Volume IV, Issue 5/ May 2010

Welcome Letter

Welcome back. This month I’m on the road again in Peru and Bolivia. I am writing you from the Bolivian city of Santa Cruz, where I had drinks with one of the rebel leaders of the separatist movement. The ‘rebels’ are desperate to remove the resource rich southern province from the tyrannical reach of Evo Morales and the socialists controlling the Bolivian government.

When most people think of South American rebels or ¨freedom fighters¨ they think of the fiery and scraggly ideologues like Che Guevara, or the coked up bandolier bearing FARC fighters of Colombia. The rebels I met with this week were nothing like that; they wore pressed khaki slacks, with polished slip-on calf skin loafers and talked about agricultural production and the efficient allocation of resources. But don´t let the outward civility belie the deadly seriousness of the situation. In the past 18 months Morales’ government has killed or imprisoned more than 50 people who openly agitated for a separate state. Several of the dead were foreigners who were accused posthumously of trying to overthrow Morales. The tension is palatable and after the meeting I felt compelled to conduct a full three hour surveillance detection route to ensure I had not attracted the attention of the Bolivian secret service.

Santa Cruz is a powder keg in search of a match. The Morales government gets more aggressive by the day and, in addition to nationalizing the assets of foreign companies, he is squeezing productive individuals to the point where they feel they have no choice left but to fight or flee. As I cleared immigration on my way out of Bolivia, I could not help but think how much it reminded me of Belgrade in 1991. I will be going back to Bolivia in a few weeks and will report again with a full Dispatch. In the meantime keep your eye on the headlines, and if you own shares of any company with operations in Bolivia sell them now! Take a look at the chart of Rurelec Plc, the London-listed electricity provider whose Bolivian assets were nationalized this past month. If you are still holding any miners with high hopes for rich Bolivian deposits, you may want to redeploy that capital elsewhere.

Peru and Bolivia, although neighbors, and once part of the same country, could not be more different. Peru is booming. The government is pro-business and the country is actively courting international investment. On this visit I met with a Peruvian family in the iron ore business, and the positive energy was contagious. Things are looking up in Peru and we think we have found some very interesting investment opportunities. We will also be covering Peru in much greater detail in an upcoming edition.

In this month´s edition of our roving rambling capitalist quest we review our portfolio of investments and recommended locales with an eye towards the near future. The world may have survived the financial crisis of ‘08 more or less intact, but the real economic crisis is yet to come. We can’t help but feel that the markets are not at a crossroads, as much as they are running full-speed towards a jagged cliff.

Rage Against the Machine

We know we’ve said this before and will likely say it again, but we remain convinced that calamity lies dead ahead. We are surprised it has taken this long for catastrophe to strike, both in the markets and in the economy. Remember, the economy and the markets are not one in the same. Our hypothesis is that we are witnessing the markets and the economy ¨rage against the machine¨. That is, they are fighting against an unnatural force.

In the case of the markets, the ¨machine¨ is the programmed ‘trading systems’ that buy and sell trillions of dollars of securities based entirely on mathematical formulas. Stocks, bonds, currencies and commodities are all traded within these ‘systems’ based solely on price movements and historical data. This explains why stocks may fall rapidly during a majority of the trading day (for good reason) and then have a sudden spike in the afternoon. Don´t let this incongruity bother you. Here is what is happening. In the morning, living, breathing human beings wisely dump stocks, sell the euro or buy bonds for a good reason (like the Eurozone disintegrating before our very eyes, just as we predicted back in 2007). So, stocks plunge and the Euro plunges and so called ¨safe assets¨ such as short term Treasuries spike. Then around three in the afternoon an arbitrary ¨trigger point¨ is reached and electronic buy signals kick in. These ¨trigger points¨ are determined by mathematical regressions or deviations from the long term averages, which are calculated by historical price movements. Since so many of these systems share the same analytical formulas there is a wave of programmed buying that sends prices back up.

But don´t let this volatility bother you. The zig-zagging of prices will slow the trend but it will not change the trend or change the fundamentals. As we wrote to our FLASH CABLE subscribers a few weeks ago, the ¨flash crash¨ of May 6^th was a good example of the effects these programmed trades can have on the markets. They can also provide us with some fantastic trading opportunities. According to the Wall Street Journal, over 70% of the daily volume on the NYSE results from programmed trading systems. The bottom line for us is that the trends we outlined as early as September 2007 are now unfolding before our eyes, and while it will not be a straight line, our portfolio is positioned for profit. These artificial interventions give our FLASH CABLE subscribers the chance for extraordinary profits, because with this service we have the ability to alert them intra-day.

In the case of the economy, the ¨machine¨ is government. Governments around the world are taking unprecedented, and what will eventually be seen as unsuccessful measures, in order to slow the inevitable economic reckoning resulting from a half century of excessive debt and spending at the household, corporate and government level. They may know it only prolongs the pain, but they don´t care as long as it gets them through the next election cycle.

