Wealth International, Limited

October 2006 Selected Offshore News Clips

(Especially noteworthy articles’ headings highlighted in gold.)


In my practice, I encounter plenty of tragic stories where people might have better protected themselves, if only they had foreseen the unforeseeable. Take John and Dianne. They had met in college, became engaged and planned to get married in their home state of California. But before they could marry, one evening John’s car was struck by a car careening down the road, out-of-control and he was killed instantly. Being relatively young, with no children, and just at the eve of starting their life together, it did not occur to John and Dianne to worry about estate planning or asset protection yet. And the consequences to Dianne of this oversight compounded her loss and heartbreak. Though she felt sure John would have wanted her to inherit his property, she did not get a single penny of it. Since he died without a will, under the California laws, the money went to John’s parents. And because they did not approve of John and Dianne’s relationship, they did not pass any of his estate along to her.

Circumstances like this are never planned for – they just happen. And when they do, we need to pay attention to the lesson that everyone, no matter how young or old, needs to construct a succession and asset protection plan. This should include:

Link here (scroll down).


We are living in interesting times. A popular TV program called “Deal or No Deal” – a high-stakes game show of odds and chance – says it all. On the show, contestants compete for cash inside 26 sealed briefcases. The show is exciting because so many contestants take very big risks and at each stage they are offered a “Deal” of a certain free winning or “No Deal”, which means they risk it all for a chance to win even more. The critical thing to realize here is that the contestants can only win because their own money is never at risk. This show is a sign of the times and parallels the mentality of many money managers and financial institutions. “Deal or No Deal” is, indeed, a study in human nature and has great bearing on more than a few hedge funds, financing institutions and companies. The message here is that there are too many people willing to make extraordinarily risky bets with other people’s money if they personally have a chance to win big.

Many hedge funds collect 2% for assets under management, and 20% of any winnings, but they do not offer a “claw-back” clause in their agreements. If a claw-back clause existed, investors in a hedge fund would be able to take back the previous winnings of their asset managers if too much of the hedge fund’s money they managed was gambled away foolishly. When financial interests are not clearly aligned, a trader can literally bet the bank. The recent Amaranth Fund story is just one example where a 32-year old “kid” bet tens of billions of investor dollars and lost $6 billion.

Think about it. What lunatic pension, endowment or advisor, would trust billions to someone who has barely lived through one economic cycle, or was just a child when Nelson Bunker Hunt and his brother lost everything on March 27, 1980 on “Silver Thursday”. The memories of today’s young asset managers are so short that they cannot even remember when 28-year old Nick Lesson blew up the Baring Investment Bank, a 233 year-old institution, or when Long Term Capital collapsed and folded in 1998 when it lost $4.6 billion in less than four months. Even after going through the 2000 stock market crash, the financial markets today are still running without adult supervision. I am placing my bets that Amaranth is not the last giant hedge fund disaster to play out.

The real risks to the market are not in the tens of billions of dollars that can be lost in highly-leveraged commodity futures, but in the hundreds of billions that can change hands now that total derivatives are around $270 trillion, and credit default swaps are over $23 trillion. In the credit default swap market, a hedge fund or a firm like JP Morgan or Goldman Sachs can collect cash payments today, with a promise to pay tomorrow if a bond or note defaults. Wall Street traders and hedge fund managers take the credit default swap premiums into income and assume that low volatility and low loss will run forever. The mentality on Wall Street is still all about making a year-end bonus big enough to retire.

Do the traders and money managers really care that they are gambling pension, endowment or shareholder money? Are they overly concerned if the losses pile up in housing, bonds, or corporate credits? Everywhere we look there are instances of decision makers getting to reward themselves over and over again. Accounting frauds, such as Enron, are in the headlines every day and back-dating options for corporate management has now been discovered at hundreds of firms. Corporate executives, money managers and traders, who get to measure their own performance, are putting their hands into your cookie jar and grabbing as many cookies as they can.

Low market volatility and credit spreads indicate that the markets perceive credit risk to be minimal. However, risk appears low only because the growth of derivatives, such as credit default swaps, has been exponential. All the hedge funds and major Wall Street players have been selling volatility and credit default swaps – especially credit default swaps on mortgages to buyers collecting far too few premiums to insure the risks. The retired Chairman of the Fed also assured us that the growth in derivatives lessens risk. Sadly, the same retired Chairman was on record just a few short years ago urging individuals to take out adjustable-rate mortgages when there was an incumbent President to re-elect and an economy to jump start.

Given human nature, the real risk in the markets is not just whether a stock goes up or down, but rather in the behavior of your asset manager. Investors beware! It is time to go back to only risking the money you can afford to lose, otherwise someone may already be playing “Deal or No Deal” with your money.

Link here.


One of the largest tax investigations ever seen in the UK is currently underway by the OFPG. The OFPG was created a couple of years ago to recover tax from untaxed offshore bank accounts. Although it consists of only 40 investigators, they are investigating hundreds of thousands of offshore bank accounts. The OFPG believes that funds held by UK residents in 13 Offshore Financial Centers total over £200 billion with a significant proportion evading tax.

The OFPG persuaded the UK Special Commissioners to issue a production of information notice to force overseas banks to produce massive amounts of information previously thought to be confidential. These notices force the overseas bank to disclose information about bank accounts held by UK residents, even though the identity of these account holders are unknown (and hence unnamed) by the Inland Revenue. The banks attempted to thwart the Revenue’s disclosure notice by arguing, among other matters, that the EU convention on Human Rights would be breached and that the interaction of EU Law and EU Savings Directive overrides the disclosure requirement. However, the taxman successfully argued that the notices should be given because, even though they could not identify the taxpayers, they had reasonable grounds to believe that substantial tax was being evaded and that they could not obtain the information otherwise.

Offshore banks in jurisdictions such as Channel Islands, Isle of Man and Switzerland are all subject to the Exchange of Information agreements signed by their respective governments and may now be compelled to provide even so-called “confidential” information. Based on sample endeavors the Revenue stated that they expect to yield at least £1.55 billion of additional tax – far greater than any tax investigation ever conducted in the UK previously. The tax investigation easily surpasses the Revenue’s secret occupation of a central Post Office in the 1950s, where for nine months they illegally opened Londoners’ private post. The taxman’s bonanza will lead to many criminal prosecutions, fines, interest on unpaid tax, and tax.

The 40 investigators in the OFPG cannot possibly cope with this number of investigations. “Normal” tax investigations will be put on hold to cope with this extra workload. Civil cases will be worked under the civil investigation of fraud process and, as long as the taxpayer fully discloses and cooperates, will be limited to penalties, interest and tax. They will go back up to 20 years. In addition, the tax payers must not be found guilty of providing false documents or dishonesty. The penalty regime will nonetheless be severe, with high penalty levels. In other cases, criminal proceedings may be taken. If the tax payer has already had an investigation, and is now found to have other undisclosed assets, criminal proceedings will very likely follow.

The tax investigation will lead to a full review of the individual’s private and business matters over several years. This tax investigation could have repercussions for expatriates. The information gathered by the UK tax authority during this investigation may also include the account details of many people who currently live overseas. The UK tax authority has agreements with overseas tax authorities whereby it will share information. In the event they suspect tax evasion in another country they are likely to advise the overseas tax authority accordingly. This is likely to be followed by other national tax authorities in their seemingly unremitting pursuit of tax evaders, at a time when all EU countries are anxious to increase tax revenues to meet their unfunded state pension and other social welfare promises.

Note that if you discuss confidentially your position with a UK adviser, and intimate that you have undisclosed assets, your adviser must immediately and secretly report you to the SOCA (the Serious Organized Crime Agency) and is not permitted to tell you about his reporting disclosure, even if the nondisclosure is with an overseas tax authority. So you cannot take advice in the UK about this situation without immediately disclosing it, in which case you need to decide to disclose in full before approaching your adviser. The future for tax investigators is looking exceptionally bright.

Link here.


The Channel Islands are expanding the more sophisticated sections of their offshore industries. Guernsey staged a marketing conference in London last week for its offshore funds industry. Jersey organized a London promotion in May for a wider range of offshore activities. Offshore finance is booming.

It was not supposed to be like this, according to the strategies of mainland jurisdictions. The UK has become tough on offshore trusts – once a core Channel Islands activity. And a few years ago, the EU organized a twin assault – one on tax evasion by EU-resident investors and another on tax-exempt offshore companies. Perversely, these initiatives have encouraged the “tax neutral” centers to expand the more sophisticated sections of their offshore finance industries. Just as the U.S. Securities and Exchange Commission is floundering in its battle to enforce registration of hedge funds, jurisdictions such as Jersey and Guernsey are rolling out the red carpet.

