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A WORLD RECREATED
Heads up on the content of this column: it contains big thoughts in a short space. The market economy -- globalized, enormously powerful, breathtaking in scope and breadth -- is remaking the world in ways that far surpass any existing political development in the US, from the crafted blather of the State of the Union to the mad rush to grab the Democratic nomination. We are living through changes that may appear slow if observed from the point of view of the daily headlines, but which are momentously fast and completely transforming when looked at globally and from the point of view of years and decades into the future.
These developments are going to bring about surprising political shifts, profound upsets in rooted cultural assumptions, and an eventual and merciful end to the US imperium. These changes will touch everyone in ways that will be both stunning and glorious for average Americans, and deeply disturbing for the American regime that aspires to unchallenged global hegemony.
What is the underlying cause? The unleashing of human energies in nations that have been isolated, regimented, and closed for centuries. China, Malaysia, India, the countries of Latin America, and the new economies of Eastern Europe, among many others, are expanding at as much as twice the rate of American and European markets. This is not only remaking their nations, but the way we perceive the geographical distribution of wealth and power. Over time, and extended far into the future, this trend is going to mean dramatic upheavals in the way Americans perceive their role in the world.Link here.
SOME THOUGHTS ON CAPITALISM AND INVESTING
Ruminations on the German merchant banking scene, stocks in 2004, the changing nature of capitalism (so-called), and John Templeton.Link here.
THE CASE FOR MARKET LIBERALISM
Economic freedom and limited government under the rule of law are crucial for peace and prosperity in the 21st century. Globalization has helped spread market institutions and foster political reform, as in South Korea and Taiwan. Countries that have cut themselves off from the global economy, such as North Korea, have failed to develop. Critics of globalization have good intentions -- to alleviate poverty and close the gap between rich and poor countries -- but those ends are more likely to be achieved by economic freedom than by government intervention.
Interfering with free trade, dictating massive government-to-government aid programs, imposing burdensome environmental standards, fixing wage rates, and penalizing successful entrepreneurs are not in the long-run interests of poor countries. A policy of engagement is the best strategy to increase living standards, improve the environment, and reduce the risk of war.
The market-liberal order is both natural and ethical. Former Czech President Václav Havel, in his Summer Meditations, noted that naturalness when he wrote that the free-market economy is “the only natural economy, the only kind that makes sense, the only one that can lead to prosperity, because it is the only one that reflects the nature of life itself.” The market-liberal order is ethical, in the sense that it is based on freedom under the law. As Zhang Shuguang, an economist at the Unirule Institute in Beijing, stated, “In the market system, ... the fundamental logic is free choice and equal status of individuals. The corresponding ethics ... is mutual respect, mutual benefit, and mutual credit.”More on this story here.
LET COMFORT BE A GUIDE IN FINANCIAL ADVISER SEARCH
The Financial Planning Association recommends anyone in the market for a personal money manager should hire “a competent, qualified professional with whom you feel comfortable, one whose business style suits your financial planning needs.” But exactly how do you do that? In this arena, what are the definitions of competent, qualified and professional? How do you identify a business style and mesh it with your personal needs?
I recently shopped for a financial planner with my parents and realized the hardest part of the search was not finding someone competent, but finding someone we liked. Someone with whom we felt comfortable sharing intimate financial details, aspirations and fears. So for those whose life circumstances have them in the market for professional financial advice, here are some questions that will help you figure out if you feel comfortable letting that person help you manage your money.Link here.
Estate planning by women important and educational.
Women own or control a majority of the wealth of this country. So why do some lawyers still assume the husband will die first and is alone responsible for establishing the family estate plan? Even if a wealthy husband does die first, he then leaves a wealthy widow who must have her own estate plan.
The excuse, “I don’t need a will yet” (meaning not until the husband dies), does not hold water. A common disaster or incapacity will eliminate the opportunity to make plans later. Writing a will -- and a trust, if necessary -- should be an educational experience for either a married or a single woman. For the wife, it is a training lesson for the possibility of being a widow. And an unmarried woman will realize more about her present assets and crystallize her thinking about the disposition of them during the process. A will can do more than simply dispose of assets.Link here.
