How Nicaragua is Benefiting from the Economic Crisis

The US stock market did a whole lot of nothing again last week…or worse than nothing. The Dow Jones Industrial Average slumped nearly 400 points to 10,303 – plunging the Blue Chip average back into the red for the year. The Dow is also in the red for the last five years…and the last ten years.

This thing has been a complete bust!

Back in 2000, most investors believed US stocks to be an all-weather capital-accumulation machine. Ten years later, most investors have no idea what to believe. The buy-and-hold strategy that offered such promise ten years ago has delivered far more disappointment than delight.

As a result, many folks are scouting around for a better mousetrap. Some investors are responding to the dismal performance of big cap US stocks by buying small cap US stocks. Other investors favor emerging market stocks; others buy gold; others buy rare cars; and still others buy beachfront real estate.

Down here in Nicaragua, your editor has spent the last couple of days in the company of Daily Reckoning readers who are here to kick the tires of Rancho Santana, a beachfront development owed by the publishers of The Daily Reckoning.

What’s known about this speculation is that the beaches are pretty, the weather is warm…and the sunsets are gorgeous. What’s not know about this speculation is…well…everything else.

A short list of the unknowns would include:

1) The trajectory of political risk in the country;
2) The stability of the currency.
3) Respect for the rule of law.

In other words, the Nicaraguan unknowns are identical to the US unknowns. The main difference is that the Nicaraguan unknowns sell for about one twentieth the price of the US unknowns.

“What’s happening down here these days, Mark?” your editor asked Mark Brown, the guy who runs Rancho Santana. “Are sales picking up or stagnating?”

“Well, actually, they are picking up a bit,” Mark replied.

“That’s surprising,” your editor answered. “Aren’t you feeling the effects of the slowdown up in the States?”

“Well yes and no,” said Mark. “We’re getting a different kind of a buyer now. Four years ago, every American had at least $100,000 of equity in his home, if not $200,000 or $300,000. So it was pretty easy to pull out some of that equity to finance the purchase of a lot down here…as a future second home. But after the crisis hit, that all went away.”

“So what happened next?” your editor asked. “Did prices fall a bit? And who’s buying now?”

“Well, yeah, demand cooled for a little while,” Mark continued. “But then we got a new type of buyer. These folks are motivated to buy property here because of the crisis.”

“How’s that?”

“Well first,” Mark explained, “you need to understand that everyone lost a lot of money in 2008. Everyone. So there are some folks who lost so much of their retirement funds that they are forced to choose between going back to work or cutting their expenses. Going back to work is not a great choice for most. So buying a retirement property down here is one way to cut expenses. It’s much cheaper here than, say, Florida.”

“Makes sense.”

“Then you’ve got a lot of other folks who also lost some money in the crisis, but who still have substantial net worth. They’re sitting there with a couple million bucks and don’t know how to invest it. They’re nervous about the stock market and they can’t get any yield from the bond market. So they’re saying to themselves, “Hey maybe I should diversify into foreign real estate. And besides, I like it down here!”

“That’s pretty interesting,” your editor replied. “So are you saying that the crisis has been good for sales?”

“Actually, yes,” Mark smiled. “And it feels like the trend is just starting. Another piece of the puzzle is the rapid rollout of communications technology. Not very long ago, there was no Internet here and barely any phone service. Now we’ve got state-of the-art everything. So you can be physically distant from whatever you used to call ‘home,’ but still be totally connected. That’s a very new phenomenon. And one that could influence the pricing of real estate worldwide.”

Your editor would not have guessed that a financial crisis in America would produce demand for beachfront property in Nicaragua…but neither would he have ruled it out. Crises always produce a surprising list of beneficiaries. In fact, that’s the purpose of a crisis – to redistribute opportunity from the slow to the quick; from the infirm to the healthy.

This dynamic does not merely pertain to enterprises within a given national economy, but also to national economies themselves.

National economies follow a kind of life-cycle. When one nation’s economy becomes too encumbered with constraints – be they political, regulatory or financial – to operate successfully, it cedes market share to others.

Let the reader decide which nations are sickly and which are healthy; which offer a range of opportunities and which impose an array of risks.

Eric Fry
for The Daily Reckoning