The EU savings directive became effective in July last year but it appears largely to have failed, not only in the Channel Islands but also in Switzerland, at which it was primarily aimed. In the first six months, the country coughed up only €100 million in withholding tax on the trillions in secret savings held there by EU citizens. Jersey delivered just €13 million. There are various loopholes. Deposit interest can be restructured into “dividends” or even Islamic “profits” and escape tax. Or savings can simply be sent to other centers such as Dubai, Singapore or the Bahamas, where the directive does not apply. Growth in bank deposits in Guernsey stalled in the period to mid-2005, which may have reflected some evasive activity. But oddly, deposits jumped by 23% in the following 12 months, suggesting a return to business as normal.

The European Commissioner for taxation, László Kovács, has launched a campaign to extend the savings directive to other jurisdictions. But it is not obvious that he has any worthwhile bargaining power. The Channel Islands, the Isle of Man, the Caymans and British Virgin Islands, being Crown possessions, were delivered up as bargaining chips by UK chancellor Gordon Brown. This manoeuvre was part of a successful negotiation to avoid the imposition of withholding tax on eurobonds, which would have damaged the City of London. But Singapore, for instance, is another matter entirely.

The other international assault on the Channel Islands related to discriminatory corporate taxes, with a zero rate on profits on off-island activities. The deal hammered out was a “zero-ten” structure in which all companies, resident or not, pay no tax on profits from 2008, with the crucial exception that regulated financial businesses will pay 10%. This deal will be expensive for Jersey and Guernsey, and to fill the fiscal black hole, Jersey is to levy a 3% sales tax. The most attractive way out of the deficits for island politicians will be to promote the accelerated expansion of the offshore finance activities that dominate the local economies.

In the past, there has been a certain amount of local political resistance to the rise of the finance sectors – opposition that has been reflected in housing licences and curbs on employee numbers. Jersey is relaxing its complex residential rules while Guernsey, despite facing a shortage of tax revenues, is to offer an income tax cap so that resident hedge fund managers enjoying bumper bonuses will not have to suffer the 20% rate borne by lesser islanders. There is plenty of scope for growth. Advances in communications technology have transformed the potential of offshore centers. They can be smoothly plugged into the electronic networks of firms in the City, Switzerland and almost anywhere else. Regulation is a crucial factor. While clumsy onshore regulators are struggling to install light-touch rules, the offshore financial commissions are far ahead with near-instant regulations backed, if required, by legislation nodded through by local politicians.

Regulatory arbitrage is coming to the fore as an offshore driving force. The EU prospectus directive has brought business to the Channel Islands and there are expectations that the markets in financial instruments directive will also deliver competitive advantages as mainland financial institutions become tangled in yet more red tape. The stakes are rising, though. Last week the SEC launched an investigation into the near-collapse of hedge fund Amaranth Advisors, which lost $6 billion on energy speculation. The mainland watchdogs are becoming concerned about the amount of risk and leverage in alternative investment sectors that are largely outside the regulatory framework. Europe and Caribbean havens have long been bothersome for tax collectors in leading economies, but the question now is whether the offshore boom is becoming big enough to undermine onshore regulation.

As long as the Channel Islands keep their finance sectors out of serious trouble, they will have a largely free run. But if there is a scandal, they will face expensive retribution. Reputational risk is rising to the top of the agenda.

Link here.


There has been a lot of talk lately about how we might have better luck trying to work with our friends on the Left now that the hopelessness of the Right is undeniable. I suppose anything might be worth trying and I agree there is reason for giving it a shot. But I am skeptical. My frustration with liberals goes back a long way. When I came of age, back in the ‘60s, it seemed to me that my peers had a healthy mistrust of government, all government. After all, it menaced us in ways one does not have to rehearse. Admittedly, most people’s reasons were generally too crude and uninformed to be intellectually useful, but at least their gut instinct was appropriate.

But the energy of those days faded away as soon as the Viet Nam business ended. The focus of popular anger gone, folks soon forgot the forces that brought on the evil of imperialistic war and its corollary, domestic tyranny, were not gone at all, just moved to the background where the political class and its owners wanted it. The so-called counter culture got co-opted so fast one can hardly remember it ever existed. The Left no longer distrusts the government, it embraces it. How can the Left be taken seriously today when it offers no principled opposition to the system with which it claims to be at odds?

How anyone who thinks himself a Liberal, in the best sense of the term, can stomach the antics of their current crop of saviors of the common man is astonishing to me. If it is not perfectly clear that they are only in it for what is in it for them, and not in any sense for the good of the people they claim to represent, then all I can conclude is that people wish to be deceived. And as long as otherwise good folks think the root of all evil resides exclusively in the machinations of the Republican party, or that by redoubling their efforts to promote the success of the Democrats those evils will be stymied, they will never see the cause of justice advanced. Just as the ruling class wants it.

Link here.


You smell the perfume of the white ginger and watch the palm fronds sway in the southeastern trade winds … slip into quiet, blue water that feels like velvet on the skin … and walk along the white sand and scoop up shells, adding to a collection already spilling onto the patio table. Experiences like those – a daily pleasure on Roatan, Honduras – are, really, what enticed us to invest here.

We never imagined we would be able to afford an island retreat – let alone one right on a secluded beach. But we are here pretty much full-time these days, enjoying the beautiful, open-air house we had built, and an incredible quality of life, for a fraction of what it would cost us elsewhere in the region. The truth is that we are living a dream retirement we never even dared dream about before we came here.

It feels like we are a long way from the United States. We have traded crowded freeways for two-lane roads that land crabs amble across. But for my husband and me, moving here turned out to be an easy decision. We joined a tour to Roatan back in March 2003. We had traveled widely before that and always asked ourselves, “Would we want to live here?” But until we landed on this island, the answer was always, “No, too far from the children, grandchildren, and friends.” The quick, two-hour direct flight from Houston to Roatan made our decision easy. As did the incredibly well-priced properties. Back then, and still today, there were all variety of properties on offer – excellent-value waterfront, view, and wooded lots at various developments, reasonably priced homes already built and landscaped, and large tracts of acreage. Of course, make sure you have clear title to what you buy. And get title insurance.

Within five days, we had bought a lot and met the Canadian designer who would build us our dream house. Actually, we had never dreamed that we could afford a home right on the water. But the description of our ideal home all but tumbled out of us in short order. We wanted a pod-style Balinese house. One year later, we moved in. The boxes piled high in our container on the ship from Miami, held Pier One furnishings in reds and oranges. We brought everything, from refrigerators to light bulbs. And today we have an inside garden flourishing riotously and tables groaning under vases of newly picked orange birds of paradise, red hibiscus, pinks of the torch ginger, and leaves from the varieties of crotons.

I was interested in learning more about our new home, and so I began writing for the magazine that covers the community and the people who make it work. And within time, I became the editor, in fact. Would it be corny to say it is a joy rounding the bend of the road on the way to do an interview? Would it surprise you to know that we think of Roatan as our home, and our USA townhouse as our jumping-off place? Our gray hairs are showing, yet we feel alive and adventuresome.

Link here.


Rolling down the new coastal highway at 75 mph, I was continually surprised by the breathtaking views of the rocky Pacific shoreline, the majestic cliffs, the wide beaches, and the hidden sandy coves. Reminding me more of California than anywhere else in South America I have travelled, the Chilean coast enjoys much the same climate and geography. But, while the quality of life and the infrastructure are comparable, Chile’s cost of living and property prices are dramatically lower than in southern California.

Viña del Mar is the primary coastal attraction in Chil, with its wide, white-sand beaches, luxury hotels, oceanfront apartment buildings, and excellent restaurants. But the most pleasant surprise for me was the city of Viña del Mar, which sits inland adjacent to the beach resort. Its turn-of-the-century architecture, grand buildings, and busy shopping district are clean and well organized, with a flourishing year-round population of a little more than 350,000. Viña del Mar would stand alone as a great place to live even if the resort were not there. And Viña does not close in the winter, so no matter when you choose to come to the resort, the adjacent city will be open for amenities. The beach is well maintained and lined with some of the country’s best restaurants, bars, and houses.

Things in Viña del Mar are surprisingly cheap – given the quality of everything the city has to offer. In downtown Viña del Mar, we looked at a 2-story house with four bedrooms and a garage, situated on a quiet street, within walking distance of the downtown attractions. The owner is asking $144,000. A few miles up the coast from Viña del Mar proper, you will find the neighboring community of Reñaca, which is more upscale, with gleaming new luxury apartment projects along the shoreline. Prices here were a bit higher.

A little farther on, I found what turned out to be my favorite part of this area, a town called Concón (sometimes written Con Con). It has a more old-fashioned feel, with its waterfront seafood restaurants and lower, slightly older, seaside apartments. To me, Concón represented the best value in the Viña del Mar market and it is only a 5-minute shuttle ride from the action of Viña del Mar. I looked at an apartment here with 3 bedrooms, 2 bathrooms, and a wide terrace overlooking the ocean priced at $93,000. I also saw a house for sale with a quiet street to the rear and the ocean to the front. With 3 bedrooms, 2 bathrooms, and a deck overlooking the sea, its asking price is $136,700.

