, and restaurants.
Something like this would go for at least 20 times that price in Los Angeles, and 40 times the price in London.
Much of this price mismatch is due to the currency anomaly-- that the South African rand is so undervalued, AND that the US dollar is so overvalued.
Perhaps this is most obvious when looking at the travel package I just bought.
Longtime readers know that I’m a big fan of special “round the world” fares that major airline alliances offer.
I’ve written about this before-- all three of the major global airline alliances offer special fares for passengers when you travel completely around the world.
A typical journey might be, for example, Los Angeles to London to Singapore to Sydney and back to Los Angeles again.
That itinerary takes you all the way around the world, and you’ll pay one simple fare that’s usually quite attractive.
Typically the round-the-world fare is calculated based on the country where you depart.
So if your journey starts and stops from London, your fare will be quoted and priced in British pounds.
But if your journey starts and stops in Los Angeles, your fare will be quoted and priced in US dollars.
The strange thing is that when you convert the currencies, the amounts won’t match even though the journey is essentially the same.
In other words, LA-London-Singapore-Sydney-LA costs $11,400, while Sydney-LA-London-Singapore-Sydney costs AUD 13,600, or about $9,875 USD.
That’s more than a $1500 difference.
This doesn’t make any sense since both itineraries are comprised of the exact same flights, i.e. Sydney to LA, LA to London, London to Singapore, Singapore to Sydney.
The flights are simply in a different order. That’s all. The price should be more or less the same.
And yet, due to these major anomalies in the currency markets, there are major differences in the fares.
Here in South Africa, I’ve just booked a business class ticket that goes from Johannesburg to Asia, then the US, Chile, Madrid, London, and back to Johannesburg.
The price I paid was 70,000 South African rand.
But due to the rand being near it’s all-time low, that’s the equivalent of just $4,500.
To put this in perspective, the same itinerary starting and stopping in the US costs about $12,500 in business, and over $6,600 in economy class.
Crazy. I paid 30% less to fly in business class for the exact same flights that someone would pay in US dollars to fly in economy class.
Clearly this makes no sense (but I’m happy to take the deal).
The reason is obvious: the rand is undervalued relative to the US dollar.
Ten years ago it was the opposite: the US dollar was deeply undervalued relative to other currencies.
Oil was expensive, and major commodities exporters from Brazil to Australia, and even here in South Africa, had overvalued currencies.
Now the pendulum has swung in the other direction.
Commodities prices have plunged, and those same exporters are experiencing major economic slowdowns. Their currencies have all been punished.
Undoubtedly the right equilibrium is somewhere in the middle.
But markets rarely find the equilibrium. They almost always overcorrect.
So now the rand has plummeted and become absurdly weak, while it’s the US dollar that has become extremely expensive.
Sure, it’s possible that the dollar becomes even stronger (and the rand weaker).
But these things routinely go in cycles, and there will be a correction. There always is.
So anyone who owns US dollars has an opportunity right now to trade overvalued pieces of paper for undervalued real assets… as long as you look abroad.
Part of being a Sovereign Man is having a global view-- expanding one’s thinking to the entire world.
I’ve written before about how our company is acquiring or has already purchased productive farmland in central Chile, deeply undervalued, profitable businesses in Australia, and real estate in Colombia.
These are all REAL assets. And as long as central bankers continue to print paper money without restraint or regard for the consequences, it’s critical to own something real.
Gold and silver are also real assets, and both are historically inexpensive relative to the US dollar.
Bottom line: take advantage of this opportunity to trade your paper for something of value. It won’t last.