Riding The Economic Cycles
Throughout the
history of free market economies, there have been boom and
bust periods. To the chagrin of business owners,
individuals and governments alike, economies ebb and flow
from growth to retraction and then back again. In
some extremes, we also have had periods of above average
growth and as well as periods of more pronounced
adjustment, or what can be called recessions and even
depressions. But, is this really a bad thing?
Meaning, is it not just a normal and natural process of
growth and re-balance we find in nature also?
The key we think is to know that the good times do not
last forever but neither do the negative times as
well. Learning how to survive and plan for both
takes the angst out of being caught unprepared. Of
course artificial manipulation by central banks can
greatly distort this natural process, often resulting in
cures that are worse than the disease. But don't
take our word for it. Former Bank of England
Governor Mervyn King has publicly said: More monetary
stimulus will not help the world economy return to strong
growth. We have had the biggest monetary stimulus that the
world must have ever seen, and we still have not solved
the problem of weak demand. There are quite serious
disequilibrium both between and within economies that, for
good economic reasons, are depressing demand. Simply
lowering rates even further or adding more monetary
stimulus is unlikely to solve that problem (Editor's Note:
Why do all these guys suddenly tell the truth AFTER they
leave public office?).
Mr. William White, former chief economist to the Bank for
International Settlements in Switzerland and current
chairman of the OECD's Review Committee said the following
(January 2015): We're seeing true currency wars and
everybody is doing it, and I have no idea where this is
going to end. Sovereign bond yields haven't been so low
since the Black Plague: how much more bang can you get for
your buck? QE is not going to help at all. For those
people that point to Japan's recent kamikaze QE
initiatives, Mr. White says: The Japanese are now doing it
as well but nobody can complain because the US started
it. There is a significant risk that this is going
to end badly because the Bank of Japan is funding 40
percent of all government spending. This could end in high
inflation, perhaps even hyperinflation. Those who
argue that the US and the UK are growing faster than
Europe because they carried out QE early are confusing
correlation with causality. The Anglo-Saxon pioneers have
yet to pay the price. It ain't over until the fat lady
sings. There are serious side-effects building up and we
don't know what will happen when they try to reverse what
they have done. They have created so much debt that they
may have turned a good deflation into a bad deflation
after all (Editor's Note: What he is trying to say is, if
they left it alone and allowed deflation resulting from
the natural market correction mechanism to run it's
course, which by the way is an expected and normal result
of an economy coming off a credit or debt bubble, then
things would be quite different in terms of where we are
now. Unfortunately they have distorted the normal
correction process via QE, money printing and even more
debt issuance that what we now have is something
potentially far worse).
Claiming economic victory in the US and UK due to QE
programs is premature and is in reality a myth.
While some new jobs may have been created and while
reported
unemployment may be down (according to government
figures), the truth is that much of this is attributed to
lower wage jobs, whereas the former unemployed may now
have work, it involves a lower income type of
employment. This in part contributes to the
phenomena that government income tax receipts are NOT
really recovering even though they are claiming economic
victory. In the US of course, while stated
unemployment is reported to be down, enrollment in Social
Security disability is up by 12 percent over the last 8
years, so a reduction in the number of unemployed reported
by the government in the US (12 percent unemployment down
to the more recently reported 6 percent) is offset by the
increase in persons on the social security disability
rolls. In other words, where did the 6 percent
reduction in US unemployment come from? The answer
is it was shifted over in part to Social Security
disability, which is the new long term unemployment
insurance. Mr. Jim Clifton, Chairman and CEO of Gallup,
writes in a February 3, 2015 editorial that the US
government reported 5.6 unemployment figure is a Big Lie.