Rocas de Santo Domingo was a pleasing, small residential community that had little in the way of commercial establishments (two supermarkets and a bakery), but was among the best places I saw for full- or part-time living. Along with the beach, the town has a great 27-hole golf course and country club. Santo Domingo was originally a planned resort community founded in 1942, which explains its well-organized feel. The homes here have well-manicured gardens under the shade of giant eucalyptus trees. For any serious shopping you will need to cross the Maipo River to San Antonio, about 10 minutes away. I saw my favorite condos on the coast here – Paseo del Mar. The 3- and 4-bedroom homes run from 1,300 square feet to 1,500 square feet and are located on the beach with great views. The 2-story condos are circled around a nice pool and a green, well-landscaped lawn. Prices start at around $100,000 and my favorite 4-bedroom model was $137,000.

Nestled in a heavily wooded region of pines, the city of Concepción is reminiscent of the U.S.’s Pacific northwest, right down to the resemblance between its river Bio Bio and the northwest’s Columbia River. Concepción exhibits the life and vibrancy common to many university towns – from the street musicians to the abundant cafés, bookshops, and restaurants. A clean city of 380,000 people, it is home to two orchestras, a music conservatory, and several theaters. The cost of living is lower in Concepción than in most of Chile’s other desirable locations. There are new 2- and 3-bedroom apartments for sale atop a wooded hill in a residential area on the edge of town, about five minutes from downtown and serving as what I would call a bedroom community for the city. The apartments have a view of the river, the city, and the ocean. Prices start at $96,000 for 1,070 square feet. In the rental market, there’s a small furnished apartment centered on the Plaza de Armas, renting for $543 per month. A few blocks further away from the square, a similar apartment is $300 a month.

Concepción is not actually on the coast. It is several miles inland and there are no beaches to speak of unless you drive a few miles either north or south of the city. There are much better places in Chile to go if you are looking for a seaside destination, but I think of it an alternative to Santiago, even though Santiago is more than 10 times its size. It has all the essentials – including a rich cultural life and an airport – along with a more vibrant, young-at-heart feel. It lacks Santiago’s huge variety of amenities. But it also lacks Santiago’s traffic congestion and renowned smog.

Link here.
Buenos Aires, the Paris of South America – link (scroll down to piece by Chris Mayer).
St. Kitts and Nevis tightens its citizenship by investment program – link.
Southern France attracts Brits – link.


The U.S. Treasury Department and IRS issued Notice 2006-87, which permits individuals who work outside the U.S. and live in foreign countries with high housing costs to deduct or exclude a greater portion of their housing costs. Although U.S. citizens and residents are generally subject to U.S. tax on their worldwide income, section 911 of the Internal Revenue Code permits individuals who live and work outside the U.S. to exclude from U.S. tax portions of their earned income and housing costs.

The Tax Increase Prevention and Reconciliation Act of 2005 (TIPRA) made several changes to section 911, one of which effectively placed a limit on the amount of housing costs that could be taken into account under that section. TIPRA provided the Treasury Department with authority to adjust the new housing cost limitation based on geographic differences in housing costs relative to housing costs in the U.S. In the Notice, using the approach suggested in the legislative history to TIPRA, the Treasury exercised its authority to increase the housing cost limitation for specific locations. The relief provided by the Notice is retroactive to the effective date of TIPRA.

Link here.


ETFs resemble index-based mutual funds in that both represent baskets of securities that track the performance of an index. However, there are key differences between ETFs and index funds, including how they trade, what they cost and what they can do.

Trading: ETFs are bought and sold through brokers and trade throughout the day on an exchange, like stocks. Because the share price is published throughout the day, traders are able to buy or sell shares as they please. Index fund shares are purchased from the holding fund, and share purchases and sales are only priced once a day, at the close of trading.

Costs: ETF expense ratios are generally cheaper. For instance, the expense ratio for Vanguard’s Total Stock Market ETF (VTI) is 0.07%, compared with an expense ratio of 0.19% for the firm’s Total Stock Market Index Fund. However, many of the newer ETFs coming out are more expensive than the original plain-vanilla products. Second, because ETFs are bought and sold through brokers, investors have to pay a commission each time they trade. ETFs have no minimum investment requirements (though you do buy in whole shares as opposed to dollar amounts) and no fees for early withdrawals. But with an ETF you do have to pay the bid-ask spread, which can vary.

Pricing: Both ETFs and index mutual funds use the net asset value of the underlying holdings to calculate share price, but with ETFs, the price can be influenced by market forces, such as supply and demand. When this happens and an ETF starts trading at a premium or discount to its NAV, arbitrage mechanisms are used to bring the price back in line.

Tax efficiency: ETFs are generally more tax-efficient than mutual funds. When a large investor wants to cash out of a mutual fund, the portfolio manager often has to sell shares in the fund to raise the money. This generates capital gains which are taxable to shareholders. ETFs, though, are sold on the open market, so when an investor wants to cash out, he can just sell his shares without affecting other shareholders. (In some cases, an authorized participant – typically large institutional organizations, such as market makers or specialists – can exchange shares of the ETF for the underlying stocks, and since this is an “in-kind” transaction, no capital gain distributions are triggered.) ETFs may incur capital gain distributions if, say, the fund needs to sell securities when it rebalances. The ETF structure, though, often allows capital gains to be minimized or avoided altogether.

Capabilities: Because ETFs are securities, investors can use them in many of the same ways they would stocks. For example, they can set limit orders or sell ETFs short. Many ETFs have options listed on them as well. Among the various differences between ETFs and index mutual funds, the ones above are the biggies.

Link here.
How to choose which sector ETF to invest in – link.
A dividend ETF that merits a look – link.
This ETF hogs yield – link.
New ETF hits gold in materials sector – link.
Too many ETFs? – link.


Convictions are deep that a $46-trillion world economy has acquired a new Teflon-like resilience. On the surface, recent events appear to bear that out. Despite unprecedented outbreaks of terrorism, mounting geopolitical instability, soaring oil prices, and the bursting of a major equity bubble, the global economy has hardly skipped a beat. In fact, by the IMF’s metrics, world GDP growth appears to have surged at a 4.9% average annual rate over the 2003-06 period – the strongest 4-year global growth spurt since the early 1970s. And most forecasters, including those at the IMF, are banking on a similar outcome for 2007. Is this resilience a new organic feature of an increasingly globalized world, or has it come at a much greater cost than widely appreciated?

I am firmly in the latter camp, that the world may have paid a very steep price for its newfound resilience. That price, in my opinion, is very much associated with the second-order effects of excess liquidity – namely, a profusion of asset bubbles, record disparities between current account deficits and surpluses, and a mounting protectionist backlash. In a myopic rush to celebrate the immediate dividends of faster economic growth, the costs of what it has taken to achieve that outcome have all but been ignored. As long as global growth remains strong and the liquidity cycle remains accommodative, I suspect those costs will continue to be finessed. But when the tide goes out and the global growth engine slows for any one of a number of reasons, an increasingly integrated global economy and its tightly interdependent financial markets could well have to come to grips with these costs head on. That remains the biggest potential pitfall of 2007, in my view.

Central banks have created a monster – not just liquidity-driven excesses in financial markets but also major cross-border imbalances in the global economy and mounting political tensions associated with those imbalances. Nor do I believe that the instability of this disequilibrium can be resolved through a mere normalization of monetary policies. Ultimately, a more meaningful shift to policy restraint will probably be required. At the same time, by waiting this long to face up to the excesses of the global liquidity cycle, the systemic risks embedded in world financial markets and the global economy have only gotten worse. A monetary tightening that goes too far risks a collapse in this proverbial house of cards. Yes, the world economy has been very resilient over the past five years – but at a real cost. Increasingly, the celebrants of global resilience are dancing on the head of a pin.

Link here.


I miss the days of smoke-filled rooms when crooked pols chose corrupt presidential candidates who were approximately sane. Today we have a sort of presidential bus-station lottery. We choose as ruler any beer-hall putz who can shake hands and grin his way successfully through New Hampshire. This, plus the deep rot of the American political framework, is allowing the rapid conversion of the United States into something previous Americans would hardly recognize.

Given a president who seems chiefly concerned to display his indomitable manhood, the question arises: What restraints keep him from absolute control of a formidably armed nation of three hundred million? The Constitution, noblest of fables, was designed to do just this. But absent the will to enforce them, checks and balances do not exist, and laws, principles, and constitutions mean nothing. If no one says “no,” the president simply behaves as he wants. The genius of the strange little man in the White House has been to recognize this, to divine the weakness of the American political order.

When Mr. Bush gets caught lying or breaking the law, he shows no embarrassment, contrition, or sense of having done anything wrong. He seems to have no conception of right and wrong, of principle. He is not accustomed to being told “no,” and accepts no constraints on his power. All that matters to him is that he get his way. He gets it. Where will this lead? Obviously, to vastly increased police powers. But I wonder. If, down the pike, Bush announced that to protect us from terrorism he would have to postpone the presidential elections and remain in office – what would happen? The public, the congress, the judiciary are so very, very easily manipulated. All it takes is the will to do it. And that the little man has.