Just like the programmed trades that send falling shares temporarily higher, government intervention sends economic data in the opposite direction, also temporarily. House prices fall until the government pours massive amounts of tax money into the system to ¨help¨ homeowners purchase homes. This artificial increase allows for government sponsored, or government corrupted economists to declare the worst is over; but, as we will shortly see that only lasts until the ¨stimulus¨ runs out and the inevitable trend continues. The same was true for the futile ‘Cash for Clunkers’ campaign, and it will be true for Germany´s short selling ban and any future government-sponsored folly.

The important lesson to learn is that these measures are irrelevant in the long term, but important in the short term because they do affect price movements and send false signals. We need to be cognizant of, but not fooled by, the artificial, the contrived and the increasingly volatile actions of both programmed trading systems and government intervention.

Our Portfolio

Our core portfolio continues to perform well. Our precious metals positions, US dollar allocation and our short positions have done very well in the last several months. Our long positions are all in the black and should do well throughout the next cycle. Even so, this month we are going to lock in some profits and increase our cash position for the next phase. As both speculators and investors we recognize that crisis breeds opportunity, and therefore we want to be poised to deploy ready cash as we did in the fall of ‘07 and the winter of ‘08. As the financial crisis morphs into a sovereign debt and general economic crisis we will be well prepared.

Our Places

All of our subscribers recognize that Without Borders is much more than a financial publication. We are at our core a freedom publication. Financial independence is merely one of the more important elements of personal freedom but it is not an end in itself. Far more important is the ability to live free and have control over all elements of your life.

Our search for individual freedom and enlightenment is the driving force behind all that we do. Unfortunately, we live in a time where the global trend is against personal freedom and it is only going to get worse as governments begin to crumble. Throughout history the period just before the death rattle of a nation state is marked with aggression and often violence. Therefore it is incumbent on us to find the best places to spend our time, either as a primary residents or as a place to ride out the storm should it be impossible, or unwise to remain where you are. At last count we have written dispatches from nineteen different countries since we first started publishing Without Borders in 2007. We only write about places that have something to offer and there are many places where we arrive with high hopes, only to be disappointed with what is on offer after spending some real time there and analyzing the way personal freedom and private property are treated.

This month we will review the countries and places which had topped our list of potential second homes. As immigrants ourselves it saddens us to note that many of the places we really like are trending in the same direction as the US and Europe. Again this does not mean you cannot benefit from spending time in these places or investing in them but it does mean that we need to be aware of trends and outright changes. As Intellectual Adventurers we need not despair, as we are geographically agnostic and always seek the path that provides the most promise, yet we must be mindful that trends move very slowly and then all at once. The megatrend we talk about more than any other is the trend away from liberty towards tyranny, and we are preparing for the trend to gather momentum in the very near future. We must remain in a posture that allows us to act ahead of the crowd both in the markets and in our personal lives. We want to watch the riots on TV, not out of our living room window. We want to plant the garden before the grocery store shelves are bare. And, most importantly we want to enjoy the company of those who add positive value to our daily lives.

On a personal note, our free market band of brothers keeps growing. In the last month I have had the pleasure of breaking bread or popping corks with over twenty five Without Borders subscribers. Some form the nucleus of our ‘rational wing of the lunatic fringe’ here in Uruguay, while others were passing through. A special thanks to our visitors from Vancouver who kindly brought Olympic souvenirs for the boys. They were a big hit at school. Recently returned from Australia and New Zealand, another couple now occupy the guest quarters on our farm. As we compare notes of our recent travels, our world shrinks while our knowledge grows. They wrote an excellent ebook which covers relocating temporarily or permanently to New Zealand. We highly recommend it. You can get your own copy HERE.

Friend and respected resource analyst Carlos Andres of The Frontier Research Report is also going to be back in Uruguay for a while on his way to Brazil and Chile so we plan on spending some quality time with him discovering the latest opportunities in the resource stock market. We hope you are getting as much out of your free subscription to his newsletter as we are. For investors interested in the powerful returns that can be found in small resource companies the three must read publications each month are the International Speculator, The Casey Energy Report and The Frontier Research Report. If you consider yourself a learned global speculator you should be tracking the progress of these intrepid analysts as they hunt for proverbial elephants. Their advice has made me many multiples of the subscription price year in and year out.

There is also another subscriber-turned-friend, and soon to be investment partner, who I have now had the pleasure of meeting several times, and always in a different country. Based between Zurich and London, he has holdings in as many out of the way places as we do. As we smoked cigars and sipped Scotch on a Bolivian sidewalk, we found out that we share a similar Weltanschauung and were born on the same day exactly ten years apart. [space]Encounters like these, and the friendships that result, are what make Without Borders so unique.

Until next time thanks for subscribing, and please keep us posted on your personal life Without Borders.

Yours in Exploration,

Fitzroy McLean

Chief Bon Vivant and Speculator

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