You can read his comments via the link below:
http://www.gallup.com/opinion/chairman/181469/big-lie-unemployment.aspx
Seventy percent of new social security disability
participants are aged 50 or above (too young to collect
retirement benefits, but maybe too old to take on the
physically demanding minimum wage jobs that might be out
there). And it has been tabulated that 5 percent of
the US population, or roughly 11 Million people are on the
social security disability payroll, which is reportedly
about the same number of people employed in the
manufacturing sector in the entire country. What has
made all this possible are the changes in 1989 that now
include mental illness, depression, anxiety and back pain
as qualifiers. In fact, in a few US states, roughly
half of all recent applications have been for so-called
mental disorders, such as depression. Now, to be
very clear, we are not trying to be heartless and
criticize someone that may have signed up. After
all, it is not easy for a 50 year old factory or warehouse
supervisor to get a new job with the same pay he might
have had before. Not only that, while such a person
was working, they certainly paid taxes into these programs
their entire previous employed lives, so insurance is only
valuable if the proverbial insurance company (in this case
the government) maybe pays off when you really need
it. However, we see this as a very permanent
trend. There is a study that found ten years after
starting on disability benefits, less than 4% of
recipients had returned to work, so we would say those new
enrollments on the social security disability program will
stay there until they reach retirement age, and then maybe
flip over to the so-called old age insurance part of
social security. But, the point is, the reported US
Government figures and the journalists that act as shills
for the government are not exactly peddling the truth when
it comes to reporting what is really going on with the
economy (and one cannot make prudent business or personal
economic decisions when the information is a fairy tale).
We touch upon these various but related topics because
there has been quite a bit of conversation in the media
and among so-called learned economic academics regarding
unbalances in the economy plus wealth distribution and a
specific call for even more government (read artificial)
intervention. Apart from the prospects of central
bank policy involving more so-called stimulus (QE,
electronic money printing, bond purchases) and continued
(and artificial) interest rates of zero percent, we also
have the esteemed politicians harping about increasing
various forms of taxation. Specifically the
so-called rich are the target, but what is the definition
of rich? Someone who earns the equivalent of
US$50,000? US$100,000? US$1 Million? If anyone
thinks a household earning US$100,000 is rich they are not
living in the real world. Try to pay a mortgage and
send a child to college (without burdening the child with
student loans for the rest of his or her life) on that
kind of income (or more correctly what remains after
taxes) – it is not going to happen.
According to the Institute on Taxation and Economic
Policy, a report and collection of data from April 2014
concludes the following: The richest one percent of
Americans pay 23.7 percent of total taxes and receive 21.6
percent of total income. The poorest one-fifth of
Americans pay 2.1 percent of total taxes and receive 3.3
percent of total income. Each income group will pay
a total share of taxes that quite is similar to each
group’s total share of income. Contrary to popular
belief, when all taxes are considered, the rich do not pay
a disproportionately high share of taxes, but they are not
under taxed either as is so often claimed. However,
all this does not stop the rhetoric regarding unfair
wealth disparity, a segment of the population supposedly
not paying their fair share, and so on.
A January 28, 2015
article from CNN titled: IRS to tax cheats: Stop
hiding your money offshore, claims that: The IRS has been
cracking down on tax cheats trying to hide money in
offshore accounts. And they highlight the 2009
voluntary amnesty disclosure program as having produced
50,000 people that have reported their offshore accounts,
and have supposedly paid US$7 Billion Dollars in back
taxes and penalties. And the IRS has re-established this
program again in 2012 which supposedly is still in
effect. But interestingly enough, the article also
claims that: One of the reasons Americans have one of the
highest tax compliance rates in the world is because of
this kind of third-party reporting. Let us repeat
that again but worded another way. The only
effective compliance is gained by a non government entity
reporting (your banker, your broker, your accountant, and
so on). And so, the pressure is placed on such
individuals and institutions to rat you out, to put it
bluntly.