A tribal rite in the column racket is the discovery of darkness in the hearts of presidents, or witlessness, and we discover away industriously. I have done my share. I thought Clinton a bright, libidinous lout, Jimmy Carter a moralizing cipher, Reagan a sort of Grandfather Barbie and, by contrast, Eisenhower a wise man hiding behind remarkable syntax. None was evil, or mad. Bush is something new in presidential politics, genuinely dangerous and genuinely out of control. The time is ripe for him. America no longer has the institutional defenses to say “no.”

My impression is that much of the public wants authoritarian rule, or would be perfectly content with it if it even noticed its arrival. What do most people care about beyond television on screens that grow ever larger, beyond porn, beer, and the competitive purchase of grander SUVs? I ask this not as a lifelong curmudgeon being tiresome (though doubtless I am both) but seriously. Who in a sprawling TV-besotted country cares about the Constitution? A comfortable police state is after all comfortable.

I do not predict that the reigning curiosity will stage a coup (which should it occur would not be a coup but “an emergency measure,” necessary to protect us from Terrace). I do say that what is happening today is unlike anything that has happened before, and that people do not always see what is coming. If you read books from the Germany of the 1930s, you will find that people were uneasy, divided, unsure of things, but had no idea just what the squatty little man with the voice had in mind for them. He just did it. The unimaginable does sometime occur. We notice only afterward.

Link here.


Perhaps you dream of a high-ceiling pied-a-terre in a cosmopolitan city. Or a swath of land where grape vines grow and you can walk for miles. Or maybe you long for a mountain retreat where snow-capped peaks offer heart-stopping views and world-class skiing. Perhaps you always imagined yourself a land baron – steward of a vast, productive expanse. Whatever your dream, you may be pleasantly surprised to find there is one nation where it is not simply attainable – but remarkably affordable, too. Argentina is varied, beautiful, sophisticated … and undervalued, which means it makes a lot of sense right now, whether you are in the market for a primary residence overseas, a vacation home, or simply a smart investment.

As you probably know, there was an economic crisis in Argentina in 2002. And back then, if you had flown down with greenbacks to spend, you would have found properties selling for next-to-nothing. In Buenos Aires, for example, you could have picked up a 1,550-square-foot loft with a rooftop terrace in one of the city’s chicest neighborhoods for $63,000 – about 1/15th what you would have paid for a comparable place in Paris and about half what it would have cost you the year prior. Today, a steady recovery is underway. Argentina’s economy is among the fastest growing in the world, expanding at a rate of 8.6% over the past 12 months.

But that does not mean you have missed the good deals. Far from it. In fact, compare what you get in Argentina to what you would pay for comparable property in Europe (and Argentina is decidedly European), and you are still looking at an extraordinary value. There are at least four smart ways you can take advantage of your purchasing power in Argentina today and position yourself comfortably for potential appreciation gains as the economic recovery there continues.

  1. Stake your claim in the Buenos Aires apartment boom. Buenos Aires is a vibrant city, which has a sophisticated, genteel Latin flair, but is cosmopolitan like New York or Paris. In three neighborhoods I like, properties are appreciating anywhere from 10% to 25% a year.
  2. Cash in on China’s demand for lumber. Stumpage prices for timber in Argentina have tripled in the past five years in terms of U.S. dollars. Hardwood grows nearly 65% faster than in the U.S., and after harvesting, it resprouts on its own. China’s demand for wood has grown 400% over the past five years – it has trouble finding enough pulp to meet its toilet-paper needs alone. China now looks to Argentina for all its paper needs, and there is a fortune to be made.
  3. Own a New World vineyard. Argentina’s vineyards are winning accolades around the world. Its wine exports to the U.S. are up more than 50% over the past five years, plus producers are making inroads into European markets as well. You can still get in at the ground floor in the best grape-growing territory region in the country. You can own vineyard land at a small fraction of what you would pay in Napa Valley.
  4. Enjoy Patagonia’s vacation playground. Think Aspen, only priced like rural Kansas. Bariloche is to Argentina what St. Moritz is to Switzerland or Aspen is the U.S. From June through September, this upscale ski resort is the place to see and be seen. But it is just as nice in the off-season when visitors come to hike, fish, sail, ride horses, swim, and sun. You can still own property for as little as $50,000, at the Arelauquen Country Club high-end retreat. Outside of the resort, consider a stand-alone home close to skiing and with views of the slopes, 4 bedrooms, whitewashed with a pretty tile roof and a mature, well-landscaped garden as well as wooded land … listing for just $130,000.

The good values you will find today in Argentina will impress you. But what will strike you as just as attractive is how unabashedly beautiful, welcoming, invigorating, and comfortable a place it is to spend time. (After all, cheap real estate alone does not an attractive place make.) Argentina makes smart sense both for your wallet … and your heart.

Link here.
Exploring the Delta Area of Buenos Aires – link.


It is likely that Hong Kong and Singapore will refuse to discuss joining the EU’s tax information-sharing scheme, applied under the Savings Tax Directive. Faced with paltry returns during the first year of operation of the Directive, the European Commission recently said that it wanted to extend the Directive to major Asian banking entrepots. But according to the Financial Times, Singapore told an EU commissioner that extension of the Savings Tax Directive is simply not on the agenda.

The commissioner met with Prime Minister Lee Hsien Loong and Senior Minister Goh Chok Tong for discussions on a wide range of bilateral and regional issues of mutual concern, including strengthening EU-Singapore political and economic relations through the negotiation of a Partnership and Co-operation Agreement. The Agreement offers the possibility of immediate enhanced cooperation with the European Community on a wide range of policy areas. The EU would like to include information-sharing in the Agreement.

Meanwhile, Martin Glass, Hong Kong’s Deputy Secretary for Financial Services & the Treasury in Hong Kong told a Society of Trust and Estate Practitioners conference last week that the SAR did not have the power to share information with other tax authorities. Said Mr. Glass, “The powers of the government and the commissioner of inland revenue are relatively limited and extend only to information which is required for our own tax purposes. There might be huge ramifications that compliance with such a savings directive would have for our future as an international financial center, which is also guaranteed under the Basic Law.”

The Savings Tax Directive, which extends to a number of “third countries” such as Switzerland, the Channel Islands and Caribbean offshore territories, was introduced in July 2005. It facilitates the exchange of information between EU tax authorities on certain types of savings and investments held by EU residents in their territory so that interest earned can be taxed in the resident investor’s home state. The legislation also allows some jurisdictions to apply a withholding tax, currently 15%, instead of exchanging information. However, these jurisdictions have reported relatively paltry withholding tax revenues, prompting the EU to take action to plug the directive’s many loopholes.

Although there are several ways for investors to escape the directive, such as switching assets to vehicles not covered by the legislation, perhaps the most obvious avoidance strategy is for investors to simply shift their money to more tax-friendly jurisdictions. Anecdotal evidence suggests that Dubai, Hong Kong and Singapore have been major beneficiaries.

Link here.


This was the first IMF conference I have been invited to (and probably the last) and I therefore have little experience of this annual gathering of mostly irrelevant people. However, I have a few observations to make about the IMF meeting. These events are gigantic in size, and one can only wonder whether the financial markets and the entire financial sector have outgrown their usefulness. Also, huge investors’ conferences are more symptomatic of extremely mature markets or market peaks, than of sectors that offer great buying opportunities. Our industry has far too many treasure hunters and it has become virtually impossible to identify truly unusual investment opportunities.

Moreover, the financial sector is now so huge, the costs associated with maintaining us – the parasites of the real economy – must be astronomical. These costs are, of course, directly or indirectly, borne by the clients and reduce their performance accordingly, since the majority of fund and hedge fund managers do not outperform the stock indexes. The rather reclusive Steven Cohen of SAC Capital recently expressed such in an interview: “It is hard to find ideas that are not picked over and harder to get real returns and differentiate yourself. We are entering a new environment. The days of big returns are gone,” he says, because the tailwind of low interest rates, low inflation, and strong profits has been lost. Cohen also worries that as hedge funds have become bigger, a sudden rush for the exit could spell trouble. And while not predicting such a decline for this year, he thinks that some time in the future, “There will be a real decline that may devastate hedge funds that have crowded into the same stocks.”

I should like to add that “a real decline” will devastate not only hedge funds but the entire financial services industry. For this reason, I continue to argue that, in the long term, the U.S. Federal Reserve has no other option but to print money, and that a decline in asset prices will occur in real terms (inflation adjusted) rather than in nominal terms. In my opinion, the asset bubbles are simply too big, and so much of the economy depends on them not bursting and seriously deflating that more and more money (credit growth) will be required to keep them going. This is not to say that individual asset markets cannot deflate despite expansionary monetary policies.

