Wealth International, Limited

September 2007 Selected Offshore News Clips

(Especially noteworthy articles’ headings highlighted in gold.)


Contradictions now wrack the world’s financial system, and a growing consensus exists between those who endorse it and those who argue the status quo is both crisis-prone as well as immoral. If we are to believe the institutions and personalities who have been in the forefront of the defense of capitalism, we are on the verge of a serious crisis – if not now, then in the near future.

The IMF has taken the lead in criticizing the new international financial structure, and over the past three years it has published numerous detailed reasons why it has become so dangerous to the world’s economic stability. Events have confirmed its prediction that complexity and lack of transparency, the obscurity of risks and universal uncertainty, especially regarding collateralized debt and loan obligations (CDOs and CLOs), will cause a flight to security that will dry up much of the liquidity of banking. “Financial innovation itself,” as a Financial Times columnist put it, “is the problem.” The ultra-creative system is seizing up because no one understands where risks are located or how it works. It began to do so this summer and fixing it is not very likely.

It is impossible to measure the extent of the losses. The final results of this deluge have yet to be calculated. Even many of the players who have stakes in the countless arcane investment instruments are utterly ignorant. The sums are enormous. Only a few of the many measures give us a rough estimate. The present crisis began – it has scarcely ended there – with subprime mortgage loans in the U.S., which were valued at over $1.3 trillion at the beginning of 2007 but are, for practical purposes, worth far, far less today. Indirectly, of course, the mortgage crisis has also brought many millions of people into the larger financial world and they will get badly hurt.

We are at an end of an era, living through the worst financial panic in many decades. Now begins global financial instability. It is impossible to speculate how long today’s turmoil will last, but there now exists an uncertainty and lack of confidence that has been unparalleled since the 1930s. This ignorance and fear is itself a crucial factor. The moment of reckoning for bankers and bosses has arrived. What is very clear is that losses are massive and the entire developed world is now experiencing the worst economic crisis since 1945, one in which troubles in one nation compound those in others.

Central banks will have increasing problems and the solutions they propose, as in the past, will be utterly inadequate, not because their intentions are wrong but because it is impossible to regulate such a vast, complex economy. Internationalization of finance has meant less regulation than ever, and regulation was scarcely very effective even at the national level.

Link here.


As boom turned to gloom, some gamblers with good timing made a fortune. Will they also know when to take their bets off?

Earlier this year Prem Watsa, the gunslinging chief of Fairfax Financial (NYSE: FFH), had $341 million riding on a hunch that dozens of brokers, banks and insurers could struggle paying their debts. Watsa has a history of making a killing on bearish bets. He sold half the company’s stock holdings before the 1987 crash and bought puts against the S&P 500 before the index fell in 2000. But as summer began, his latest wager had produced nothing but losses.

Then the credit markets seized up, and investors began clamoring for the Toronto insurer’s collection of credit default swaps, basically insurance against bond defaults. Prices climbed. By the end of July Fairfax’s swaps were worth $537 million, up 170% in a month.

The winners and losers from the credit crunch are still being tallied, but one thing is clear: Some smart investors won big, and suddenly. They went short on subprime mortgages or went long on market volatility or bought credit default swaps – recommended in a speech by one Fairfax-like bear last year as “the most inexpensive disaster insurance” around.

Harbinger Capital Partners, a $12 billion hedge fund in New York City, started buying credit default swaps on subprime mortgages in November, according to someone familiar with the fund. It agreed, in effect, to pay an insurance premium over the life of a mortgage pool and to receive a payout on losses of principal on that pool. But it did not own the underlying pool, so what the hedge fund was doing was more like buying fire insurance on a building it does not own and then hoping for a fire. With default swaps you do not need to wait for the fire to profit. All you need is for other people to get worried and bid up the price of insurance. Then you can sell your insurance contract at a profit. In the case of subprime mortgages, insurance coverage of the sort Harbinger was buying has tripled in price since it started buying.

Credit default swaps also helped famed value investor Baupost Group return more than 20% so far this year, according to a source close to the fund. The hedge fund’s press-shy chief, Seth Klarman, was the man pushing swaps last year in a rare public appearance. Most of the swaps, used as a hedge against distressed debt held by the Boston fund for four years now, have not been cashed out yet. Another way the fund is playing it safe: A third of its $8 billion is in cash.

Russell Abrams runs a $375 million hedge fund called Titan Capital Group that trades volatility. He made a big bet earlier this year that preternaturally calm markets would soon get a case of the jitters. One of 50 securities he targeted: Countrywide Financial. In January he began buying out-of-the-money puts. As Countrywide’s bad news broke, its share price fell, volatility soared, and premiums on the options exploded.

J. Kyle Bass, a managing partner of Hayman Capital in Dallas, expects profits to keep coming for subprime bears, too. Last year he put all $106 million of his Subprime Credit Strategy Fund into shorting mortgage bonds and claims he has already tripled the money – on paper. Just back from a trip to California’s Central Valley, the epicenter of subprime defaults, Bass says he now expects $175 billion in additional losses on subprime bonds over the next year – 20% of the total $1 trillion subprime loans outstanding.

If some bears are still hoping for worse things to come, others are switching sides on the expectation that the bottom has already been touched. New York lender Clearlake Capital was started in January to rush in where others fear to tread. In August Clearlake agreed to provide $60 million – half equity, half loan – in a deal to take software maker Compudyne private. It was able to get eight percentage points over Libor for the loan portion – nearly double, says Clearlake partner Jose Feliciano, the spread Clearlake could have demanded a few weeks earlier. In two months, Clearlake says, it has agreed to provide $500 million to a half-dozen other companies at similarly rich spreads.

Investors in distressed securities apparently agree. So far this year funds targeting such risky assets have attracted $12 billion, quadruple what they got all of last year, according to Hedge Fund Research in Chicago. Another buyer of junky debt is William Gross, manager of giant fixed-income fund Pimco. His fund recently put $1 billion into the High Yield Credit Default Index – in effect, selling insurance against defaults. This bet will pay off if yield premiums on junk decline or, to put it another way, if junk prices rebound.

Fairfax Chief Watsa remains bearish. He concedes that this is a risky place to be. In a recent conference call he reminded investors that, given that his gains are still on paper, there is “no certainty” he will be able to realize any of them.

Link here.


Find the ideal fund for you from among the thousands of available choices. In the report you will find both conventional metrics for analyzing funds and Forbes’s proprietary indicators for distinguishing winners from the losers and cost-efficient funds from inefficient funds.

Link here.


Greg Bertrand and Jan Tilston left Toronto in 2002 to build a small hotel and a new life in Costa Rica. They counted on it being tough. What they did not count on was the help they would get along the way.

Greg, a partner in a graphic arts firm, and Jan, a family law attorney and director of the Toronto Family Law Office, had had enough of cold winters and workday stress. They had both done quite a bit of traveling over the years, but they decided that in the future they would like the world of travel to come to them. A small hotel, they reasoned, would let them bring the world to their doorstep. And it has, says Jan: “We thoroughly enjoy our guests and find that everyone has a story. We appreciate them all, from the boat captain from South Africa and the police sergeant from Canada to the Dutch environmentalist and the ex-American Marine who works as a bodyguard in Iraq.”

Greg and Jan chose Costa Rica because it is an easy flight from Toronto, so family and friends can readily come to visit. They like it that Costa Rica is politically stable with a long established democracy and no army – which allows more spending on things like universal medical care and free and subsidized educational programs. The magnificent weather was a factor, too. But the biggest magnets pulling Jan and Greg to Costa Rica were the “wonderful and generous” people they met here. “Their help and friendship has been invaluable,” says Jan.

Their real estate agent helped them set up their business, and their architect positioned the hotel in just the right location to capture the ocean and mountain breezes. Two nearby hotel owners happily gave them suggestions about running the hotel and told them where to buy the best mattresses and supplies at the best prices. Staff at the local garden center helped them choose the perfect plants for the gardens. One neighbor cautioned them against using a red neon sign on the hotel – this generally attracts a transient pay-by-the-hour type of guest in Latin American.

Vista Pacifico Hotel opened for business in January 2004. Perched on a mountaintop, the location offers a view in one direction of the beach town of Jaco and the Pacific Ocean, and in the other direction, pastoral green Costa Rican farmlands and mountains. “We enjoy sharing the magic of this country with our guests, and we find ourselves becoming more generous than we had been in North American society,” Jan says. “Both of us offer our professional services without payment. Of course, we now have the option to do this with whom and when we want. Greg got paid a pound of coffee per hour for an exceptionally time-consuming graphic design job he did for some friends who started a coffee roasting company.”

Link here.