THE CHINESE FEAR INFLATION; THE JAPANESE LONG FOR IT
The Chinese celebrated the lunar new year on Thursday January 22nd, gladdened by the news that the economy grew by 9.1% in 2003. But this heartening performance has stoked fears that the Chinese economy is overheating. It would not be the first time. During the last year of the monkey, in 1992, China’s then leader, Deng Xiaoping, made his famous tour of the south, urging the country to make the most of its new economic liberties. Liberty soon slid into licence, however, and within a year or two the economy was struggling to cope with rampant over-investment and inflation over 20%.
This year marks an equally troubling anniversary for China’s neighboring economic giant, Japan. It was ten years ago that the economic superpower fell into a deflationary quagmire from which it has yet to escape. Core consumer prices registered a small increase in October, but fell again in November. The GDP deflator, a broader measure of prices, continues to fall by over 2% a year. While the Chinese authorities are acting smartly to head off inflation, the Japanese authorities are actively seeking it.Link here.
INLAND REVENUE CONDUCTS “DOMESDAY SURVEY” OF FOREIGN WORKERS
The UK government has dropped a strong hint that current tax rules allowing non-domiciled residents to escape UK income taxes is to be scrapped with the news that the Inland Revenue is building a new database of expatriate workers living in the country. National reports indicate that the Revenue has set up five regional offices to collect personal details of non-domiciled workers, including names and national insurance numbers. It has also begun to send out letters to around 6,500 employees asking for information on “inward expatriate employees who are non-domiciled.” The tax authorities have no accurate way of assessing how many expatriate workers are resident in the UK under current rules.Link here and here.
Inland Revenue seeks to end tax advantages of trusts.
An Inland Revenue discussion paper published last month has suggested that wealthy taxpayers could lose the tax benefits of trusts as part of the government’s proposals for reform. The discussion paper suggested that: “Anti-avoidance legislation is appropriate for those who use trusts to avoid tax. The government does not want a system that enables people to use trusts to avoid tax. As far as possible we should aim to tax the person benefiting from the trust where that person can be identified.”
The consequences of this could mean that beneficiaries of trusts, currently paying income tax at 34%, would pay 40% if they were in the higher rate income tax bracket. In a separate proposal, reports state that government ministers are also planning to increase the taxation of dividends paid on discretionary trusts from 25% to 32.5% starting in April this year.Link here.
WHY LONDON’S SUPER-RICH GOT SHY
Out have gone the old money types whose names fill society pages. Out too is the Middle-Easterner with dubious taste in curtains who was the cliché collector of expensive London homes 10 years ago. Nowadays those who buy at the £10 million-plus level might as well have entered Trappist monasteries for all the publicity their moves generate. The new palatial purchaser is usually from overseas and has made his or her own fortune but is otherwise hard to categorise except for an insistence on privacy about property dealings. That desire can stem from fears about security, financial repercussions, having peccadillos uncovered or of not being able to act normally.
The UK is very favorable for international super-rich because, if they organize their affairs correctly, they hardly pay any tax here, one buying agent explained. London is now seen by many as the world’s greatest city. As a financial center it is on a par with New York but it is uniquely tolerant. If you are an Arab now living in America it is not a lot of fun. Wealthy people such as the Duke of Westminster can nip out and buy a newspaper without being protected by bodyguards. The British public’s distaste for other's extreme wealth is another reason for wanting anonymity with house dealings.Link here.
CONRAD BLACK’S WHITE KNIGHTS: JUST WHO ARE THE BARCLAYS?
Sir David and Sir Frederick Barclay are 69-year-old British twins who own Press Holdings International, a company based on their private, English Channel tax-haven island Brecqhous, off Sark. Press Holdings has agreed to pay $467 million for all of the shares of Hollinger, a Canadian holding company now controlled by Conrad Black, a British media mogul of Canadian origin.