In the 1982–2000 U.S. bull market for stocks and bonds, investors who bought and held stocks and bonds, ideally with leverage, could not fail to do well. The same can be said of the bull market for all asset classes from October 2002 to May of this year. During these periods an investor who allocated his funds to, say, 100 different hedge fund managers (such as some funds of funds do) would have in general done well despite the high cost structure (2% management plus 20% performance fees). But if we now move into trading markets as opposed to trending markets, as I believe is likely, new strategies will have to be adopted by investors. If we move into the trading market, it is likely that some fund managers will do exceedingly well while others will fail badly because they are positioned in the “wrong” asset class. The problem will then be that the investor will pay performance fees to the performing funds and will not receive anything back from the poorly performing funds (in terms of performance fees). As a result, the entire fee structure will begin to weight heavily on the performance of the fund of funds or of an investor’s portfolio that pursues a similar strategy of allocating money to different managers who charge a performance fee.

Some very prestigious names in the investment business had money with Amaranth. Picking the “right” manager must be about as difficult as picking the “right” stock. It may be worthwhile to consider whether a similar or higher performance, with less risk, could be achieved by allocating money simply into a variety of exchange-traded funds (ETFs), based on some technical timing model – a strategy that would entail far lower fees.

Lastly, if indeed “the days of big returns are gone” for the hedge fund industry, an investor might consider going back to basics simply by buying a diversified basket of companies with a reasonable track record and solid management with, say, 30% of his assets and parking his remaining funds in Treasury bills, short-duration bonds, and gold. With this strategy an investor would incur an opportunity cost should the stock market soar, because he would only have a 30% net long exposure. (However, his costs would be very low compared to a 2% management and 20% performance fee.) On the other hand, his risk exposure if the stock market fell would be limited compared to any fund manager or hedge fund, which would on extremely rare occasions have only a 30% net long exposure.

Bennet Sedacca of Atlantic Advisors recently sent me a figure showing the annualized 16-year return for the Dow Jones Industrial Average, which I found very interesting. This figure does not include dividends, nor is it adjusted for inflation, but the broad message is visible. Great buying opportunities occurred whenever the 16-year annualized returns were either below the mean, which was 6.6%, or ideally when it fell into negative territory, as was the case in 1932, between 1940 and 1945, and in 1982.

Conversely, when the 16-year annualized returns were around 11%, the market was a better sale than a buy from a long-term perspective. While the 16-year returns have come down significantly since 2000, they are still above 9% – significantly above the mean of 6.6%. Based on the figure, the likelihood that the annualized 16-year returns will move towards the mean of 6.6% – and eventually towards zero – is very high. The above 30% exposure in equities could be increased once the returns drop below the mean or towards zero, as the probability of returning from below the mean to the mean then increases significantly. There is, of course, also the possibility that the 16-year annualized could return, through a strong rise in the stock market, to the highs we saw in 2000, when they reached 16% per annum. However, we shall now analyse under what kind of conditions such high returns could be achieved.

Link here.


Rarely has a Nobel Peace Prize been more deserved than in the case of Muhammad Yunus of Bangladesh. The founder of Grameen Bank beat out Irish rock star Bono and a bevy of others for the honor, and rightfully so. Financiers do not often register with the Nobel folks in Oslo. Giving this year’s award to a banker – and the bank he created – caused some head scratching. Why not former Finnish President Martti Ahtisaari or Indonesian President Susilo Bambang Yudhoyono? Or former Czech President Vaclav Havel or Ukrainian President Viktor Yushchenko? Or Bob Geldof?

Yunus, 66, deserved it more. The best part of his strategy of giving loans to the poor, known as microcredit, is not the millions of people Yunus has helped so far. It lies in how the bank he founded in 1976 is inspiring a growing number of copycats. That may help provide credit in Asian economies where more is due. By lending to the poorest of the poor in rural areas without asking for collateral, microcredit seeks to create economic and social development from below. It is called microcredit because the loan amounts are tiny by developed-nation standards, often $20, $50 or $100.

The money can have a powerful multiplier effect. Families can buy a cow to start a dairy farm, or a mobile phone to open a communications business or chickens to launch an egg company. Yunus founded microcredit by lending $27 to a Bangladeshi bamboo stool maker and 41 other villagers. As of May, Grameen had 6.61 million borrowers, 97% of them women. What Grameen proved is that money can be made when lending to the poor, thus giving the world’s biggest banks incentives to focus on society’s weakest links. It is an approach that ensures inclusive growth so that virtually everyone may have access to finance. Microcredit can be more profitable than some people think. Interest rates on Grameen’s loans are about 16%, and 95% of them are repaid. One reason for such low default rates is the shame factor.

Asia needs more Grameen-like operations, and fast. Hidden under all the euphoria about Asia’s booming economies are “vast pockets of paralyzing and persistent poverty.” Take China, where 42% of the population lives on less than $2 a day. In India, 75% of the population survives on less than the cost of a Starbucks latte. Ensuring that growth is more equitable will help morph Asia into a richer consumer market. That is a win-win situation for Asia’s people, and for the executives and investors aiming to profit from their increased prosperity. Hats off to the Nobel Committee for shining a spotlight where it is badly needed.

Link here.


Dubai and Qatar compete on many fronts. Emirates and Qatar Airways happily slug it out for the title of the world’s fastest growing airline, while Qatar’s reclaimed island project “The Pearl” will go head to head with Dubai’s “Palm Jumeirah” when they come on line later this year. But it is the battle to be crowned the Gulf’s financial hub which is perhaps the most intriguing. With both cities having opened top-notch financial complexes in the last two years, the question is “Who’s winning this fight?”

Dubai’s bid to become the financial capital of the Middle East began in earnest in September 2004 when the Dubai International Financial Centre (DIFC) opened for business. And after a slow start over 200 companies have now been accepted for membership with the majority having already received full regulatory approval. The DIFC has, in recent weeks, consigned its stuttering start firmly to the past by welcoming a range of multinational and regional firms to the center. Saudi telco Oger Telecom, HSBC Bank Middle East, U.S. investment bank JP Morgan and Fortis’s merchant banking arm have all set up their regional bases within the complex.

DIFC increased its scope and ambition last September by launching the Dubai International Financial Exchange (DIFX). Delays have hit some of DIFX’s mooted IPOs, and the market slump in the region has compounded DIFC’s woes. The center’s future success will largely depend on how its independent regulator, the Dubai Financial Services Authority (DFSA), enforces the regulations it has drawn up for the center. Doubts over governance rules have historically made many financial institutions reluctant to set up in the Gulf. The center’s laws were closely modeled on the regulatory systems used in London and New York, but it has also drawn from the EU for laws governing data protection, and from the OECD for money laundering rules.

New Zealander Phillip Thorpe is chairman and CEO of the regulatory body of Qatar’s financial center the QFC, which celebrated its first anniversary this summer. No longer considered the region’s also-ran, the country sits on the 3rd largest gas reserves in the world. With a host of gas-related projects under way and 25-year LNG supply deals secured with many developed countries, Qatar’s future looks bright. Add to that an annual GDP growth of around 10% and $130 billion worth of investments lined up for the next decade and it is easy to see why top financial institutions and multinational corporates are making a beeline for the Gulf state.

There is a catch. In order to get a piece of the multi-billion dollar action, interested organizations have to set up shop in Doha. As an inducement, QFC is offering businesses participating in the initiative 100% ownership, full repatriation of profits and a 3-year tax holiday, after which a corporate tax rate of 10% will apply. Thorpe believes QFC will attract businesses because of the large volume of banking and financial business to be transacted in Qatar, and the security of locating in a jurisdiction with a tough independent regulatory authority operating to the highest international standards.

Link here.


For a few years in the late 1990s, the term “asset protection” became synonymous with offshore planning. The offshore tax/debtor havens were booming, and offshore trust companies, banks, mutual funds, and other supporting services were sprouting like dandelions after a spring rain. Many planners came to believe that the only effective method of protecting assets was to transfer them offshore, and more specifically in a foreign asset protection trust. The major European banks that had branches in the offshore jurisdictions created trust and incorporation services to attract the literally billions of dollars that were flowing offshore from the overheated U.S. dot-con economy.

In about two years, this all changed. In 2000 the OECD and FATF announced that they would seek sanctions against the tax havens unless they agreed to enter into treaties with the U.S. and other industrialized nations to allow the investigation and pursuit of tax cheats. Then, in July the Ninth Circuit dropped a nuclear bomb on foreign asset protection trusts in the Anderson case, and judges throughout the U.S. decided that offshore trusts were bad and they would simply throw people into jail until the money would come back irrespective of what the trust documents said. Then 2001 brought the 9/11 tragedy and heightened scrutiny of financial transactions, and particular those involving the offshore havens. The IRS started aggressively pursuing offshore tax shelters. “Offshore” no longer seemed safe or desirable. People who had involved themselves in stealthy offshore tax schemes quietly started filing amended returns and paying their back taxes, interest, and penalties. By the fall of 2001, the offshore world was a mere shadow of the 1990s boom. The Nassau financial services sector contracted to barely 30% of its 1999 size.