Two years ago, William Stout lost his home in Allentown, Pennsylvania, to foreclosure when he could no longer make the payments on his $106,000 mortgage. Wells Fargo offered the two-bedroom house for sale on the courthouse steps. No bidders came forward. So Wells Fargo bought it for $1, county records show. Despite the setback, Mr. Stout was relieved that his debt was wiped clean and he could make a new start. He married and moved in with his wife, Denise.

But on July 9, they received a bill from the I.R.S. for $34,603 in back taxes. The letter explained that the debt canceled by Wells Fargo upon foreclosure was subject to income taxes, as well as penalties and late fees. The couple had a month to challenge the charges.

For those who struggle to pay their bills, who watch their housing payments rise out of reach with their adjustable-rate mortgages, who lose a job or who fall victim to illness, losing one’s home can feel like hitting bottom. But one more financial indignity may await as the fallout from the great housing boom ripples across the U.S. Notices of unpaid taxes, unanticipated and little understood, will probably multiply as more people fall behind on their mortgages, said Ellen Harnick, senior policy counsel at the Center for Responsible Lending, a nonpartisan research and policy center in Durham, North Carlina.

Foreclosure is one way that beleaguered homeowners can fall into this tax trap. The other is when homeowners are forced to sell their homes for less than the value of the mortgage. If the lender forgives that difference, they are liable for income taxes on that amount. The 1099 shortfall, as it is called, stems from an I.R.S. policy that treats forgiven debt of all types as income even if the taxpayer has nothing tangible to show for it, unless the debt is canceled through bankruptcy.

The Center for Responsible Lending expects that 20% of the home loans made in 2005 and 2006 to people with weak credit, commonly called subprime loans, will end in foreclosure. Because so little money was required as a down payment during the boom, the value of many of these houses may be less than what is owed.

Some people in this predicament are fighting the I.R.S. and winning. Sometimes, lower payments can be negotiated with the I.R.S., tax experts say. In other cases, bankruptcy or a claim of insolvency can eliminate the tax burden. Sometimes, the bills are sent out erroneously, as banks fail to keep track of home values and what price the properties ultimately sell for.

“The tax laws are far too complex for borrowers to understand,” said Kurt Eggert, a professor at Chapman University School of Law, noting that there are distinctions between selling a house for less than the loan amount and losing one in foreclosure. He says it is crucial to get expert tax advice to sort through the bewildering complications. The whole concept can be counterintuitive. “Your home has declined in value and you lose it,” Mr. Eggert said. “Then the I.R.S. says you owe tens of thousands in taxes because you got a windfall when the debt was forgiven.”

Stephen G. Doherty, of Bennett & Doherty in Doylestown, Pennsylvania, set out to appeal the Stouts’ tax bill by arguing that Wells Fargo got the home as collateral so the family did not reap a benefit. The Stouts and their lawyer also hoped to show that Wells Fargo was able to sell the house for far more than $1. Finally, they contended that penalties were inappropriate because they did not receive a tax notice in 2005 or 2006. After a reporter inquired about the Stout matter, Wells Fargo Home Mortgage said last week that it had reviewed the Stouts’ tax documents and was filing a corrected 1099 tax form to show that no debt had been canceled, because the fair market value of the home was actually more than Mr. Stout had owed.

Mr. Doherty pointed out that the acquiring lender has some leeway in valuing a house. The fair market value can be the high bid at a sheriff’s sale, or an alternative valuation. In this case, Wells Fargo’s about-face was tied to an appraisal that Mr. Doherty says he believes was completed before the sale. It set the value of the house at $132,844, eliminating the Stouts’ liability.

An I.R.S. spokesman would not comment on the Stout matter or how the agency applies the tax rules on forgiven debt, but referred to a document on the I.R.S.’s policies. Diane Thompson, a lawyer in Godfrey, Illinois, for the National Consumer Law Center, says the tax can be a real hardship for some people. She recalled a client who owed $39,000 to her lender and got a tax bill after her house was sold in foreclosure for $10,000. Ms. Thompson appealed to tax authorities, contending that her client, a part-time waitress, was broke because her debts were greater than her assets. “If you can prove you are insolvent, the I.R.S. does not treat the forgiveness of debt as income,” Ms. Thompson said. Her client did not have to pay.

Lawyers may also be able to show that the original loan process was so flawed that the borrower is not liable for taxes. Indeed, during the real estate bubble, lenders and mortgage brokers sometimes encouraged homeowners to borrow more based on inflated home values.

Link here.


Recent news about a certain much-anticipated work of fiction being posted to the internet, in advance of its scheduled release, was not terribly surprising. The method used was, perhaps, a bit crude, and certainly time consuming, but it got the job done. Unbeknownst to the anonymous poster, their camera helpfully provided some extra information that might be used to track them down. Our devices are collecting all kinds of data about our habits and they are increasingly divulging that data in unexpected ways.

In the case of the Harry Potter book, the camera serial number was recorded in the Exchangeable image file format (Exif) data of the JPEG files of each page. Based on that information, Canon, the camera’s manufacturer, may be able to match the camera to its original purchaser. If the camera has been serviced in the three years since it was released, that would also create an entry matching the serial number to the owner at that time. Neither of those conclusively links a person to the “crime”, if it even is a crime, but they could give any investigators a good place to start.

It could have been a lot worse – some camera models have GPS capability built-in with Exif fields available to store that information on each shot. It would be pretty easy to track down where the photos were taken if some were tagged with latitude and longitude coordinates. GPS data encoded into each photograph that you take, is a useful feature, keeping track of where the photos were taken some years down the road after (human) memory has failed. The other Exif data, much of which is detailed information about camera settings, is probably quite useful to photographers and is much simpler than trying to keep a record of exposure settings as you take pictures. Gathering and storing the data is quite helpful, it is the unexpected disclosure that causes problems.

It would be easy to ignore this problem, writing it off to an ignorant user, who should have scrubbed the Exif data before posting, but the problem comes in other guises as well. The U.S. Secret Service evidently wants to be able to track your printer output, presumably as part of their anti-counterfeiting responsibilities, so they have convinced laser printer manufacturers to secretly add the now-famous yellow dots to each color page that is printed. Some of these codes have been cracked by the Electronic Frontier Foundation and others, and have been found to contain model and serial numbers along with a timestamp of the print time.

It is much harder to blame ignorant users when the device manufacturer actively tries to hide the fact that identifying information is being leaked. Worse yet, it appears that inquiring about this practice and asking how to turn it off can lead to a visit from the Secret Service. The folks at Seeing Yellow have lots more information, including a plan to overwhelm the agency through sheer numbers of people asking how to turn this “feature” off.

Imagine a world where the government required each person to carry a device that knew its location via GPS, had the ability to take pictures, and had wireless connectivity. In many ways, lots of people already, voluntarily, live in that world as cell phones have all those characteristics. It is not inconceivable that the cell phone manufacturers have already had a visit, from the Department of Homeland Security or some other three-letter agency of the government, asking for help in the “War on Terror”. The devices are certainly capable of reporting location (possibly with a helpful photo of people in the vicinity) back to the carrier and through them to the DHS. That might not (yet?) be happening, but there is no real technical barrier.

If we ratchet the paranoia level down a notch, cell phones, in particular smart phones, still pose an enormous target for the criminal world. Subverting phones that have cameras and GPS, to run them under the control of an attacker, makes an incredible surveillance tool. By using the same kinds of techniques that are used to spread viruses and spyware today, it should not be difficult to get targets to willingly perform actions that will lead to the subversion of their phone. From there, the attacker can get all of the call records, photos, calendar items and contacts while directing the phone to transmit its location every minute to the attacker.

Not only could this kind of information be used by stalkers, muggers and other criminals, this same capability could be used by lovers or employers to track people, keeping tabs on their movements and contacts. Rather than hire a private investigator, a jealous husband or wife might just borrow the other’s phone, surf to a spyware site, and install a tracking program themselves. The opportunities are endless.

There are no easy answers on how to protect oneself against these unintentional data leaks. The organizations and individuals interested in collecting the data are doubly interested in concealing the fact that they are doing it, and it is difficult for users to detect. If a cell phone is sending a short burst of encrypted information every minute, how would the average user, or even a sophisticated lab, detect and decode that data? If someone had not stumbled upon the yellow dots, we might be printing traceable documents, in blissful ignorance, to this day. What other, similar kinds of tracking are going on that we do not yet know about?

Free software can certainly help with this problem, but it is no panacea. Being able to replace the software in a device, with code that can be scrutinized and built before installing, is a good way to know what the device will do. Getting code that is vouched for by a trusted group, also serves to alleviate privacy leakage concerns. Unfortunately, the hardware itself may be the culprit. Laser printer hardware is likely responsible for the identifying information in the output, making it rather difficult to replace. It is extremely difficult to know what the hardware in other devices might be doing behind our backs.