So the Barclay twins appear to have walked into a hornet’s nest of shareholder disputes, litigation and regulatory activity. Who are these guys? The record is scanty; these are very private people who eschew the markets and do business the private way. The standard media adjective attached to the Barclays is “reclusive”. One foretaste of things to come?: “Will the Telegraph continue to be the house-organ of the Conservative party?” a reporter asks. “Certainly not,” David Barclay says.Link here, here, and here.
SWISS BANKERS DESPONDENT OVER INCREASING REGULATORY BURDEN
The Swiss Private Bankers Association was critical about the increasing regulatory requirements being placed on the industry last week, arguing they add to costs without necessarily adding to increased investor protection. “It’s difficult to quantify in franc or dollar terms but I usually use about 30 per cent of my time for regulatory questions. There’s not a lot of added value behind that obviously,” Konrad Hummler, a managing partner with a St. Gallen-based institution revealed.Link here.
CENTRAL BANKS SET TO RENEW GOLD PACT
European central banks are likely to renew their five year agreement restricting gold sales in the spring, well ahead of its expiry in September, in a move that could prolong the two year bull run in bullion prices. The new agreement is also expected to raise the limit on aggregate annual sales by the 15 participating central banks, which include Germany, France, Italy and the UK, from 400 tons to more than 450. Analysts said the renewal of the pact at these levels would be positive. The pact has a big influence on the gold price, and many had expected the central banks to seek a bigger increase in sales.Link here.
FOREIGN CASH IS VITAL TO U.S., BUT WILL IT LAST?
Every day, foreign individuals, companies and governments plow $1.5 billion into U.S. stocks, Treasury bonds, factories, companies and real estate. This money is the economic lifeblood of America. It helps the United States expand and modernize factories, secure mortgages, build highways -- even fight the war in Iraq. Two decades ago, Americans sent more money abroad than foreigners invested here. But since then, we have been living beyond our means, consuming more than we make, investing more than we save.
How long will the decision-makers in the global market continue to favor the us? Were foreign investors to flee, stocks could tumble, bond interest rates could jump and it could push the United States back into recession. Interviews by Wall Street Journal reporters found angst overseas about the U.S. economy and the nation’s swelling debts. But it also found that the world’s biggest economy continues to have allure as a place to invest.Link here.
How you can play the falling dollar.
Traditionally, Americans play a weakening dollar by buying foreign stocks and foreign-stock funds, which they are still doing. But foreign bonds -- which tend to be less volatile than stocks -- can offer a safer way to play a weakening dollar. That is a draw for investors who want to play the currency market without the risks and hassles of directly trading currencies.Link here.
AVOID GIVING OUT PERSONAL INFORMATION TO INTERNET “PHISHERS”
With more and more consumers turning to the Internet to shop, bank and exchange messages, scam artists now lurk like pickpockets in crowded public areas. Using e-mail, they coax people into surrendering personal information or money codes, which they then use to commit fraud or money laundering. The phenomenon is called “phishing”. These thieves send out e-mail like baited hooks and hope for a bite. What does this e-mail look like? It can appear legitimate, including a company logo.
How do you protect yourself? Be deeply suspicious of any e-mail that asks you to divulge personal information, such as your Social Security or bank-account numbers, or common questions used to verify your identity such as your mother’s maiden name. Companies will never ask for such information over the Internet.Link here.
here is an example fake bank site. It claims to be a Barclays site, but it is pretty obviously not.
Net Fraud, ID theft jump.
In its 2003 Report on Consumer Fraud and Identity Theft, the FTC finds that 42% of 215,000 complaints last year are related to identity theft, an increase of 2 percent since 2002. The biggest culprits for complaints: Internet auctions, shop-at-home catalog sales, and Internet or computer services. A total of 55% of the fraud complaints were connected to the use of the Internet--up from 47% last year.Link here.
THE 50 STATES RANKED BY DEGREE OF CORRUPTION
Mississippi is the most corrupt state, with North Dakota and Louisiana a close second and third, respectively, according to a report released Friday by a The Corporate Crime Reporter, which based its findings on public corruption convictions per 100,000 people in the 50 states from 1993 to 2002. Public corruption takes on a range of forms, perhaps the most prominent being misuse of taxpayer money by elected officials and acceptance of bribes.Link here.