Most of the contraction in the offshore industry came from the loss of tax-generated moneys, and undoubtedly some loss of moneys from the decrease in offshore trust formations post-Anderson, as well as the decrease in money laundering activity post 9/11. However, a solid core of the offshore industry remains and is available for use in certain circumstances. For risk management purposes, offshore planning can sometimes provide unique and effective planning solutions.

We have always been strident critics of unreported or “hide the ball” offshore planning. To the extent you utilize offshore planning, everything should be properly reported to the IRS and done in anticipation that creditors will figure it out. Take the fullest advantage of offshore laws, but just do not put yourself in a worse position if offshore secrecy and privacy does not turn out to be what it is advertised to be – because it often has not.

Offshore planning for U.S. persons usually requires extensive reporting, but this reporting basically generates what amounts to a roadmap for creditors to follow in unwinding offshore asset protection schemes. Thus, U.S. persons often must choose between the failure to file the appropriate IRS reporting forms, which will probably lead to fines and possibly lead to imprisonment, or file those forms and give creditors the keys to unlocking the offshore asset protection. Between the two, most people would wisely rather be in full compliance with the law, which is largely why offshore asset protection is much less popular than it was in the mid-1990s when the offshore reporting requirements were significantly more lax.

Link here.

Offshore finance attracts attention.

Offshore financial centers (OFCs) typically refer to low-tax and lightly regulated jurisdictions that provide regulatory infrastructure for individuals or companies to set up companies or banking accounts. They often have numerous financial institutions that conduct business with nonresidents and have external assets and liabilities out of proportion with their domestic economies. The growing volumes of investments destined for OFCs continue to attract the attention of the international community and nation-states. Their concern is to combat tax evasion, money laundering, terrorist financing and other sophisticated fraudulent activity.

The appeal of higher real investment returns, combined with the attraction of secrecy and relatively lower levels of regulation and taxation, continue to drive the popularity of OFCs. Today, there are roughly 50 jurisdictions globally that are designated “tax havens” by the U.S. OFCs offer commercial and financial services in an environment often marked by secrecy – it can be a crime to even divulge the name of an account holder or transmit any account-specific information without a long process initiated by international tax enforcers. While OFCs have become popular locations for individual and corporate investment, the international community has become suspicious. Due to international efforts, secrecy has been on a steady decline as international clampdowns on money laundering and tax evasion have forced tax havens to become more transparent.

OFCs have little incentive to implement increasingly strict regulatory reforms. OFCs that change regulations in response to international pressure will alter their competitive position. Some of this international scrutiny is predictably having negative impacts on OFCs’ profitability. As international regulation and oversight restrict some of the secrecy and financial maneuverability of long-standing OFCs, others inevitably emerge in a bid to capture the growing share of global wealth seeking to stay outside onshore tax and regulatory structures. Moreover, international safeguards to prevent money laundering, terrorist financing or tax evasion can easily result in regulation that hinders the execution of legal transactions.

Link here.


The U.S. Joint Economic Committee will begin a study of the interactions between the virtual economies of online role-playing games such as World of Warcraft and Second Life, and the official U.S. economy. In a statement, the Committee explained that, “The past few years have seen a dramatic increase in the popularity of online gaming and the virtual economies that accompany them. The population of these online worlds has been estimated to exceed 10 million people worldwide. Because of their newness, some uncertainty exists regarding taxes and intellectual property rights.” Chairman Jim Saxton went on to add that, “There is a concern that the IRS might step forward with regulations that start taxing transactions that occur within virtual economies. This, I believe, would be a mistake.”

The staff of the Joint Economic Committee has therefore begun an examination of the public policy issues related to virtual economies. A virtual economy is defined as the universe of transactions that occur within an online community. These transactions include the sale of goods and services and take place entirely within virtual economies. There is no real-world or physical exchange. However, a real-world value can often be assigned to such transactions using exchange rates or other methods. Based on existing law, if an individual generates cash income in U.S. dollars from transactions in virtual economies, the question may arise whether a tax is due on that real-world income. However, if the transaction takes place entirely within a virtual economy, then it seems there is no taxable event.

The Committee observed that, “Such distinctions should be addressed and resolved in a common-sense manner. Clearly, virtual economies represent an area where technology has outpaced the law. The goal of the forthcoming JEC study is to help lawmakers understand the issues involved and head off any premature attempt to impose a tax on virtual economies.” According to reports, the currency used in Second Life, known as the Linden dollar, is often traded on third-party exchanges and on eBay. In addition, real life companies are expressing an increasing interest in selling their wares to a virtual captive audience.

Link here.


Coupled with the trend in globalization, the communications technology revolution of the 1990s has transformed an impoverished, sclerotic, Soviet-inspired state into a booming center of world capitalism in which businessmen like Bill Gates are greeted with more pomp and circumstance than most visiting heads of state. Despite the economic reforms of the past two decades, India’s state sector still resembles the decrepit socialist experiment described above. Perhaps even worse, most of India’s roads are in abysmal repair, and the traffic congestion in most cities is bad enough to make Los Angeles rush hour look appealing. Moreover, living conditions for large segments of India’s population are appalling. The Financial Times reports that there is one toilet for every 1,500 people in some of the poorer parts of Mumbai (previously known as Bombay).

The good news is that the power of information technology has allowed the new economy to largely bypass the state and its rickety infrastructure altogether. It has also brought unprecedented wealth to India’s educated middle class while supplying the West with a vast supply of skilled knowledge workers at a fraction of the price it would cost at home. This new generation of young professionals is earning and spending at an unprecedented rate for India, and this trend will only continue as they progress through their life cycles – marrying, buying homes, and raising their children – spending ever more in the “keeping up with the Jones’s” tradition of Middle America. Even though the country is still in the early stages of its economic modernization, over the longer term India’s prospects are brighter than those of China, South Korea and Taiwan.

In the July/August 2006 edition of Foreign Affairs, Gurcharan Das published an insightful article titled “The India Model” that explains how the country has taken a very different path from most of its contemporaries in Asia. It is one particular development – the emergence of a viable domestic consumer economy – that we find particularly appealing. With most of the developed world facing an unprecedented demographic-induced recession or even depression after 2010, countries that have viable domestic consumer markets should fare much better than those that are focused on exporting to the West. This makes India’s growth boom much more durable than that of, say, China. Das’s article points out that personal consumption accounts for 64% of India’s economy, vs. 58% for Europe, 55% for Japan, and 42% for China.

U.S. consumption has hovered around the 70% mark for many years. In an economy dominated by services and information – like that of the U.S. today and the one developing in India – savings and capital spending become less crucial to sustaining growth. China saves and then invests an enormous percentage of its GDP in building new manufacturing capacity, which puts China at a real risk for over-capacity and deflation in the event of downturn. India, in contrast, appears to be skipping the industrial phase of its development altogether and moving directly to services and information, thus looking much more “American” than any other developing country.

India’s demographics are slowly beginning to look more American. After decades of high birthrates and overpopulation, Indian mothers are having fewer children as more join the ranks of the middle class, while spending far more money on the ones they do have. Expect India to boom as its enormous young population begins to move through its Spending Wave over the next 40-50 years much like the American Baby Boomers of the post-war generation.

Despite the overwhelmingly bullish case for India over the coming decades, it is important to remember that India is still an underdeveloped country and is at a much different stage than many other countries labeled as “developing”, such as South Korea or Taiwan. Per capita income is still pitifully low, on par with Iraq or Cuba, and India’s government is certainly not immune from the occasional populist rash of anti-globalization sentiment. There will definitely be setbacks that rattle investors. India also has an unresolved conflict with Pakistan that could erupt into war at a moment’s notice.

Needless to say, India is volatile. The world-wide stock correction of this past summer that sent the S&P 500 down 8% took a full 30% cut out of Indian stocks. For this reason, while we are enthusiastic about India’s prospects, Indian stocks must be viewed with extreme caution and are best bought after substantial corrections.

Link here (scroll down to piece by Charles Sizemore).


FBI Director Robert Mueller called on Internet Service Providers to record their customers’ online activities, a move that anticipates a fierce debate over privacy and law enforcement in Washington next year. “Terrorists coordinate their plans cloaked in the anonymity of the Internet, as do violent sexual predators prowling chat rooms,” Mueller said in a speech at the International Association of Chiefs of Police conference. “All too often, we find that before we can catch these offenders, Internet service providers have unwittingly deleted the very records that would help us identify these offenders and protect future victims,” Mueller said.

The speech echoes other calls from Bush administration officials to force private firms to record information about customers. Attorney General Alberto Gonzales, for instance, told Congress last month that “this is a national problem that requires federal legislation.” Justice Department officials admit privately that data retention legislation is controversial enough that there was not time to ease it through the U.S. Congress before politicians left to campaign for re-election. Instead, the idea is expected to surface in early 2007, and one Democratic politician has already promised legislation. Industry representatives claim that if police respond to tips promptly instead of dawdling, it would be difficult to imagine any investigation that would be imperiled.