The truly paranoid will not be willing to trust any hardware they did not build themselves, perhaps from individual transistors, while trying to figure out how to trust the compiler. For the rest of us, open platforms with free software and hardware, may provide reasons to believe that our data is protected – unless, of course, the device gets stolen or lost. Encryption anyone?

Link here.


I know it is crazy. But I have written a draft for my next newsletter advising readers to liquidate all their positions and get into cash. If you think that is crazy or just stupid, you need not bother reading on. Otherwise ... read on.

I wanted to see if a letter telling people to sell everything now sounded panicky ... or reasonable ... or not really sensible/defensible once you go through all the risks, costs, and objections to doing so. It could also be epic stupidity. But I am still not sure. So I went to my white board and made a list of reasons for and against advising readers to liquidate their stock holdings and get into cash. Can you see something I missed? What do you think? Are there exceptions?

Reasons against liquidation:

  1. Precedent. Though stocks can move sideways for years, they have generally gone up over time.
  2. Emotion. It is a decision influenced by a rising sense of fear, not a calm assessment of probabilities and risks.
  3. Transaction costs. Between taxes, transaction costs, and opportunity costs, it has the potential to be painfully bad advice.
  4. Insufficient evidence. We have no evidence that even a major disruption in the credit markets will wipe out stocks, leading to forced selling and lower stock prices.
  5. The government response (fiscal and monetary) has not really been cranked up yet. It may or may not work. But governments will try and do more when they think they have to.

Reasons for liquidation:

  1. Evidence of illiquid markets. The August tumult caught out the most poorly prepared leveraged borrowers. But it precipitated something larger. It would be stupid to ignore the sign.
  2. Commercial paper market is dry. If companies cannot borrow using securitized assets as collateral, they too will be forced to liquidate assets to raise cash or drastically cut costs (fire people).
  3. Deleveraging. This is taking place with quiet desperation in an attempt to do it in an orderly fashion. To sell without causing a selloff.
  4. Hedge fund redemptions. Funds have to raise cash by selling assets. More sellers, fewer buyers.
  5. Hedge fund redemptions refused. Funds refusing consumers their money citing inability to value assets ... for which there is no market ... and thus no price (effectively zero).
  6. Central bank interventions. The CBs are already knee-deep in the problem, showing that it is further along than just a theory. Bad moves, wrong moves, any moves that lessen market confidence in the bankers or the banks can trigger more selling.
  7. Nothing is worth buying or even owning, given the level of risk and volatility. Stocks are not going to rally 30% from here. So you could buy back in in December at around the same price.

Have I worried myself into a frenzy? Are our readers as scared into indecision as I am? Well, truthfully, I am totally in cash anyway, with no debts. So I am not much worried at night. But it is the first time in my 10-year career I have been this worried.

During every other mini-crisis I felt like there was something worth buying, some other asset class negatively correlated to the “bad thing” I thought was coming. But if the credit bubble well and truly deflates, the best place to be is with your feet firmly planted on the ground and cash in your pocket (not in the bank, or in a money market fund, or Treasuries (which should get shellacked now that Bush has proposed the nationalization of the sub-prime market).

Here is the essential question I am asking: “If there is one thing you could do with your money right now to make it safer, what is it?” My best answer is to take $1,000 cash out of the ATM and stash it in my cigar box. If you are thinking the same thing, or have any thoughts that might talk me down from the financial ledge, please share them.

Link here.
Part II of discussion here. Part III here.


Could the U.S. government confiscate gold again?

In light of the bearish news affecting financial markets recently and the calls to pile into gold – which is generally considered a countercyclical asset and inflation hedge – a reader recently asked when the other shoe might drop. He meant if gold prices started rising too quickly, would the government not just outlaw gold and precious metal ownership, as it did in 1933?

That kind of stuff cannot happen in this day and age, can it?! True, we are not talking about just any commodity. The welfare statists and banking elite have a peculiar hatred for the metal, and today, they are joined by the environmentalists. Heck, all socialists hate the doggone thing. But they are the minority. Unlike 1933, most people are indifferent to it, as they are also indifferent to the long story of the fight for liberty and the progress of civilization seen through the precious metals as their circulation progressively widened its course through history. Indeed, this story, some thousands of years old, had abruptly ended only a few short decades ago.

If one could readily read this history in a gold bar, scarcely a whimper would exist past 1933, and 1971 would be the “end of history” as we knew it. Money is now paper, based on the full faith and credit of government, and only the winners get to write history – thus, gold has no utility and exacts a large social cost. In fact, reckon the winners, the only reason that central banks have not sold all of their gold reserves yet is to prevent harm from coming to those backward countries still dependent on gold mining. Thus, gold’s value is artificially buoyed by the central bank gold agreement, they say.

Not surprisingly, most people would decry gold’s monetary value while at the same time complaining about the general rise in prices and the many other side effects of an unhinged monetary system – which are typically attributed to the mysterious workings of the capitalist system instead. Yet those basic positions, unenlightened as they may be, happen to form the views of most politicians and central bankers, as well as the vast majority of people. And they alone constitute reason enough not to worry about confiscation, not at these prices.

Still, the question should be considered before investing in gold.

On Monday, March 5, 1933, investors woke up to this headline on the front page of The New York Times: “ROOSEVELT ORDERS 4-DAY BANK HOLIDAY, PUTS EMBARGO ON GOLD, CALLS CONGRESS”. From that point forward until 1975, anyone owning gold coin or bullion in the U.S. could be fined up to $10,000 (in 1933 currency) and imprisoned for up to 10 years, or both! Since it was unconstitutional to tell Americans they could not own something, especially money, FDR had to resort to a wartime emergency measure – the Trading With the Enemy Act – to check Congress.

Gold was an integral part of the monetary system back in the day. It was money. It did, in fact, prevent the central bank from providing liquidity to the markets at a critical moment for the inflation-induced boom, apparently making life difficult for millions of paupers. It interfered with the supposed need for a lender of last resort. Since reserves were gold, not paper, and could not be created out of thin air as today, the destruction of confidence in the banking system led to a credit crunch that proceeded to wipe out most of the stock market’s wealth in that era. That is, the gold standard prevented the central bank from doing its job!

Conventional wisdom blames the gold standard for “dramatic fall[s] in aggregate demand” leading to a “series of long depressions,” though, apparently, not a slowdown in actual production. This reasoning relies on the then-popular Keynesian explanation for the business cycle, rooted in the consumption paradigm, which assumes that consumption drives as well as delimits growth. The gold standard allegedly kept interest rates artificially high to begin with, but an overheating in final demand would force prices and interest rates up too much, resulting in a contraction in demand. The gold standard was also blamed for forcing wages and prices generally lower, especially in some sectors, like agriculture.

None of these contradictory objections hold water today. Keynes has long been discredited. More satisfactory explanations for the business cycle and the phenomenon of interest have survived. We found that cheap money does not eliminate poverty, and that despite eliminating the gold standard, the boom-bust cycle still occurs to this day. We have also discovered that the Depression was brought on by the effects of monetary expansion, the manipulation of credit and interest, and progressive era government interventions that hampered the economy (capitalism) and lengthened the Depression.

The real reason that the gold standard was abandoned was not because gold hoarders and foreign exchange speculators held the fate of the economy at ransom, or because it technically failed. The gold standard was done away with because it stood in the way of inflation and big government so we could have the world we have today – easy money, illusory prosperity, boom-bust, war, empire, and welfarism. Today, of course, it is difficult to blame gold for any of these shortcomings. The financial chicanery produced by central banks lay bare. Except they still write history.

Can they do it again?

Technically, yes. The president today has wider powers than ever. But circumstances do not favor it, and there are many obstacles.

First, at this precrisis gold price, such an act would simply hasten an actual crisis. It risks suddenly increasing the importance of gold in the public eye, while undermining confidence in the boom. Moreover, gold investors can probably also rely on the practically universal axiom that governments will always react to a crisis rather than preempt it – usually because they are the fundamental cause. Those few bankers and politicians who do understand and fear a realization of the value of gold are still likely overconfident in their ability to whip gold bugs with simple propaganda. They probably will not even raise their eyebrows until gold prices reach far beyond $1,000.

Then there is the question of why the government repealed its restrictions on gold ownership in the mid-‘70s, when gold prices had quintupled, and why there was no reconfiscation when gold quadrupled again in the late ‘70s, when people lined up at their banks to buy gold each payday?

