Arbitrage lessons from the most expensive city on Earth

January 9, 2013
Sydney, Australia

[Editor’s note: Sovereign Man Chief Investment Strategist Tim Staermose is filling in for Simon today.]

No matter where you live in the Western world right now, the sands of your local economic landscape are likely shifting. To gain your footing, it’s essential to learn classic arbitrage techniques.

Take Sydney, Australia, for example, one of the most spectacular cities in the world. The stunning geographical setting alone… a natural, sparkling-blue harbor with high cliffs and rolling hills either side… is enough to take your breath away.

So are the prices. On a recent visit, the menu at my five-star hotel’s restaurant offered a hamburger for A$36 (US$37.80).  Local friends and contacts confirm that most half-decent restaurants now charge at least A$25 (US$26.25) for a simple burger.  Crazy stuff.

My sister, a medical specialist, was recently sending out claims forms to medical insurance companies.  I noticed she was putting A$0.65 (US$0.6825) stamps on the envelopes.

I choked on my coffee.  You can send a letter from Hong Kong, airmail to Australia, for the equivalent of only A$0.36, almost half the price.

This leads to an arbitrage opportunity: she could send PDF files via email to Hong Kong, have the letters printed there, and then mail them back to Australia. It might take a few days longer, but she’d realize big savings. Classic arbitrage.

Another example: My father runs his own accounting practice in Australia.  To obtain staffing, he must pay through the nose, as it’s not uncommon for an entry-level number cruncher to earn a six-figure annual salary.

Fed up, my father recently experimented with outsourcing some work to India for less than one third of what he’d have paid a local.

I bring these examples up for two reasons:

First, wherever you are in the world, there are always ways to play similar arbitrage opportunities, pitting various countries against each other to save (or make) money, often without having to even leave town.

Second, as more people do this, Western economies will realize great losses. In Australia, this will almost certainly lead to a fall in the Aussie dollar.

Worth about 1.05 US dollars now, the Aussie dollar is really too strong.  Costs are out of whack on a global scale. It’s choking off local job creation.  And, it’s making Australian exports — even in the all-important mining and resources sector — uncompetitive.

Australia’s strong union traditions, minimum-wage laws, insanely complicated mandatory pay-scales, and pedantic occupational health and safety rules make running a profitable business here a very difficult task.

The BASE minimum wage for a burger flipper at McDonald’s in Sydney is currently A$15.87 an hour… plus penalty and holiday rates tacked on top of that. Restaurant union rules require that dishwashers START at A$20 (US$21) per hour.

How can you run a business with these costs?

Which leads to my last arbitrage example: If you are a young, flexible person willing to work casually in odd jobs in order to fund your travels, Australia could be a great place to come and work for a few months.

Young people from many countries in Europe and North America, plus Hong Kong, Singapore, South Korea, and Japan, can easily qualify for working holiday visas to Australia.

If you are a young person in the jobless queue in the UK, Spain, Greece, Italy or Portugal, for example, Australia might be an option.  There are few places on earth where wages are higher, provided you’re wiling to roll up your sleeves and take a service job that most of the locals seem to shun.

Just don’t put all your Australian dollars in one basket.

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