ACCOLADES FOR THE FLAT TAX FROM ADAM SMITH’S HOMELAND
Would you be surprised to learn the top tax rate in Baghdad is 15%, while in Moscow, where a uniform rate has been in place since 2000, the figure is 13%? While these may seem low compared with the UK’s top rate of 40%, the real jolt may be the discovery the harvest of tax in Russia has doubled since the turn of the decade. And the men who influenced Russian policy-makers are a group of United States economists, who acknowledge their ideas are derived from Adam Smith’s writings on tax policy when he was a Customs officer in Edinburgh.
Applying the wisdom in Smith’s great book, The Wealth of Nations, the authorities in new eastern European state Slovakia have a simple tax of 19%. After generations of complex and confusing taxes, Slovaks are yielding more to their government than they did under high taxes. It may seem strange, but a long-dead Scot is one of the leading influences in Bratislava.
There have been many sage voices in the past who advocated lower taxes -- the French economist Say articulated the Law of Diminishing Returns to urge the Crown in Paris to levy less. There is one famous episode in tax history when, in 1827, a U.K. Treasury clerk “forgot” to impose the full rate of tobacco tax. Almost overnight he killed off the profitable smuggling trades around Britain’s coast as he obliterated the benefit of illicit tobacco. Many suspect the clerk was not suffering amnesia, but rather had read his Adam Smith.Link here.
But is it really such a great idea in Iraq?
Under the old regime, Iraq taxed up to 60% of individual and corporate incomes, with exemptions for foreign-company development projects. In practice, however, many ordinary Iraqis did not pay any tax on their small incomes. After the U.S. invasion and the collapse of the old regime, Iraq became in effect tax-free. This brief period of tax freedom has come to an end.
The U.S. military administration of Iraq has imposed an income tax of 15% on Iraq, starting in January 2004. While a flat 15% rate may seem low relative to taxation in the rest of the world, the tax adds an unnecessary hardship on the struggling economy of Iraq. Many of the countries along the Persian Gulf have no income taxes, so this tax, in addition to the danger of violence, creates a major comparative disadvantage for Iraq.Link here.
THE BANKRUPTING OF AMERICA
An analyst’s sobering take on the recent (and very important) study which shows the US government is $44 trillion dollars in debt. Ironically, the people most threatened by the hydra-headed financial and political monster are the very same people these programs were designed to benefit: the middle class. The financial imbalances stem from direct wealth redistribution, from one generation to the next. They are a disincentive for saving and investment, hindering current growth today while bankrupting America tomorrow. But politically they are sacred cows.
And it is not just the government who is borrowing with reckless abondon. Household borrowings now total $8.2 trillion and they continue to grow at near double-digit rates. Only twice in the last 25 years has debt service taken as large a chunk of America’s income as now -- and that is despite the lowest interest rates in fifty years. So...what will happen? What is the financial endgame? What are the consequences of America’s bankruptcy...? Sooner or later, inflation will be back -- and in a big way.Link here.
We have seen the temperature rise along the corridors of power in recent days as finance ministers, central bankers, and others have clamored to have their say on the current disruption in international capital and goods markets. This disruption has its roots in America’s Military Keynesianism and the Asian Mercantilist response it has elicited.
European Central Bank chief Jean-Claude Trichet said, somewhat tautologically, that “excessive volatility” and “brutal moves” in currencies were “inappropriate”. Trichet seems to be offering a coded warning that while the central banks will not give the markets a definite target at which to aim, dollar bears should not reckon on an uninterrupted reign, especially if the dollar’s decline becomes, in a buzzword, “disorderly”.Link here.
Sell oil for gold, former Malaysian Prime Minister tells Saudi Arabia.
Mahathir Mohamad said that Saudi Arabia should sell oil for gold, not dollars, to avoid being “short-changed” by a decline in the U.S. currency. “The price of oil is $33, but the U.S. dollar has declined by 40% against the euro so you’re effectively getting $20,” Mahathir told an economic conference in Jeddah. “So you’re being short-changed.”Link here.