One answer is precedent. The world now knows what it did not in 1933 – that it did not work anyway. But no gold standard stands in the way of the central bank’s monetary machinations today. Gold is not an integral part of the monetary system. Neither is gold money any longer. If it were, you could use it to buy a pair of sneakers at Target. So why pick on a scapegoat that has already been pushed over the cliff?

The only way gold could be blamed today is if it started to rise so fast that it began to unnerve the financial markets and caused yields to rise. You might see headlines such as, “The Ghost of the Gold Standard Haunts Wall Street”, “Gold Hoarding Causes So-and-So”, “Gold Speculators Hold Economy for Ransom”, and so on. Personally, I do not think they could prove that the increase in gold prices caused anything more than the increase in any commodity price. The key fact is that gold was outlawed in 1933 specifically because it was money and restricted the ability of the Fed to inflate. It was an obstacle to inflation.

But the idea faces other hurdles, too. The gold mining industry is still troubled, and the act would incite backlash from developing nations that rely on it, as well as from bleeding-heart liberals lobbying to subsidize those nation-states.

Moreover, it is doubtful that prohibition would be effective, due to technological factors, especially if the abolition of ownership was not a universal policy agreed to by all countries and central banks. Politically, given the current rift between both political parties in the U.S. that otherwise could not be more similar, some Americans believe that the act would make only fodder for another partisan squaring-off.

Still, despite these hurdles, concerns about gold and wealth confiscation are readily understandable in light of the increased looting of the government for subsidies and handouts today. Bastiat could not have found a more fitting example of a situation matching his metaphor of the state as a fictional entity where everyone is indeed living at the expense of everyone else. Consequently, the investment reality is that owning anything is “fraught with risk” in this day when politicians move the line between private and public property around like it was a skipping rope.

The prudent course is to diversify. Own some gold bullion, some coin collectibles (which were not outlawed in 1933, though coins were), and some mining equities, but also own other sound assets that will hold their value better than a Fed Note.

The precious metals are chiefly simple inflation hedges today – one class of many – and, historically, not even the best. I am bullish on gold here not because I hope that one day gold will be money again, but because I am convinced its monetary value will become widely recognized again in future. Notwithstanding, such a realization of value takes time, and gold would be at much higher prices before it became important enough to outlaw. At least there should be enough time to see it coming.

Link here.
Effects of the debt economy on gold – link.
Gold regains its luster – link.


The freedom to travel of more than 100,000 Americans placed on “watch” and “no fly” lists is being restricted by the Bush-Cheney regime. Citizens who have done no more than criticize the president are being banned from airline flights, harassed at airports, strip searched, roughed up and even imprisoned, feminist author and political activist Naomi Wolf reports in her new book, The End of America.

“Making it more difficult for people out of favor with the state to travel back and forth across borders is a classic part of the fascist playbook,” Wolf says. She noticed starting in 2002 that “almost every time I sought to board a domestic airline flight, I was called aside by the Transportation Security Administration(TSA) and given a more thorough search.” During one preboarding search, a TSA agent told her “You’re on the list” and Wolf learned it is not a list of suspected terrorists but of journalists, academics, activists, and politicians “who have criticized the White House.”

Some of this hassling has made headlines, such as when Senator Edward Kennedy was detained five times in East Coast airports in March, 2004, suggesting no person, however prominent, is safe from Bush nastiness. Nicolas Maduro, Venezuela’s foreign minister, said he was detained at Kennedy airport by officers who “threatened and shoved” him. And that was mild. Maher Arar, a Canadian software consultant was detained at Kennedy and “rendered” to Syria where he was imprisoned for more than a year by goons that beat him with a heavy metal cable.

After the Canadian furor over Ararwts illegal kidnapping and torture, he was eventually released as he had zero ties to terrorists. Yet the Bush gang refused to concede error, refused to provide documents or witnesses to Canadian investigators, and claimed last January it had “secret information” that justified keeping Arar on the watch list, Wolf noted.

Over and again, the Bush gang claims it can prove terrible crimes about suspects but, like the men imprisoned at Guantanamo, it repeatedly turns out to have “conspiracy” zilch in its briefcase rather than hard proof of actual misdeeds. Yet it goes on punishing hundreds of suspects with solitary confinement and worse without ever bringing them to trial. Globally, the number of such detainees is in the tens of thousands. Stalin would have understood.

Apparently, favorite targets of the Bush tyranny are peace activists like Jan Adams and Rebecca Gordon, detained at the San Francisco airport; a political leader such as Nancy Oden, of the Green Party, prevented from flying from Maine to Chicago; King Downing and David Fathi, both of the American Civil Liberties Union and both detained (proves ACLU’s case about Bush, eh?); and Constitutional scholar Walter F. Murphy, of Princeton University, who had attacked the illegalities of the Bush regime. He was put on notice his luggage would be ransacked.

Wolf traces the “watch list” back to a 2003 directive from Bush to his intelligence agencies to identify people “thought to have terrorist intentions or contacts.” After the list was given to the airlines, CBS-TV’s 60 Minutes got a copy. The list was 540 pages long and there were 75,000 names on it of people to be taken aside for extra screening.

The more stringent “no fly” list has 45,000 names on it, Wolf reports. Prior to 9-11, the list had just 16 names, but 44,984 suspects were quickly manufactured to justify the creation of the vast airport security apparatus at God knows what cost to American taxpayers.

Author Wolf notes that dictatorships from Hitler’s Germany to Pinochet’s Chile have employed arbitrary arrests to harass critics. Bush’s airport detention policies are more of the same. As Wolf writes, “being free means that you can’t be detained arbitrarily.” Somebody ring the fire bell!

Link here.


September 11, 2001, has become an exceptionally memorable date, and a great deal more, for Americans. Not simply the date on which the infamous terrorist attacks took place and the great World Trade Center towers collapsed with horrific loss of innocent life, 9-11 has become a compelling ideological symbol as only a few other dates in our history, such as July 4, 1776, and December 7, 1941, have become. A visual representation of the burning skyscrapers brings a plethora of associations instantly to mind and triggers a suite of strong emotions.

Any symbol of such tremendous evocative potency invites exploitation, and each anniversary of that terrible day brings us an abundance of efforts to place its symbolic power in the service of various exploiters. The news media, of course, use the remembrance of 9-11 to attract consumers to their broadcasts and printed materials, and hence to gain advertising revenue. In the U.S., everything memorable becomes an article of commerce in some fashion, and 9-11 is no exception. Many of these commercial offerings are maudlin or otherwise in bad taste, to be sure, but in this country no one is shocked when sellers market tasteless products successfully, and anyone who does not fancy the goods may simply decline to consume them.

Far more troubling and much more dangerous, however, is the state’s exploitation of 9-11. During the past six years, 9-11 has often served as an all-purpose instrument in the state’s propaganda kit. For the Bush administration, it has provided the answer to every critical question about foreign and defense policies, among other things. If we challenge the wisdom, legality, or morality of the U.S. invasions and occupations of Afghanistan and Iraq, the government’s spokesmen and supporters throw 9-11 in our face. If we criticize the enormous run-up in spending for military purposes and for “homeland security”, much of it obvious political pork that contributes nothing to the public’s safety, the response to our criticism is that the people dare not risk another 9-11. If we express doubts about the wildly ambitious and morally presumptuous U.S. foreign policy of global hegemony, we are told that 9-11 changed everything. If we object to the government’s multifaceted assault on our civil liberties, the president stridently declares that everything being done is necessary to prevent another 9-11. If we wave our copy of the Constitution and express doubts about the president’s claim of overriding power as a “unitary executive”, the government’s lawyers assert that since 9-11 the nation has been “at war”, and hence the president’s constitutional power as commander-in-chief trumps everything else.

Although 9-11 has served as an “open sesame” for the government’s seizures of power, revenue, and liberties during the past six years, its potency is waning with the passage of time, and eventually it will no longer measure up as a “daily special” on the government’s menu of irresistible dishes. Not many Americans today feel an emotional rush at the mention of December 7, and even the news media have more or less abandoned their ritual anniversary remembrance of the infamous “surprise attack” that caused a large majority of the populace to switch instantly from opposing to favoring war in 1941. This attenuation of the date’s symbolic potency hardly matters, because December 7 served its intended purposes extremely well more than 60 years ago, and the consequences, for better or worse, have become irretrievably embedded in the course of world history.

Recalling December 7, however, reminds us that eventually we may awaken to discover that 9-11, like Pearl Harbor, was not exactly as the government represented it to be. From the very beginning, the Roosevelt administration described the Japanese strikes on U.S. military bases in Hawaii and elsewhere in the Pacific region as “sneak attacks” launched by a cunning and deceitful enemy without provocation, catching the somnolent commanders completely unaware in Honolulu and the Philippines. Anyone who has dipped into the serious literature on World War II, however, understands that this official line is utter humbug. The facts have been sufficiently exposed for anyone who cares to transcend the myth.