http://money.cnn.com/2015/01/28/pf/taxes/hiding-money-offshore/
Ironically enough, a number of so-called economic tax
breaks given to US corporations is estimated to cost the
US government US$45 Billion Dollars in lost tax revenue
over the next 10 years. So, the Internal Revenue
Service claims victory in convincing 50,000 individual
citizens to pony up US$7 Billion voluntarily while the
legislators turn around and give out US$45 Billion in tax
breaks to US juridical entities (corporations). Two
noted tax loopholes open to US corporations, that are NOT
open to individual US citizens are the CFC Look-Through
Rule, which allows corporations to shift or re-domicile
income to make it look like (and benefit from) it came
from a low or no tax jurisdiction. Re-invoicing is
one term used to describe this practice and it is
perfectly legal. The real question is: why is it perfectly
legal for a corporation but not for you as an individual
citizen? The law or tax regulations should apply
equally to all, or none at all. The current United
States President made a proposal in his very recent state
of the union speech to eliminate such tax benefits, but it
yet to be seen how this plays out.
The second prominent tax loop hole is the Active Financing
Exception. This regulation, loop hole (or whatever
you want to call it) basically allows for passive income
(patent royalties, interest, dividends, etc.) to appear as
if it were also generated abroad and thus non-taxable
until it is brought back to the US (which is never going
to happen as long as it has the chance to remain
non-taxable abroad). Again, individual US citizens
with non US based bank accounts, brokerage accounts and
other investment or passive income generating vehicles are
required to report and be taxed on such gains or income
and yet corporations are given a free pass.
Nathan Proctor, a director of the Fair Share organization,
opines: I don't understand why Congress would want to
reinstate loopholes that reward companies for hiding
profits offshore and cost us billions annually as part of
the tax extenders package. And let us not forget the
illustrious Obama Care tax, which will penalize
individuals 1 percent of their entire household income if
you do not have any kind of so-called qualified health
care coverage. As an example, a working couple with
a combined income of US$100,000 will have to pay a
US$1,000 penalty on top of any other income tax owed
simply because they do not have a health care policy the
US government likes.
What Can You Still Do To Mitigate
US Income Taxes?
Well for starters, try and
get a job outside of the US. US citizens living and
working outside of the US (with salaried income) can still
benefit from the the Overseas Income Exclusion allowing
them to exempt up to US$99,200 (for 2014) for US Federal
Income Tax purposes (however you still need to pay the
FICA or Social Security tax payment portion).
For some additional ideas, Mr. Todd Ganos offers some
interesting information for US citizens about various
forms of juridical entities known as Trusts. One
particular article is referenced here:
http://www.forbes.com/sites/toddganos/2014/12/26/might-these-little-known-irs-recognized-trusts-save-you-substantial-taxes/
And in the United States of Hypocrisy, there is always
Puerto Rico. Puerto Rico you might ask? Yes,
Puerto Rico. While the US has spent considerable
time and effort chasing and chastising tax havens around
the world in general, it seems what applies to the rest of
the world does not apply on US soil (or for US territories
as it were). To explain further, we have the Export
Services Act, which allows service business and most
notably investment funds, hedge funds and the like to
benefit from a flat 4 percent corporate income tax in
Puerto Rico (Puerto Rican companies and individuals do NOT
pay US Federal Government Income Tax) and dividends paid
out from such companies are 100% tax exempt to individual
recipients (this is not an error, you read correctly: 4
PERCENT and 100 PERCENT TAX FREE dividends). This is
in stark contrast to President Obama's recent proposal
(from the 2015 state of the union speech) to up the income
tax on dividends from 20 to 28 percent for all the main
landers, so deduce from that what you may.
In addition we have the Individual Investors Act which
grants COMPLETE tax exemption on interest, capital gains
and dividends for individuals providing the person lives
in Puerto Rico for a minimum of 183 days per year.
However, Puerto Rican Government finances are at best
Third world with over US$70 Billion worth of junk bond
quality bonds outstanding, a debt to GDP ratio over 100
percent, a 14 percent unemployment rate and US$40 Billion
in unfunded pension liabilities. And almost 40 percent of
the island's residents are receiving food stamps or some
other welfare benefit, costing the US mainland taxpayers
US$2 Billion (as of 2012 figures). Overall, US
mainland taxpayers send an estimated US$20 Billion Dollars
worth of aid related funds to Puerto Rico, earning it the
nick name of Welfare Island or America's Greece.