AMERICAN BANKS ARE MAKING VERY BIG DEALS AND VERY BIG PROFITS. FOR HOW MUCH LONGER?
The latest bank deal, between J.P. Morgan Chase and Bank One, will create America’s second-biggest bank by assets, which is to say a very big bank indeed, since the assets concerned amount to some $1 trillion or so. America’s banks have been jaw-droppingly profitable. Financial firms now account for a third of all corporate profits, compared with some 18% in 1988, their recent low. For that, thanks goes mostly to Alan Greenspan and his colleagues at the Federal Reserve, for slashing interest rates to the bone and saying that they will keep them there. This has kept consumers borrowing and otherwise shaky companies afloat.
In addition, the difference between short- and long-term rates, otherwise known as the yield curve, is close to historic highs, even though long-term rates have fallen remorselessly over recent years. Banks have been able to snaffle up deposits and lend out the money at much higher rates. In such conditions, in other words, bankers would have to be more than usually stupid not to thrive. Sadly, the wonderful times are unlikely to continue.Link here.
KIWIS TAKING ADVANTAGE OF WEAK U.S. DOLLAR AND FUNNELING CASH OFFSHORE
New Zealanders are funneling a river of cash offshore, taking advantage of what they see as an over-valued New Zealand dollar. ABN Amro Craigs, one of the country’s biggest retail brokers, said orders to buy US assets had doubled in the past six months. Craigs is now buying on average NZ$400,000 of US shares and bonds each day on behalf of its clients. Occasionally orders are reaching NZ$1 million. The broker is also seeing strong increases in demand for Australian and British assets. “It is an obvious opportunity to diversify (investment portfolios) at these currency rates,” said ABN Amro Craigs chairman and managing director Neil Craig.Link here.
BOTSWANA AFRICA’S FREEST ECONOMY SAYS REPORT
Botswana’s reputation as a well-managed and liberal economy has been further enhanced by the publication of the 2004 Index of World Freedom report which ranks the nation as Africa’s freest economy. The report, sponsored by the Heritage Foundation, rates 155 countries, with its authors basing the rankings on the assumption of a strong correlation between economic freedom and individual prosperity.
The league table is calculated by measuring a country’s performance in 10 key categories: trade policy, fiscal burden of government, government intervention in the economy, monetary policy, capital flows and foreign investment, banking and finance, wages and prices, property rights, regulation and informal (or black) market activity.Link here. CIA factbook on Botswanna here.
MENDING SUB-SAHARAN AFRICA
Zimbabwe provides a dramatic illustration of how statist economic policies, corruptly enforced, swiftly impoverish. In the past five years, Robert Mugabe’s contempt for property rights has made half the population dependent on food aid, while his cronies help themselves to other people’s land and savings, and build helipads for their own mansions. But Zimbabwe’s curse is also Africa’s. The main reason the continent is so poor today is that Mugabe-style incompetent tyranny has been common since independence (see survey). The most important question for Africans now is whether Mr. Mugabe represents not only their past, but their future as well. There are encouraging signs that he does not.Link here.
CONSERVATIVE REPUBLICANS PUSH FOR SLOWDOWN IN U.S. SPENDING
A day after President Bush vowed to submit an austere budget and halve the deficit in five years, conservatives in his own party said that they were not satisfied and stepped up their campaign to force the White House and Republican leaders on Capitol Hill to do more to hold down the growth of government spending. Forty Republican House members gathered to hash out how to press Mr. Bush and the Congressional leadership to deal with spending increases that they say are running out of control and a deficit that is reaching alarming proportions.
Their discomfort has been echoed in recent weeks by conservative researchers and commentators who support Mr. Bush on most issues. Among them are the Heritage Foundation, the Club for Growth, a political action committee, and The Wall Street Journal’s editorial page. Polls show that the widening deficit is of increasing concern to the electorate and that Republicans are losing their traditional advantage over Democrats on the issue.Link here.