Unbiased scholars appreciate, e.g., that the U.S. government systematically goaded the Japanese Empire with a series of increasingly stringent economic-warfare measures, eventually placing the Japanese in a natural-resources chokehold from which their only means of escape, apart from war, was acceptance of a U.S. ultimatum that struck at the very heart of their foreign-policy commitments and their sense of honor.

Moreover, because U.S., British, and Dutch cryptographers, who shared information with one another, had broken the Japanese diplomatic and naval codes, officials in Washington had ample warning that the Japanese were moving toward an attack in the Pacific that included Pearl Harbor. General Walter Short and Admiral Husband Kimmel, the commanders in Hawaii, were consciously set up and made scapegoats for a devastating attack that the U.S. government deliberately provoked and knew was coming – an acceptable price, Roosevelt and his top advisers believed, for gaining the public’s approval of U.S. entry into the war in Europe, to assist the British – and the government subsequently conducted a far-reaching cover-up of what its leaders had known and what they had done prior to the attack.

Everyone with any critical sense understands that like the attack on Pearl Harbor in its immediate aftermath, the attacks of 9-11 have thus far left many unanswered questions. No one should be surprised if 20 or 30 years hence, information has surfaced that completely controverts the government’s current story of what it knew and did not know, and what it did and did not do, prior to the attacks. Certainly everyone with a serious nonpartisan interest in the matter already knows that the attackers did not carry out their murderous plan simply because “they hate our freedoms.” More than 50 years of U.S. government interventions in the political and economic affairs of the Middle East did much to sow the seeds of 9-11, even if those interventions did not foreordain the 2001 attacks in every detail.

No one needs to wait 20 or 30 years, however, to understand how the government has exploited 9-11 at every turn to provide a knock-down justification of its irresponsible (and sometimes criminal) political, legal, military, and fiscal actions. For the Bush administration, no mistakes are ever made, because no matter what the government chooses to do and no matter how disastrously that action works out in practice, it is always alleged to rest on the same purportedly unimpeachable foundation – 9-11.

Link here.
Top 10 reasons for a new 9-11 investigation – link.
The war on individual liberty – link.


Gibraltar’s chief minister, Peter Caruana, predicted that tax havens will cease to exist within 10 years because of what he calls “international scrutiny and pressures.” Of course, the Rock is both a semi-independent British overseas territory and a certified tax haven. The busybody, left-leaning OECD once listed Gibraltar as a harmful tax haven. But since then, Gibraltar has reformed its laws to become more “transparent” – a favorite word the anti-tax haven crowd uses to refer to tax information exchange about individuals among governments. Or in other words, “transparency” means the end of financial privacy.

Of course, Mr. Caruana sang praise for his own jurisdiction. But he might just as well have praised almost the entire offshore financial community, including all tax havens. In the last decade, almost every offshore jurisdiction has adopted stringent new anti-money laundering and “know your customer” laws. These offshore regions have also imposed obligations to report suspicious financial activity. These laws are aimed specifically at drug and terrorism money. In fact, most of them are far tougher and are better enforced than those in the major centers of dirty money – including the U.S. and the U.K.

The real source behind all the pressure and manufactured media hullabaloo against tax havens has been the tax collectors of major welfare state nations. These collectors are a miserly group that is convinced everyone and anyone who does business offshore is automatically a tax evader. The IRS and British HMRC hate the fact that tax havens offer tax-free profits and statutory guarantees of bank and financial secrecy. They refuse to accept the fact that tax competition among nations helps the world economy because it keeps taxes lower, increases profits and creates jobs.

Proof that tax havens have improved comes from none other than the notorious OECD group, the Financial Action Task Force (FATF). The OECD sidekicks in the FATF are the self-appointed blacklisters of all tax havens, from Switzerland to the Cayman Islands. Earlier this month, the FATF announced that the Marshall Islands has been removed from the OECD’s list of so-called “harmful tax havens”. The announcement came after this tiny Pacific island jurisdiction committed to improving transparency and establishing exchange of tax information. The only “uncooperative” tax havens remaining on the FATF hit list are Andorra, Liechtenstein and Monaco – all nations with strict financial secrecy laws that they refuse to waive in the face of FATF bullying. And God bless them!

What must be understood is that the decade old anti-tax haven campaign is really all about tax collectors using phony reasons (anti-drug, anti-money laundering, anti-terrorism) as public relations covers for curbing the right of individuals to bank, invest and do business anywhere in the world they wish. These phony attacks run counter to all modern economic trends of globalization, expanded world trade, international investment and free exchange of funds among nations. For some of the major protagonists, such as the U.S. and the U.K., it is sheer hypocrisy, because these two haven bashers are also major tax havens for foreigners who invest there.

But bashing tax havens has become an international sport among leftist politicians who have always preached “soak the rich” themes in trying to appeal to the poor, hard working masses. It is called demagoguery. Not to be outdone, the Democrats who now control the U.S. Congress are already passing new restrictions and levying new taxes on offshore financial activity. (President Bush, get out your courage and your veto pen!)

It is reported that Pope Benedict XVI is working on an encyclical that strongly condemns wealthy individuals from using tax havens and offshore bank accounts. The Times of London reports that the Pope will argue that tax avoidance and evasion is morally unjust because it supposedly prevents governments from collecting revenues to help society’s least fortunate people.

This is one Catholic who wishes the Pope had better economic advisors so that he might understand the beneficial role tax havens play in the world economy. (According to the Council of Vienne [1311], a person who charged interest on a loan was to be punished as a heretic committing a mortal sin). Notwithstanding the continuing leftist onslaught against tax havens, I predict they will survive and prosper, just as they have been doing since this battle began 10 years or more ago.

Link here.
Can offshore banking be considered a mortal sin? – link.


In natural resource investment markets, one can be a contrarian or one can be a victim. The choice is one’s own. Having once been a victim, I chose the other path.

Natural resource industries are cyclical, volatile, emotional, over-regulated and capital-intensive. That is the good news. If you accept markets for what they are, while other speculators operate in ignorance, you have an advantage in the market. Being a contrarian is hard. That is the other good news. Most speculators cannot act in contrarian fashion, for reasons we discuss later.

During the first of this year, the prevailing sentiment among natural resource investors was that the sky was rosy for the sector. Emerging markets, particularly China and India, were driving resource demand, as billions of people aspired to the western lifestyle. Meanwhile, politically-inspired supply constraints like “NIMBY-ism”, nationalism and resource taxation constrained new supply initiatives, making existing capacity more valuable. Meanwhile, absurd monetary and credit practices increased the appeal of real, tangible assets. The only answer to that combination of circumstances was an aggressively positive attitude towards natural resource investments, ESPECIALLY because the stocks were performing well.

What has changed? Are resource stocks now a “sell”? Have we, in 60 days, restored the productive capacity of industries that suffered from 25 years of underinvestment? Has the political and social unrest in Iran, Venezuela and Nigeria subsided to the extent that raw materials consumers are comfortable with their reliability as suppliers? Have absurd monetary and credit practices become less of a concern to anyone?

What has changed? Perception and the price of opportunity! Many of you have experienced one or more resource cycles. For others, this is your first voyage. Down cycles in the resource business are messy affairs. The current cycle has been no different. The small-cap stocks, for example, are becoming even more volatile than they have traditionally been, driven by several interconnected phenomenon. First, the markets are now international, with Asian, Middle Eastern and European money flowing into and out of very thin markets, often buying and selling for reasons unrelated to the real prospects of the individual underlying equities.

Large institutions, particularly open-ended mutual funds, are big players in tiny markets. In times when the public perceptions of these markets is good, money flows into resource and small cap funds and is deployed by newly minted investment geniuses into increasingly irrationally priced equities. As perceptions change and the money disintermediates, managers must liquidate increasingly cheap positions. These managers do not have the luxury of selling what they want. They sell what they can. Smaller institutions like hedge funds and liquidity funds have been huge players in these markets, and as their performance falters they too migrate from being aggressive buyers to aggressive sellers.

Finally, individual participation in equity markets is at an all time high, with millions of bull-market-spawned, internet-wired speculators trading speculative equities with less than perfect knowledge about the businesses that underlie those trading vehicles. The information most of the participants rely on for their investment decisions is delivered by the markets themselves, the blind leading the blind. The mob bids up the market, the mob sells the market down. What is the rational speculator to do? Buy stocks on sale.

Volatility is not just a condition, it is a tool. If it is a tool that you are unwilling or unable to utilize, you should consider a different investment medium.