Theft is rampant and epidemic, there are more than 1,000
murders per year (on a island with less than 4 million
people) and Puerto Rico has the highest electricity rates
in the United States. It is reported that 20 percent
of operating costs for a company will be in the form of
the electric bill (if they don't get you on the tax bill,
the electric bill will be, pardon the pun, shocking).
The license plate of Puerto Rico claims it is the charming
island (but one of the dictionary definitions of that word
is bewitched, as in hexed, so choose the definition from
Mr. Webster that you prefer best). With all that
said, you can save on US Federal Income Taxes if you move
yourself or your company to that charming island, just
remember to use the tax savings to put pick proof locks on
your doors. Oh, and what is the difference between a
Tax Haven engaging in Unfair Competition (read low or no
taxes), and a jurisdiction enacting favorable fiscal laws
or policies to attract solvent individuals and
corporations to come and reside in order to bolster the
local economy? The answer dear friends is that one
is located outside of the US, and the other one is
not. It's all semantics after all.
http://www.forbes.com/sites/janetnovack/2015/01/27/puerto-rico-expands-tax-haven-deal-for-americans-to-its-own-emigrants/
Another trend that came to attention recently comes from
Mr. Robert Johnson, a former hedge fund manager at the
Soros Fund Management group, offering comments at the
recent World Economic Forum Meeting held in Davos,
Switzerland. Mr. Johnson goes on to say that: I know
hedge fund managers all over the world who are buying
airstrips and farms in places like New Zealand because
they think they need a getaway. We would ask the question
why? This annual meeting of 2,500 plus of the
world's best and brightest (and wealthiest) people in
Davos is not exactly a David Icke seminar. Rather, this is
a collection of the world's political leaders, captains of
industry and otherwise said a group of people that have
their fingers on the pulse of world trade, commerce,
currencies, politics and central banking. A meeting
of the economic and political elite, to explain it more
simply. And so why do these folks think things are
so bad, or will become so bad that they need to do the
wealthy equivalent of prepping?
Regardless of the answer, we do think such comments are an
interesting insight into what world leaders see and think
about what many are themselves directly responsible for
when we consider all the initiatives taken in recent years
to save the day, economically speaking (how do THEY think
it is going?). Of course the good news is that you
do not need to run a hedge fund or be related to a
political icon to obtain some kind of safe haven escape
plan. Remember not to place all your faith in one
bank or financial institution, one country, one currency
or any one asset class. And that includes possibly
obtaining another citizenship and passport (just in case
being a citizen of the former falls out of favor for one
reason or another).
http://www.mirror.co.uk/news/world-news/panicked-super-rich-buying-boltholes-5044084
Is It Inflation or Deflation ?
In terms of the
current economic scenario, we are told to beware of DEFLATION in the US
and Europe and INFLATION in the emerging or developing
markets. Indeed the latest victim of deflation
appears to be Germany (land of hard working descendants of
the Teutons and home to some of the most fiscally
conservative people in Europe). And we have to
wonder: if fiscally conservative Germany is experiencing
deflation, then what does that forebode for the southern
sisters (Spain, Italy, Greece)? In terms of the
inflation comment, many developing market nations have
been complaining previously that all of this QE business
in the US and Europe has basically been causing or
exporting inflation to these other smaller emerging
markets. Increases in food costs of course have
pretty much effected everyone world wide over the past few
years so certainly we can see cost of living issues for
many consumers regardless of where they reside. And
with the recent drop on petroleum, it will be interesting
to see if that has any impact on CPI figures going
forward. However, generally speaking, many clients
are concerned about where and how to invest with all this
mayhem going on. Do you invest defensively for
deflation? Do you invest defensively for inflation?
What's the economic play-book in this kind of environment?
With regards to deflation, we have stated awhile back that
is was our belief (and it still is) that central banks
(and government policy in general) in the developed work
will engage in money printing (electronically at least)
and any other inflationary tactics that they can.