It is not clear exactly what a data retention law would require. One proposal would go beyond Internet providers and require registrars, the companies that sell domain names, to maintain records too. And during private meetings with industry officials, FBI and Justice Department representatives have cited the desirability of also forcing search engines to keep logs – a proposal that could gain additional law enforcement support after AOL showed how useful such records could be in investigations.

At the moment, ISPs typically discard any log file that is no longer required for business reasons such as network monitoring, fraud prevention, or billing disputes. Companies do, however, alter that general rule when contacted by police performing an investigation. A 1996 federal law regulates data preservation. It requires ISPs to retain any “record” in their possession for 90 days “upon the request of a governmental entity.”

Link here.


“Thou shalt not steal” is a rule as old as human society itself. It must have been, else no complex human society would have proved viable. We are all taught very early to respect what belongs to others. “Don’t take your sister’s toy away from her,” your mother admonished, punishing you if you persisted in your toddler’s larceny. By the time you were three years old, you understood the difference between mine and thine. If you did not take the lesson to heart and persisted beyond your childhood years in treating everybody’s property as something for you to take, so long as you could get away with it, then you were viewed as a sociopath, an enemy of decency and of civilization itself.

Government as we know it, however, rests entirely on this kind of sociopathy. Rulers take what does not belong to them and dispose of it to suit themselves. When the government has only recently placed itself in a position of domination over a group of people, the people recognize full well that the government’s taking amounts to looting. They pony up only because they are given the stark choice of “your money or your life,” and they want to go on living. When a government has been entrenched in a society for a long time, however, its exactions become a “fact of life,” a matter of “just how things are,” and people tend to lose their awareness that obtaining something from the government amounts to receiving stolen property.

Rulers, abetted by their kept intellectuals, go to great lengths to weave a cloak of legitimacy to disguise their theft, because by doing so they ease the difficulties of extracting wealth from the rightful owners. In some cases, especially in societies with governments that attempt to justify their existence and their actions on “democratic” grounds, many people may be taken in by this ideological sleight of hand. They may actually believe that “we tax ourselves” so that the rulers “we choose” can dispose of the loot in ways that “we voted for,” failing to appreciate the gulf that separates this pristine ideological vision from the sordid facts on the ground.

Once this sort of thinking becomes pervasive, however, it serves to sanctify specific forms of predation without any clear limit. People come to believe, or at least they work hard at convincing themselves, that anything the government might stand ready to give them, they thereby have a perfect right to receive. The loot is there for the taking. You are a fool not to take it, notwithstanding that your taking it may be wrong. Financial gain trumps moral probity. Don’t be a chump, take the money. At this point, all contact with genuine morality has been lost, and because a society of sociopaths cannot remain viable in the long haul, the nation that embarks on this course has set sail toward its own ruin.

The moral rot is comprehensive, not confined to a few bad apples, and it defiles farmers, businessmen, doctors, lawyers, clergymen, students, retirees, and countless others. Virtually everybody has checked his morality along with his pistol at the entrance to the legislature. “The state,” Frédéric Bastiat told us long ago, “is the great fiction by which everybody tries to live at the expense of everybody else.” If only the great man could see us now. Even he might be amazed, and appalled, by the heights to which this futile quest has been raised. In fact, this hoary fantasy arguably has become the central truth about government in our time.

One need not have earned an A+ in moral rectitude to understand that, however one may assess the morality of modern government’s hypertrophied taking from Peter and giving to Paul, this activity bears a deadly fruit. Because it creates such widespread and powerful incentives for people to engage in government-facilitated predation, instead of production, it diverts great energies, intelligence, and other resources to the pursuit of privilege – to what the public choice analysts call “rent seeking.” As more and more such diversion occurs, the society falls farther and farther below the full realization of its potential to create genuine wealth. Eventually, everybody will be fighting to seize and consume the seed corn, and none will remain for planting next year’s crop. There is a natural, unavoidable outcome of such action. Ask any farmer.

Link here.


As soon as the divorce papers are served, the asset shuffling begins. It is amazing what angry spouses try to do – and what they can get away with.

Link here.


For the spouse with assets.

For the spouse without.

Link here.

To have and to hold on to.

Most divorces these days are nasty, brutish, and all too long. Not to mention damned expensive. Where does all that money go?

The bulk of it, predictably enough, goes straight to the lawyers. Matrimonial law work is currently a staggering $28 billion a year industry. Court fees can also add a hefty sum to your divorce bill. A mere two-day trial can set you back as much as $25,000 (less expensive options, like formal arbitration, still run between $5,000 and $10,000). But if you are looking to reduce those costs or to avoid them altogether, you have got a few alternatives.

The simplest – and the cheapest – way of handling divorce proceedings is to do all the negotiating and paperwork on your own. Web sites like divorce.com, divorceonline.com and completecase.com offer an array of information and services to assist you, from state-specific legal forms to downloadable divorce kits. If your finances are simple, you do not have any shared debt, and you and your spouse can reach an agreement on custody arrangements, this may be an attractive option, and it will generally run you between $50 and $250.

Another inexpensive option for those whose divorces are relatively amicable is mediation. During mediation, the couple hires a mediator trained in conflict resolution and family law (and often, but not always, a lawyer) to oversee their negotiations. A mediator can advise you about potential financial and custodial arrangements, and will help to reopen the discussion if things break down. Mediation reduces your divorce bill because it reduces your billable hours – you and your spouse shoulder the burden of gathering and sharing information yourselves, and while your mediator’s hourly rates may not be any cheaper than those of your attorney, you will spend far less time together. The average mediated divorce should cost less than $5,000.

Collaborative law is a similar, and increasingly popular, approach to divorce. During collaborative law negotiations, both you and your spouse will hire lawyers, but they will be committed to resolving your differences without resorting to any form of litigation or any adjudicatory procedure. Here, too, mutual trust is imperative. Collaborative law is not the cheapest way to go – it might cost an average of $3,000 per spouse – but it still represents significant savings over the traditional adversarial method. Those who favor collaborative law over mediation may worry that the mediator is not truly impartial. But some attorneys are concerned that if the couple lets their lawyers do all the talking, they will never really learn to negotiate on their own. And if you and your spouse do not learn to negotiate, the likelihood that your settlement will last is greatly reduced.

If you are stuck in traditional divorce proceedings – where each party has hired a lawyer to represent them in a court battle – there are still things you can do to reduce your legal bill. By far the most important thing is to communicate. Disclose your assets, answer any questions, and provide all documents that are required. “With that there is not much else for a lawyer to do,” says attorney Violet Woodhouse, author of Divorce and Money: How to Make the Best Financial Decisions During Divorce. You should also make sure you have done your homework before a meeting with your lawyer. Do not make your lawyer wait around racking up billable hours as you scramble to find documents or look up information. If you and your spouse must go to court, try to keep things as neat as possible and avoid getting trapped in an endless cycle of litigation.

Link here.


John Niggeling, 56, deletes e-mails from African dictators offering him a share of their fortunes. He ignores print ads promising thousands of dollars a week working from home. But three years ago, John Niggeling’s nephew David told him about Learn Waterhouse, a company that promised investors a 10% monthly return, supposedly earned by trading debt from an elite group of “prime” banks overseas. To Niggeling the returns sounded too good to be true. But for every question he had – how did Learn Waterhouse make money? Was it legal? Who else was investing? – his nephew had an answer. David kept after him. “When he told me that a prominent local attorney was involved, I was hooked,” says Niggeling.

In the summer of 2004, he took $25,000 out of his IRA and put it into Learn Waterhouse. Within weeks he received a check for $2,200. Encouraged, he invested another $83,000. A month later the SEC froze Learn Waterhouse’s assets and alleged that its promoters had defrauded 1,700 investors out of $24.5 million. The investigation is ongoing. According to SEC claims, the Learn Waterhouse deal was structured as a Ponzi scheme – early investors appear to reap promised returns but are only getting money put in by later investors. The early results make the scam look like a genuine bonanza.

But what really sold Niggeling was the hard sell by his nephew. With affinity fraud, as regulators call it, the con artist infiltrates a social group like a church or professional club, then persuades his new friends to enroll in his scheme. According to research, when we go along with peers, activity in a part of the brain that thinks analytically may decrease, presumably reducing our skepticism. And when we go against consensus, a reaction in the part of the brain usually triggered by fear occurs. So we are afraid to go against the crowd, even when confronted with plain evidence.

The best antidote to any financial scam, of course, is to thoroughly check out the offer. That is easier said than done in an affinity fraud with so much pressure to go along with the group. Consequently, it is important to establish your own personal due-diligence procedure now and resolve to follow your checklist to the letter when an “opportunity” appears, however much your friends swear it is legit. You rarely need to be a forensic accountant to find warning signs. In Niggeling’s case, just typing “prime bank” into a search engine would have done it. The scam is so common that the SEC devotes an entire page on its website to it.

Link here.