Markets are emotional too, and that is also good news! We are programmed to seek pleasure, and avoid pain. We hate to be wrong alone, seeking solace in the crowd. Our expectations for the future are set by our experiences in the immediate past. When we experience success in a market, we experience pleasure, and as pleasure seekers we are eager to repeat the sensation. We feel smart, confident, even smug. Bluntly, we confuse a bull market with brains. When markets get cheap on our watch, our most recent memory is pain, which we seek to avoid. We either blame the market, the government, the Moslems, the Trilateral Commission, or rarely, ourselves. But, eager to avoid blame, no price is too cheap ... until at last it is no longer cheap, and we muster up the courage to re-enter.

In the short term, markets are a voting machine, a measure of the mob’s emotion and prejudice. Letting a mob, whose median intelligence and access to information is less than your own, dictate your actions is tantamount to assigning yourself a large handicap. In the long term, markets are weighing machines, swinging on a pendulum between undervalued and overvalued. Being a pawnbroker to the mob, buying goods on sale when the mob is depressed, and selling back marked up goods when the market is elated, is what markets are for. Do what is rationally easy, not what is emotionally easy. If you cannot find much to buy rationally, start selling. If a market goes “no bid”, put one up.

I personally see us in the mid-stage of a broad bull market in resources. At this instant, we are in a “wall of worry” correction. The world has woken up to the potential of resource markets, expectations have been frothy, but the inevitable supply increases that crush a market have not occurred, and will not occur for some time, because of the huge capital investments and long lead times inherent to these industries. I think most of the free money (the stealth bull market) has been made. My strategy will be to cycle out of popular sectors (Uranium), into unpopular sectors (Canadian natural gas), buy panics (hello, anyone listening?), and sell rallies.

Supply increases have not yet occurred, although the capital spending cycle has rendered them inevitable. Demand, even in the face of strong price increases, is very strong. Emerging market demand is part of that story, insidious inflation is another factor. If we adjust the prices that we experienced 40 years ago, or 20 years ago, to constant dollars, we see that commodity prices are high only in nominal, not in real terms.

Finally, the credit conundrum is, well, a conundrum. On the one hand, there is no doubt that part of the resource demand is artificial, a response to a liquidity-driven boom. More rational credit supplies can and will impact the broad economy, with profound implications for commodity demand. Limiting mortgages to people who can afford to pay back the loan will constrain demand for building materials. On the other hand, the idiotic increases in the money supply we are seeing now will make money worth less, and “stuff” worth more.

So where does this leave us? Right where we started: being contrarians, or victims. Being a contrarian is better.

Part I, Part II.


“You unlock this door with the key of imagination. Beyond it is another dimension, a dimension of sound, a dimension of sight, a dimension of mind. You’re moving into a land of both shadow and substance, of things and ideas. It’s a journey into a wondrous land, whose boundaries are that of imagination. That’s a signpost up ahead, your next stop, the ‘Twilight Zone!’”

Rod Serling was a multi-talented man and a prolific writer. His television series The Twilight Zone ran for five seasons in the early 1960s and was extraordinary, winning three Emmy Awards. As the host and narrator, and writer of more than half of 151 episodes, he became an American household name and his voice always sounded a creepy reminder of a world beyond our control.

Nowadays, there are numerous signposts indicating that inflation in the U.S. is getting out of control. The U.S. M3 money supply is 14% higher than a year ago, its fastest growth rate in 35 years, the U.S. Dollar Index is plunging to 15-year lows, gold is surging toward $725/oz, a 28-year high, crude oil is cruising above $80/barrel, wheat prices have doubled to $8.75/bushel, an all-time high, and the Baltic Dry Freight Index has zoomed 300% higher to stratospheric levels.

It is like entering “a fifth dimension beyond that which is known to man, that lies between the pit of man’s fears and the summit of his knowledge,” Mr. Serling explained. Could it be that the 5th dimension that lies ahead is hyperinflation, and the reignition of the “Commodity Super Cycle?” Money is still pouring into commodity indexes to diversify portfolios, amid recent financial market turmoil, reaching $120 billion at the end of the second quarter, up 50% from a year earlier. Food and energy prices are sharply higher from a year ago, and this time, the surge in these “volatile components” of inflation is not a flash in the pan. But remember, you are in the “Twilight Zone”, where perception is more important than reality, and emotions often trump logic. “There is nothing so disastrous as a rational investment policy, in an irrational world,” explained John Maynard Keynes.

Link here.


It is now becoming clear that whether or not Vladimir Putin relinquishes the presidency nominally, he will remain in effective control of Russia for many years after 2008. In that event, his “spook” economic and political priorities, honed during his decades with the KGB, will doubtless rule Russian policy. Since Putin appears most comfortable in a cold war world, that is what we are likely to return to. It is not an attractive prospect.

In order to have a cold war, you need adversaries of approximately comparable strength. The West cannot have a cold war with al Qaeda, which has neither the military nor economic strength to challenge it by conventional means. At the opposite extreme, the Soviet bloc was a worthy Cold War opponent, not so much because of its always fairly feeble economy, but because of its dedication to military might, which allowed it to punch far above its demographic or economic weight in world councils.

Putin is now trying to recreate the Soviet position. He has one major disadvantage – a population of only 141 million, which is tending to decline. He has on the other hand an enormous advantage over the Soviet Union. That is intelligent exploitation of Russia’s immense energy resources in a period of high oil prices, not so much to confront the West directly, but to attract allies into a bloc that will be large enough and powerful enough to do so. A second minor advantage is that he is not ideologically compelled to defend an indefensible economic and political system. Allies who stand alongside Putin are not forced to adopt Communism, but can retain whatever bizarre political, economic and religious beliefs they already have, uniting only in hatred of the common adversary.

Had the West in general and the U.S. in particular not made several serious mistakes since 2000, Putin would not be in a position even to dream of realizing his disreputable ambitions. It is becoming clear that nothing in the 9-11 attacks justified selecting one particular group of terrorists and reorienting U.S. foreign policy around it. The U.S. tied its military forces down in Iraq and Afghanistan, allowed the various Islamic terrorist groups to consolidate and alienated potentially neutral countries such as Iran and leftist political groups throughout the West. By focusing foreign policy so completely on “Islamofascist” terrorism, other challenges, notably those presented by Putin’s Russia and Hugo Chavez’s resource-controlling Venezuela, were neglected.

In 2001 a Russian challenge to the U.S. would have been met by a united West and laughed off the international stage. Had President George W. Bush pursued the “modest” foreign policy on which he was elected in 2000 that would very likely still be the case. Instead, there is today a disgruntled element in the EU and elsewhere that regards Putin as less of a menace than Bush, while anti-U.S. feeling in the UN and the EU has prevented effective blocking action in the ex-Soviet “near abroad” of Georgia, Ukraine and Kazakhstan. Beyond those countries, Putin has quite rich and potentially powerful allies in Iran and Venezuela. China is at best neutral and even in Japan opposition groups have taken to denouncing U.S. policy. Even Putin’s nuclear buildup, renunciation of arms control, detonation of record-sized bombs and recreation of a Russian air force that may well be better in quality than the USAF have been met with little response.

Higher defense spending is a priority for the U.S. and still more for the EU, which has allowed its defenses to fall to pathetically low levels. Both the U.S. and the EU have permitted defense procurement to become an incredible sinkhole of corruption and inefficiency, while Russia has spent resources in what is for governments an efficient manner. During the pacific 1990s, the Russian defense equipment sector fell far behind those of the West, but there is no question that under Putin it has been catching up fast.

To take one example, the F-22 Raptor fighter aircraft was originally put out to tender in 1986, but the first aircraft was not delivered until 2003. The current estimate of its production cost is $361 million per aircraft. The Eurofighter Typhoon, a similar aircraft, costs $440 million per aircraft. The Russian PAK-FA appears to be at least comparable or better in capability, is expected to come into service in 2010 and to cost $30 million per aircraft. The U.S. and the EU may have larger economies than Russia, but at anything like that cost differential, their economic advantage is negated.

Outside the defense sector, a new cold war will bring challenges in energy. With Venezuela and Iran as allies, Russia will control a high proportion of the world’s oil supplies. Whereas today the Arab Middle East controls the majority of the world’s oil output, Venezuela’s Orinoco tar sands make it a much more important oil source over a 10-year time frame and Iran too will benefit from Russian technology and oil industry know-how. The old Soviet Union brought very little to its clients in terms of technological capability in fields outside defense. Russia used the period of openness to Western influences well, modernizing its oil sector and bringing its technology up to cutting-edge levels. It is now unlikely that Russia will fall back since competitive forces have been maintained. Russia will use the energy supplies to which it has preferential access to influence policy in such oil-thirsty countries as China, and to browbeat customers in strategically important but politically feeble places such as the EU.