The mother of all big spenders: Bush spends like Carter and panders like Clinton.
The Bush administration’s budget projections revealed an anticipated budget deficit of $455 billion for the current fiscal year, up another $151 billion since February. Supporters and critics of the administration are tripping over themselves to blame the deficit on tax cuts, the war, and a slow economy. But the fact is we have mounting deficits because George W. Bush is the most gratuitous big spender to occupy the White House since Jimmy Carter. One could say that he has become the “Mother of All Big Spenders”.Link here.
PROPPING UP THE DOLLAR: FINGERS IN THE DIKE, AND FINGERS IN THE PIE
$1,264,000,000 each and every eight-hour business day, or around $2.6 million a minute. That is the scale of the support operation which has been mounted -- largely, but not solely by the Bank of Japan -- to keep the crumbling dollar propped up over the past three months. Yet, despite the huge intervention, which may not, in fact, fully reflect ALL of the intervention undertaken, the Greenback has fallen 6½% against a basket of its major trading partners and 8½% against Sterling in that time.
Now, if even the likes of the Brazilians are having to do what Latin American governments have historically done best -- corrupt their peoples’ money -- in order not to boost the Dollar, nor to arrest its decline, but merely to limit the speed of its descent, can you see why there are widely held fears outside of America that the fall will become what the authorities euphemistically call “disorderly”.
The Administration still fatuously talks of maintaining its “Strong Dollar” policy, and Alan Greenspan and his chums at the Federal Reserve issue reassuring speeches denying that any of this will have any impact upon the wellbeing of ordinary Americans. Indeed, in the latest act of self-serving economic illiteracy, Senator Charles Schumer, a Democrat from New York, is sponsoring legislation to impose tariffs of as much as 27.5% on China as -- wait for it -- a punishment for choosing to accumulate large quantities of the spendthrift American government’s zero-interest rate, irredeemable IOUs, know as US Dollars. Schumer is also effectively threatening to start interfering with what remains of the free market if the Chinese do not immediately assist in a further depreciation of his nation’s currency. No wonder the Bank of Japan has its work cut out for it -- images of Dutch boys and dikes spring to mind.Link here.
THE STOCK MARKET’S YIN AND YANG
The ancient Chinese philosophy of Taoism comprehends change in the world as the interplay between the forces of the yin and the yang. Portrayed in a circle and vaguely resembling two tadpoles in a tight embrace, the yin and yang represent the dark and the sunny sides of a hill: each starts growing as the other reaches its fullness and each has a dot of the other's colour within itself as a symbol that it contains the seeds of its opposite. The yang represents action, maleness, creativity and heat. The yin is cold, contemplative and dark. Whenever one movement becomes extreme it develops opposite qualities. “Reversion is the movement of the Tao”, said Lao-tzu, the legendary philosopher.
I find in the yin-yang a metaphor for analyzing the operation of financial markets. Just as the yang gives way to the yin, the excesses of the bull market create the conditions for the bear market. And as the bear market progresses, it prepares the grounds for the next bull market. Virtuous cycles give way to vicious ones and so forth. It follows from this that no investor should be either a permanent bull or a permanent bear. Everyone should adjust to the changing times. “To resist is like holding your breath -- if you persist, you will die,” proclaim the Taoists. Much the same wisdom is contained in such familiar Wall Street adages as “Don’t fight the tape” and “You can’t buck the market.”
For the last nine months or so, the world’s stock markets have been ablaze. Their recovery has been accompanied by strong economic growth in the United States and elsewhere. To remain a bear, under such circumstances, might appear to be an act of folly and of self-destruction, a prolonged holding of the breath. However, I do not believe that this is the case. On the contrary, the bear market has merely been interrupted, its work unfulfilled, and that at some point in the near future it will return.
Although the recent bear market lasted many months it failed to perform even its primary function, that of driving equity valuations back to fair value. Jeremy Grantham of Grantham Mayo Van Otterloo characterises the current stock market rebound as the “greatest sucker’s rally in history”.Link here.
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