The award for the most perplexing career move of 2005 goes to David J. Winters, formerly CEO and chief investment officer of Franklin Mutual Advisers. Winters resigned from that $35 billion fund behemoth in order to found his own mutual fund. That is mutual fund, not hedge fund. He calls his creation Wintergreen.

By its charter, Wintergreen could almost be a hedge fund. It can invest anywhere, in anything. It can buy stocks or sell them short. It can invest in bankruptcies, liquidations and distressed securities. It can do business at home or abroad. But Winters does not get 20% of the profits, as hedge fund operators do. The investors keep all of the upside, net of fees and expenses, which happen to come to a stiff 1.95% of assets yearly. It is worth it.

Winters, 44, is the antithesis of the popular conception of the hedge fund manager. Mainly, he is an outright owner of common stocks. He keeps a sizable cash cushion. He is acutely price conscious. Ask him the question most often put to hedge fund jockeys by jumpy institutional investors: “What is your edge?” And he replies, “We are long-term investors.” This is a phrase you might not have heard recently. If it means anything these days, it means holding on for 12 long months to qualify for the 15% capital gains tax rate. Winters means something else by it. A member of the value investment tribe, he means that good things happen to cheap stocks over the sweep of years. Five years is Winters’s idea of a decent holding period.

Most money managers nowadays are held on a short leash. Their performance is monitored by the week or the month. They are admonished to track an index or to hew to a “style”, and woe betide the stock picker who suffers a “drawdown” (i.e., loss), is found guilty of “style drift” (i.e., opportunism) or who is so headstrong as to buy more when the market goes against him. Winters is the best kind of opportunist. True to Graham and Dodd tenets, he believes that the future is a closed book and that nobody – at least not he – can forecast stock prices. From which it follows that the thing to do is to armor oneself with a margin of safety. The less you pay for an investment, the less you have to fear from the unfathomable future.

For Winters, as for all value seekers, cash is the default investment. It is what they own until something better comes along. And who knows? Something just might. Winters contends that the world is chockablock full of cheap stocks. Yet Wintergreen has a 25% cash cushion. “You get paid 5% to wait,” Winters says. “And there are lots of opportunities in the world. You never know what is going to happen. We are just always looking under rocks for gems and waiting for that big, fat slow pitch in our zone.”

In their determination to not overpay, value investors sometimes invest in stocks that deserve to be even cheaper than they are. Last spring Winters was buying newspaper stocks. Yes, he acknowledged, the Web was a threat to hard-copy publishers, but the bad news was likely already reflected in the stock prices. It has turned out that the world needs steel more than it does USA Today, as Winters acknowledged the other day. He said he had traded out of his newspaper stocks. He had only belatedly come to realize how fast the industry is sinking. Anybody can form a conviction. The good investors, like Winters, can also change their minds.

Link here.


Judging by their body language, the U.S. authorities believe the roaring bull market this autumn is just a suckers’ rally before the inevitable storm hits. Hank Paulson, the market-wise Treasury Secretary who built a $700 mll fortune at Goldman Sachs, is reactivating the “plunge protection team” (PPT), a shadowy body with powers to support stock index, currency, and credit futures in a crash. Otherwise known as the working group on financial markets, it was created by Ronald Reagan to prevent a repeat of the Wall Street meltdown in October 1987.

Mr. Paulson says the group had been allowed to languish over the boom years. Henceforth, it will have a command center at the U.S. Treasury that will track global markets and serve as an operations base in the next crisis. The top brass will meet every six weeks, combining the heads of Treasury, Federal Reserve, SEC, and key exchanges. Mr. Paulson has asked the team to examine “systemic risk posed by hedge funds and derivatives, and the government’s ability to respond to a financial crisis.”

The PPT was once the stuff of dark legends, its existence long denied. But ex-White House strategist George Stephanopoulos admits openly that it was used to support the markets in the Russia/LTCM crisis under Bill Clinton, and almost certainly again after the 9-11 terrorist attacks. “They have an informal agreement among major banks to come in and start to buy stock if there appears to be a problem,” he said. The only question is whether it uses taxpayer money to bail out investors directly, or merely co-ordinates action by Wall Street banks as in 1929. The level of moral hazard is subtly different.

Mr. Paulson is not the only one preparing for trouble. Days earlier, the SEC said it aims to slash margin requirements for institutions and hedge funds on stocks, options, and futures to as low as 15%, down from a range of 25% to 50%. The ostensible reason is to lure back hedge funds from London, but it is odd policy to license extra leverage just as the Dow hits an all-time high and the VIX “fear” index nears an all-time low – signaling a worrying level of risk appetite. The normal practice across the world is to tighten margins to cool over-heated asset markets.

The move is so odd that conspiracy buffs are already accusing SEC chief Chris Cox of juicing the markets to help stop the implosion of the Bush presidency. One is at least tempted to ask if Mr. Paulson and Mr. Cox know something that we do not. Are other hedge funds are in the same sinking boat as Amaranth Advisers and Vega Asset Management, keel-hauled by bets on natural gas and bonds? Are currency traders with record short positions on the Japanese yen and the Swiss franc are about to learn the perils of the Carry Trade, a high-stakes game of chicken where you bet against fundamentals with high leverage to make a quick profit? Everybody knows it will blow up if the dollar goes into free fall.

Link here.


A couple of years ago, Robert E. Rubin – éminence grise at Citigroup and the Democratic Party’s economic wise man – decided that the U.S. dollar was headed for a fall. This view put Mr. Rubin in good company. Nearly everyone who spends time thinking about the American economy believes that the value of the dollar has to fall at some point. The U.S. has been borrowing enormous sums of money from other countries, largely so that American consumers can turn around and buy the computers, clothing and other goods those countries make. Like all borrowing booms, this one will eventually subside. When it does – and foreign investors stop buying so many dollars to lend back to us – the dollar will drop.

With this chain of events in mind, a former colleague of Mr. Rubin’s at Goldman Sachs had been whispering in his ear that anybody who did not have 20 or 30% of his holdings tied to other currencies was “out of his mind.” Yet as Mr. Rubin told me last week, his finances at the time were “totally dollar-based.” (As are yours, in all likelihood.) So he decided to bet against the dollar by buying options on other currencies. It turned out to be a very bad bet. Mr. Rubin’s logic made perfect sense – it still does, in fact – yet most people who have made similar bets in recent years have taken a bath.

The fate of the dollar, to be blunt, often seems like one of the most boring economic subjects around. But it really is worth trying to understand what is going on. In the end, the value of the dollar will go a long way toward determining how well Americans live. The simplest way to explain the problem is to say that the U.S. has been living beyond its means. Both the federal government and American families have been spending more money than they take in, leaving both in debt. To close the gap between our resources and our spending habits, we have borrowed from abroad. It is the only option.

The net amount of money leaving the U.S. is “just stunning,” said Kenneth S. Rogoff, former chief economist of the IMF. “It’s unprecedented.” The big question now is how will the situation reverse itself. It could happen gradually, with other countries slowly reducing their purchase of dollars. This would not be horrible, but most of us would be worse off. The other possibility is that foreign investors could cut their dollar purchases sharply, bringing all sorts of economic havoc. The other possibility is that an unexpected event — a spike in oil prices, say — could cause foreign investors to cut their dollar purchases sharply, bringing all sorts of economic havoc. Paul A. Volcker, the Fed chairman who whipped inflation in the ‘80s, has become sufficiently worried to call the circumstances as “dangerous and intractable” as any he can remember.

Whatever the outcome, a decline in the dollar will probably be part of it. That is why Mr. Rubin made his bet. But the dollar did not cooperate. While no longer at the highs it reached in 2002, it has stayed strong. “I think I was right, probabilistically,” he said recently. “But I don’t know. I really don’t. I don’t think anyone does. It’s also possible that none of this could happen. It’s possible that for reasons none of us can see that this will work itself out in a very copacetic way.” Mr. Rubin and the other dollar bears look a little like the skeptics of the real estate boom back in 2005. For years, those skeptics warned that things had gotten out of hand and that reality would soon reassert itself. And for years, they were wrong. The longer they were wrong, the more out of touch they sound.

How is that housing boom going, anyway?

Link here.


The EU is persisting in its attempts to convince Asian financial centers to cooperate on the issue of information-sharing for tax purposes, although the EU’s pleas seemingly continue to fall upon deaf ears. According to a report from London’s Financial Times, Thomas Roe, the EC’s envoy to Hong Kong and Macau, approached the two governments only two weeks after Hong Kong and Singapore refused to discuss the possibility of their inclusion in the EU Savings Tax Directive.

While the EU is very keen to tax the savings and investments that European residents have shifted to Asia to escape the clutches of the directive, the Asian financial hubs are unlikely to want to sign up to anything that would compromise their status as low tax and lightly regulated jurisdictions – a fact that Roe conceded. While opinions in the matter vary, it is generally thought that Hong Kong, Singapore and Dubai have benefited significantly from increased inflows of cash from European investors since the introduction of the directive.

Link here.
Previous News Digest Home Next
Back to top