Globalization will go partly into reverse. High tech investment will be diverted to a large extent towards devising defense mechanisms against possible cyber-attacks. Barriers will be erected against takeovers by Russian state controlled behemoths. Indeed, such barriers could reasonably be erected against all takeovers by state-controlled companies. Trade will become somewhat less free, although the protectionist impulses thrown up by Cold War suspicion may be somewhat balanced by a geo-strategic need to play nice with Third World countries wishing to export to the U.S. and Western Europe. Gross World Product growth will be lower than it might otherwise be, and more of it will be concentrated in unproductive defense and security sectors.

The one positive effect of a new Cold War might be in weeding out public sector waste in the U.S. and Western Europe. Russian public spending is only 21% of GDP, below the U.S. level and far below levels in the EU. The country runs a large budget surplus and its finances are further buttressed by soaring receipts from the 13% “flat tax” that Putin introduced when he came to office in 2001. While Russia has huge corruption and an overstuffed military, it wastes much less than the West in unproductive social spending, wasteful subsidies to agriculture and politically-directed “pork-barrel” projects. To accommodate higher defense spending without plunging its economies into recession, it is likely that the West will have to adopt a Russian – and in this respect, more capitalist – approach to its taxation system and public spending priorities.

Is there any way to prevent the escalation of this debilitating competition? Well yes, there is. The whole point of being capitalist is that one has good access to capital and uses it wisely. Russia, when given access to capital, tends to waste it, stashing it away in Swiss bank accounts and spending it on soccer clubs and call girls. However since 1995 Western central banks have used their almost unlimited ability to create money to make capital extremely cheap, in fact almost worthless as demonstrated by the huge number of insane dot-coms, vulgar oversized housing developments and megalomaniac empire-building takeover artists it has funded.

In recent years, this has also allowed the world economy to grow at a higher rate than is sustainable, raising the prices of energy, commodities and shipping ad infinitum. In other words, we have negated our advantage in capital availability and artificially enhanced Russia’s advantage in energy and natural resources.

The solution is thus quite simple – a prolonged period of much higher real interest rates, which will raise the value of capital. That will enhance our relative economic advantage and depress the price of oil and other commodities, thus forcing Russia and its satraps Venezuela and Iran into bankruptcy. A similar period of tight money and low commodity prices was instrumental in defeating the Soviet Union in the late 1980s. There is indeed a good case to be made that Paul Volcker did more to win the Cold War than Ronald Reagan! The process can be repeated now. There are other ways of winning wars beyond mere armaments.

Link here.


But your browsing speed will take a hit.

AT&T has announced plans to snoop on Internet traffic to discourage people from sharing pirated music and movies. The company has not provided details – like whether it intends to spy only on its own ISP customers, or on all traffic in its massive Internet backbone network.

Piracy is illegal, but using indiscriminate spying to catch pirates goes too far. Add to this the many Web sites and services that save records of what you searched for, posted, or looked at, and it may seem as though browsing online is about as private as standing on the corner with a bullhorn, shouting out your plans.

I spent some time with JanusVM, a program that attempts to counteract this epidemic of indiscriminate snooping by disguising the source of all of your Internet traffic – not just your surfing. The software’s creators request a donation, but they allow you to use the app for free. It will definitely cost you some speed online. But if you want to stay unknown as you perform sensitive tasks, JanusVM may be worth the price in slower performance.

JanusVM is a collection of free, open-source privacy tools, such as Tor, which links you with other Tor users to mask your virtual location. These tools are packaged in a virtual appliance that makes setup and configuration a breeze. To use it, you will need the also-free VMWare Player (a chunky 145MB download), which lets you run virtual PCs within Windows distinct from the operating system.

Regrettably, whereas my laptop’s Wi-Fi connection ran at 1.5 mbps without the software, according to a test I ran at DSLreports.com, it dragged along at 350 kbps with it [Ed: about the speed of a dial-up connection]. Though browsing was noticeably slower, it was still functional.

Link here.


Joe Smith is an average American guy. He lives in a 3-bedroom home in the suburbs with a couple of children. Joe has a solidly middle class occupation. So does his wife Jane – they both have to work to pay the bills. Joe and Jane do not worry much about asset protection, privacy and have never invested a dime outside the U.S. One day, they read an article that says more than 50,000 lawsuits are filed every day in the U.S. But they ignore it, because they “know” there is nothing “average people” can do to protect their savings.

That is a glaring misconception. Almost every “average American” can benefit from an integrated program of wealth protection, and protect their privacy to boot. And they do not need to spend a fortune to enjoy these benefits – domestically or offshore.

While the U.S. is a very “creditor-friendly” country, there are numerous opportunities for wealth preservation, particularly at the state level. These laws vary considerably state-to-state as to what assets are protected and under what conditions. If you live in a state with strong asset protection laws, they may provide an important first line of defense to protect your wealth. Here is a brief summary of what is available:

Creditors can challenge transfers of assets to a trust, partnership, insurance policy, etc. under state or federal fraudulent conveyance statutes. In a fraudulent conveyance suit, the burden of proof is on the creditor to demonstrate that the purpose of the transfer was to “hinder, delay, or defraud” its collection of an existing or known future obligation. If you cannot demonstrate a legitimate reason for the transfer, other than spiriting your assets away from your creditors, a court may set aside the transfer and order you to pay the money owed to a creditor. The court order may be reinforced with fines, foreclosures, seizure of substitute property, and occasionally, even civil contempt citations, i.e., pay the creditor or go to jail. It is absolutely critical that you obtain the advice of a qualified professional when transferring personal assets into any of the structures discussed in this article.

Link here.

How the average Joe can protect his dough offshore.

Many countries have enacted laws and regulations that are much more protective of privacy and wealth than the United States. Each offshore jurisdiction is unique, but in general, they each:

  1. Protect financial privacy much more than the U.S. Even if there are no “bank secrecy” laws in effect, taking your wealth offshore will take otherwise-visible assets off the radar screen of domestic financial investigators.
  2. Lack U.S.-style “civil forfeiture” laws. Most countries view the government seizing your property as a punishment that can only be imposed in a criminal proceeding. That means, unlike the U.S., you and your property are presumed innocent until proven otherwise. In most of these countries, law enforcers can only take your property after you have been convicted of a crime.
  3. Have procedural rules that discourage frivolous lawsuits. Unlike the U.S., Most foreign legal systems discourage or prohibit lawsuits brought on contingency. In offshore courts, the attorney bringing the lawsuit is NOT rewarded with a percentage of the assets awarded by the court. Foreign courts also often have a “loser pays” rule in civil litigation and prohibit awarding punitive damages without a criminal conviction.
  4. Have set up laws and regulations that are designed to protect wealth. Some foreign jurisdictions have enacted trust laws that make it very difficult to prevail in any claim against the assets conveyed to a properly structured trust. Others accomplish the same objective through insurance contracts. In virtually all cases, assets are better protected, and less visible, than in the U.S.
  5. Facilitate access to non-dollar-denominated investments. It is possible, although not always easy, to purchase foreign currency CDs and securities denominated in foreign currencies from a U.S. bank or broker. However, numerous restrictions apply, a consequence of laws enforced by the SEC, IRS and other government agencies. Offshore, most of these restrictions do not exist, or are less onerous.

If you are a small time investor, you can still take advantage of the opportunities offshore. Here are a few ideas:

  1. An offshore commercial bank account. It is still possible to open small accounts in a handful of offshore jurisdictions. While an account of, say, US$20,000 may not be large enough to provide access to the full range of a bank’s services, it will generally be sufficient to fund investments in savings accounts and foreign currency CDs.
  2. Offshore safekeeping arrangements. It is also possible to use safekeeping arrangements to hold precious metals or other valuables offshore. There is no minimum investment to qualify for such services, as they are strictly fee-based. These arrangements may be legally non-reportable to the IRS or U.S. Treasury, unless the holdings are sold for a profit. However, persons with less than $20,000 to protect may find the expense involved in transporting valuables abroad and paying the annual safekeeping fees too high to be practical.
  3. Offshore variable annuities. If you are looking for an easy way to provide asset protection, currency diversification and tax-deferred growth, an offshore variable annuity is worth considering. Minimum investment is around $50,000. Several offshore jurisdictions provide statutory asset protection for the death benefit and investments held by an insurance policy. It is also much more expensive for a creditor or disgruntled family member to bring a claim before a foreign court than a domestic court.

