A No-Brainer? (4/5/12)

I’ve heard many people sum this investment up as a no-brainer.  They state that the downside is only 20% or so and the upside is a potential windfall in the millions.  If that was the case I would agree that it’s a no-brainer, but I don’t believe these people realize the true potential downside and upside.  That’s one of the reasons I started this blog.

The downside here is very simple.  You could lose everything you invest.  There’s no guarantee that you will be able to exchange your dinar for USD when Iraq re-denominates.  You could be left with worthless currency if Iraq decides to only honor in country exchanges or if the dealers all disappear after a lop.  And even if you are able to exchange, who’s to say that the rate will remain where it is now prior to the RD?  Contrary to the opinion of many investors, the dinar could depreciate much further than it already has.  Currently the dinar is close to 1000 to 1 IQD to USD.  Prior to Turkey’s RD they were at about 1,000,000 to 1.  If the IQD depreciates further prior to the RD your downside potential increases far beyond 20%.

Here’s a theory on how things could unfold presented by one of our regular DDB commenters named F8.

“Say you have accumulated 10 million dinar and think you’re gonna be rich. Iraq announces that they are going to replace the currency with the new ‘no zero’ notes. Being a typical dinaidjit, you think you’re rich! but eventually it will get pounded into your head that no, it’s just like everyone has been saying, (on DV they had to say it in a special closet, but still) it’s a straight LOP. That’s okay, you think, long term investment and all, so you begin to make your plans to swap your old notes for the new. No bank will touch it, they’ve all said for years they wouldn’t and for the love of Bob, it wasn’t just smoke and mirrors, they really aren’t going to touch it. So you call your online pump it up dinar dealers. No one answers. Hell, they’ve known all along, and once the word was out, they wisely went into hiding at an undisclosed location with Dick Cheney. For there safety. About this time, you finally get a straight answer that the expiration date that the desperately stupid on the forums is not only real, but you’re gonna have to go to Iraq, not to cash in and be rich, but just to keep from losing the 10 grand you have in the dinar in the closet. So you look on priceline.com and find out it’s gonna be $1500 and take two days (actual Priceline price, I checked) but hey, if you don’t go, you’re gonna lose it all because even Ebay at $350 a million is drying up by now, you’re not the only one panicking. So you take a week off work, get your flight and go, with 10 million dinar in your checked bag, to Kuwait. There you find that to rent a car to go to Iraq is illegal, so you have to hire a driver from the livery service adn this is a big boom to them, another $1,000. You hate to do it, but you’re gonna lose $10,000 so you do. You get to the border and the customs agent opens your bag, has a big episode and eventually explains to you that it’s illegal to bring in a) any b)more than X Dinars, but this being Iraq, if you give him half of them, he’ll not notice the other half. Now you’re getting pissed, but hey, half or nothing, so you negotiate (thanks for the advice on cash in Adam Montana!) him down to giving him 3 million and letting you keep 7 million. Okay, you’ve flown around the world, taken a week off work, paid bribes spent big money for a flight, car etc…now after a night listening to the bombs go off in town, you finally make it down to the local Warka Bank. You want to both cash in, and check up on the $2500 you deposited there when the very smart Guru told you to. You’re very happy they’re still open. after the stories of them being insolvant etc… SO you go in the bank, the teller tells you that yes, the accounts are fine, although all the citizens lost 25% of their deposits. What? The foreigners? Well, they lost everything, the recovery funds only paid out Iraqis. So sorry. So, let’s cash in your dinar for the new notes, shall we? You can cahs in as much as you want, up to 1 million dinar per day. You have 7 million? Oh my, why would anyone want to cash in 3 and a half years pay all at once? Sorry, there are no exceptions. So you go get a room, cause, well, this is gonna take a week. Your livery won’t stay a week, but he’ll gladly come back next week to pick you up, it’ll only be $1500. The bank takes the 10% tax Iraq has imposed on all foreign cash ins. So lets recap, $1500 for the flight, $2500 for the car, $500 for a hotel room, $3000 for the bribe going into the country, oh, and we didn’t mention the $1500 more they took to let you leave with more than the limit, either. Can you see where this is going? People are gonna lose everything because even if you have ten million, it’s gonna cost that much or more to simply exchange them old notes for new. And that’s why the dealers are gonna be hard to find.”

Chew on that for awhile.  As for the upside, there’s no way that anybody will receive 1000 times their investment.  Given Iraq’s money supply, rate of oil production, GDP … etc. the most they could conceivably support would be a few cents which would amount to no more than 50 times the initial investment, and that’s nothing more than a remote possibility.  In all likelihood the rosiest scenario is making about a 300% ROI if Iraq lops and then RVs up to $3+.

So instead of looking at this as a no-brainer because the most you can lose is 20% and you could potentially make millions, I think potential investors should look at it this way.  “I could lose everything and the most I could make is probably only 2 or 3 times my investment.”  I have to wonder how many would invest thousands or tens of thousands of dollars looking at it that way?  If a no-brainer is something you don’t even have to think about then I guess I would refer to this as a brainer, because there’s plenty to consider.