Why? Simply because they are drowning in debt and
deflation is the bogey man for debtors (and conversely is
the friend of anyone with solid balance sheets and
conservative economic practices). Throughout history
currency debasement or devaluation (inflation) has been
the politician's favorite choice as a means to address
excessive debt and we have no reason to think things are
any different today. Of course many talking heads
from the world's central banks engaging in this kind of
activity state they can stop it any time and are confident
they will know how to tweak policy for a happy ending
(these are the same people that said there was no real
estate bubble either, and or it was difficult to spot an
asset bubble regardless). And instead of targeting
ZERO inflation, they now claim that 2 percent or 3 percent
inflation is satisfactory. It all sounds nice in theory,
but inflationary economic policies are like trying to herd
a bunch of cats after they have been just released into
the woods. You never know where they will go, never
mind trying to catch them all again.
Mr. James Quinn wrote an recent article (January 16, 2015)
looking at inflation, deflation, central bank policy and
more acutely at housing in the US. He particularly
makes a comment about Wells Fargo Bank, which he points to
as the largest mortgage lender in the US, whereby he says:
In the midst of a supposed housing recovery, with mortgage
rates at historic lows, the largest mortgage originator in
the world, saw their mortgage originations FALL by 12%
over last year. They are down 65% from two years ago. JP
Morgan and Citigroup also saw their mortgage businesses
contracting. These banks have been firing thousands of
people in their mortgage divisions.
http://www.marketoracle.co.uk/Article49044.html
Dominican
Republic Real Estate As One Hedge
Speaking of housing and
real estate, many of our clients have continued to have an
interest in buying real estate in the Dominican Republic,
and in many cases using that a conduit for investor
related residency (and resulting citizenship as
well). Dominican Republic Farmland and rural
properties also are of interest as a non-reportable asset
or investment, plus as an inflation hedge as well.
In terms of what your money can buy in Santo Domingo:
US$185,000 will get you a brand new 2 bedroom condo in a
building with 2 off street reserved parking spaces, a
swimming pool for building tenants, a gym, marble floors
throughout the apartment and few other amenities.
Another offer of US$225,000 for a brand new condo includes
a 2,000 square foot 3 bedroom (each with own bathroom)
unit that also comes with swimming pool, gym, children's
play area and a meeting room with BBQ area for
events. For something more economical another
builder is offering a 1,000 square foot 2 bedroom condo
for US$110,000 in a middle class area of Santo Domingo
(new building, new construction). If a single family
dwelling is more what you are looking for, a builder in
Santo Domingo has a new gated residential project of 2
story semi attached homes from 3,000 to 4,600 square feet.
Three bedrooms, home office, marble floors, jacuzzi,
central vacuum, backyard patio, and backup generator for
the project are some of the amenities and prices start at
US$390,000. Truth be told you can find a brand new condo
in what can be considered the suburbs of Santo Domingo
starting at US$50,000 and you can go up to perhaps
US$500,000 or more for a very large high end penthouse
(and everything in between).
Getting back to our defensive investing theme, it really
all depends upon whom you wish to believe and as a result
where you might want to safeguard your savings. If
you believe that the world economy (and the US, EU
specifically) is heading for a deflationary environment,
then you want to make sure you have no debt, keep plenty
of cash or cash equivalents, and are poised to take
advantage of falling asset prices. On the other
hand, if inflation is what you are concerned about (and we
would tend to suggest the emerging or developing markets
are more likely to continue experiencing some degree of
economic expansion, albeit perhaps a lower rates than seen
over the recent 10 years) then you need to be in inflation
hedged assets or investments. Gold of course comes
to mind, as does other hard assets such as real estate and
even commodities. Regardless of the direction
economies or markets take over the next decade, we would
tend to suggest beware of higher income taxes and other
kinds of taxes. They have built up one heck of a
debt bubble and if they do not inflate it away, they
certainly are going to be picking a whole lot of pockets
to try and pay it off (if they can).