Going back to the ‘USA is Exceptional’ meme- yes this is true! But it’s not necessarily a good thing (just like, being positive isn’t always good, for example it’s not good to be HIV positive). USA has the highest per capita prison population – and is exceptional in a number of areas. USA is number one in terms of real GDP, and last in many other terms. One thing that the USA is last in – FX. As we explain in Splitting Pennies – there is a paradoxical situation that in the land of the world’s reserve currency, knowledge about currency is reserved to the few. It is a specific USA issue – in other countries, even Canada – yes even in Canada – there is a real FX market. Only in USA is there a big black hole. Let’s summarize what this means:
- We have 2 choices of Forex brokers, Oanda and Gain. In the entire world, there are more than 10,000 Forex brokers.
- There is no Forex regulation system (NFA ‘polices’ FX but the NFA is a FUTURES regulator, hence the name “National Futures Association”) Foreign Futures, by the way – is not Forex.
- Only one bank, Everbank, offers a non-USD account. (Anyone who did business in another country knows that the first question a banker asks when you open a new account is ‘what currency do you want as your denomination’)
- The American knowledge of FX is so close to zero it’s indistinguishable from zero.
Practically, if you want to open an account at a non-US broker that offers normal options for trading and investing, you have to meet ECP criteria which for an individual, means you have about $10 Million cash in the markets. But that’s not all – you’re going to need to involve your accountant (which as an ECP you probably have) to write a letter, and you’re going to need to get ready for the FBAR, that’s IF the foreign broker will accept you. Going through that, you’ll then need to wire your funds to the foreign broker – hopefully they will offer USD accounts (most do), but if they don’t, unless you use an FX payment service, you’ll be exit-taxed at a whopping rate of 8% (that means, if you want 100,000 USD to arrive at your foreign broker, you have to send 108,000 to overcome the massive spread charged by the US banks). Multiple class actions have been settled by these banks and they continue raping their customers on foreign transfers, mostly because they don’t know there are alternatives. The alternative is a payment service that sits in between your bank in the US and the broker’s bank overseas that will do the FX ‘deliverable’ transfer for you, at a really small spread, like .25% or 25 basis points compared to the potential 800 basis points charged by the big Wall St. banks. But here again, why does this situation exist at all?
Going back to our ECP process, now that the ECP investor has jumped through all these hoops, prepared to fill out the FBAR, setup the FX payment service – now we hope after all this they’re willing to invest at least $1 Million just to pay for all this nonsense. There’s a huge upside of course, that by being ‘internationalized’ as Simon Black would say, the ECP investor can tap into a world of FX algorithms that aren’t available in the US which provide huge advantages over what’s offered in the US. To be clear on the point of the US black hole, 99% of FX strategies don’t work with the US rules and the 2 choices of broker, are not good choices. So trading FX in the US with the rules and the 2 available choices is really playing a game to lose. That doesn’t mean it is impossible to make money trading FX in the US, it’s just very difficult, when compared with the plethora of options overseas. Exiting orders in the same order that you entered (FIFO rule) as one example prohibits 90% of algorithms from working at all.
Money doesn’t grow on trees, but the Federal Reserve creates fresh US Dollars on a daily basis, making investing a game of hot potato. Don’t be left without a chair when the music stops.