    A disadvantage of an offshore annuity is that you are not allowed to manage the investments within it yourself. If you do, you lose tax deferral. However, you can usually make a non-binding request to the insurance company to purchase particular types of investments or name an outside investment manager.
  4. Invest offshore through your IRA. Offshore investments through a self-directed retirement plan are another option. You can purchase offshore stocks and bonds, offshore funds, even offshore real estate through your retirement plan. Most retirement plan custodians will not permit you to place offshore investments in your IRA, but there are a few exceptions. The minimum investment to make this a viable strategy is approximately $100,000.

Remember that for U.S. investors, offshore income or gain is generally not tax-deferred, other than the exceptions mentioned above. Extensive tax reporting requirements also exist for many types of offshore investments and contractual relationships. And no matter what options you choose for your offshore asset protection plan, please do not proceed until after you have consulted with a qualified professional.

Link here.


Discretionary, or “black hole”, trusts are nothing new in South African courts. And judges do not like them. Such trusts featured prominently in the prosecution of Peter Gardener and Rod Mitchell, formerly the joint chief executives of LeisureNet, the now bankrupt fitness club operator.

The first mention of these offshore trusts, in which they had nominal interests, emerged at the section 417 inquiry into the collapse of LeisureNet. Both men admitted the existence of the trusts. Ajax Way Investments, a company registered in the British Virgin Islands, held all the shares in Achilles Way, a discretionary trust set up in February 1998 in Jersey. The management fees earned offshore by Gardener from LeisureNet subsidiary Healthland International would be paid into the trust. Mitchell then registered the firm Moreland in the BVI, which controlled Clockwork, his discretionary trust set up in Jersey.

Gardener and Mitchell denied they had a beneficial interest in the trusts. However, in April 2002 they asked the Cape Town high court to set aside two orders which granted LeisureNet liquidators letters of request to the royal court of Jersey to recognize their appointment as liquidators in order for them to institute proceedings to investigate and recover company assets. Their investigation was to include the trusts.

Both applications were dismissed with costs. “In these circumstances, where millions of rands of LeisureNet funds have disappeared into pockets created by Gardener and Mitchell in offshore havens, a proper and thorough investigation is not only warranted but essential for the proper winding up of LeisureNet,” Judge Hennie Nel said. “The contention, that the orders should not have been granted because the information sought by the liquidators is private and confidential, borders on the grotesque. It is illustrative of the attitude of so many managers of companies who seem to believe that they should be allowed to walk away scot free from financial disasters which they have created.”

At the inquiry, the duo testified that they had been informed before the structures were set up that any assets settled on the trusts would no longer belong to them. “We would have no entitlement, nor any power in respect of them. At best we might have information rights,” they said. Amanda Chorn, formerly of Jersey-based trust company Insinger de Beaufort Trust, testified that Gardener and Mitchell’s trusts were discretionary trusts or “blind trusts” and that no beneficiaries were named in the trust deeds.

While a person who invested funds in a blind trust could request that they, or their nominees, would benefit when the trust was settled, they would not be in a position to force a trustee, who had discretionary powers, to do anything. Jane Downing, formerly of Investec Bank, said an offshore trust was different to a domestic trust in that normally the intended beneficiaries of a trust were not included as trustees. Trusts were set up for estate planning, and although those assets no longer belonged to the client, the client still had a loan account against the trust.

In terms of the most prudent estate planning, one would sell assets to a trust at market value and the purchase price of those assets would remain outstanding on the loan accounts. The capital growth from the assets would remain with the trust, not the individual, she said.

Link here.


Alan and Stephne Roos of Bothell, Washington are victims of Communism. The couple – a butcher and dental assistant, respectively – lost their automobiles to the officially sanctioned form of theft called “asset forfeiture” because their son Thomas has used them to conduct drug transactions. Neither Alan nor Stephne has been charged with a crime of any kind. Under the “War on Drugs”, it is not necessary to be convicted of a crime in order to lose one’s property, since the State’s agents are empowered to seize anything at any time, as long as some “drug nexus” can be established to justify the theft.

The theory and practice of Communism are based on the denial of private property, and the administration of “justice” under Communism is collectivist in nature. It is not necessary to prove the guilt or innocence of an individual accused of a crime against socialism, explained Lenin shortly after the Bolsheviks seized power in 1917. It is sufficient to demonstrate that the accused belongs to a collective regarded as an enemy of the State. Thus it becomes clear that Communism came to America – in principle, if only intermittently in practice – in 1970 with the passage of the Comprehensive Drug Abuse Prevention and Control Act. That measure nullified the right of private property by permitting law enforcement to steal (or “forfeit”) money and physical assets believed to be involved in, or the proceeds of, narcotics trafficking.

The very term “forfeiture” carries a connotation that property rights are contingent and can be revoked when those acting on behalf of the State choose to do so. Under the Anglo-Saxon tradition of liberty under law, property can be taken only following due process of law. This would require a criminal proceeding in which the accused are presumed innocent until proven guilty of a specific offense and convicted by a jury of their peers. None of this is true where “asset forfeiture” is concerned. The experience endured by Alan and Stephne Roos could happen to anyone living in the USSA.

Alan and Stephne insist that they did not know that their son was using the cars to conduct drug transactions, and that they were furious with him for doing so. They explained as much to the “designated hearing officer” for the County Sheriff’s Department, who ruled that a “preponderance of evidence” existed that the cars had been used for drug trafficking. Once that decision was made – not by a jury, or a judge, but by an official of a Sheriff’s Department that stood to profit from the seizure – Alan and Stephne were informed that they had the burden to prove that they were not aware of Thomas’s activities in order to receive the “benefit” of the “innocent owner exception”.

In other words, once the police stole the cars, what had been a right was transmuted into a contingent, government-granted “benefit”. The Washington State statute specifies that “no property right exists” in assets that are stolen by the government in this fashion. And in order to qualify for the exception, Alan and Stephne, like all others in such a predicament, were required to prove their innocence – not regarding a criminal act, mind you, but regarding what the state Court of Appeals called their “mental state”.

Not surprisingly, given that (once again) the hearing officer worked for the department that had already stolen the cars, and had every reason to justify that theft, ruled against Alan and Stephne, insisting (in the words of the state Court of Appeals) “substantial evidence supported a finding that Alan and Stephne knew or should have known that Thomas was using the vehicles to acquire possession of drugs.”

If Alan and Stephne knew about, or consented to, Thomas’s use of their cars to deal drugs, why were they not charged as either co-conspirators or accessories, before their property was seized by the State? But comrade, that is how the justice system works in bourgeois countries still groaning beneath retrograde, delusional concepts such as the sanctity of private property and the rights of the accused. The belief in Due Process of Law was the opiate of the masses, and eliminating that opiate was the central – albeit unspoken – objective in the Grand And Glorious War On Drugs.

Link here.


Buried in the September 5 issue of the Federal Register, was a notice that on September 20 the TSA would hold public hearings on their so-called Secure Flight Plan (PDF). Come with me into a nightmare world where American citizens will have to obtain permission from the government before they can travel by air in the U.S.

Your government (meaning the Department of Homeland Security) is up to no good. Beginning in February 2008, U.S. Customs and Border Protection (CBP) will implement their “Advance Passenger Information System (APIS)”, the gist of which is that you will need permission from the U.S. government to travel on any air or sea vessel that goes to, from or through the U.S. The travel companies will not be able to issue a boarding pass until you are cleared by DHS. This applies to ALL passengers, U.S. citizens and visitors alike. And how do you get said permission to travel? That is for your government to know and you to never find out.

Now TSA proposes to do for domestic travel what APIS will do for international routes. The new rule would require that you obtain PERMISSION to travel within the U.S. Here is the summary of their proposed rules, which seem so reasonable, couched as they are in the blandness of governmenteez: “The Intelligence Reform and Terrorism Prevention Act (IRTPA) requires the [DHS] to assume from aircraft operators the function of conducting pre-flight comparisons of airline passenger information to Federal Government watch lists for international and domestic flights. ... This rule proposes to allow TSA to ... receive passenger and certain non-traveler information, conduct watch list matching ... and transmit boarding pass printing instructions back to aircraft operators. ... This rule proposes to allow TSA to ... receive passenger and certain non-traveler information, conduct watch list matching ... and transmit boarding pass printing instructions back to aircraft operators.”

Right. And I have a bridge in Brooklyn ...

Edward Hasbrough states that these rules are more insidious than merely complying to demands for “Your papers please.” He states, “The proposal ... require[s] that travellers display their government-issued credentials not to government agents but to airline personnel (staff or contractors), whenever the DHS orders the airline to demand them. But since the orders to demand ID of [certain passengers] will be given to the airline in secret, ... travellers will have no way to verify whether ... demands for ID are actually based on government orders.”

You will not be allowed to verify if the person demanding your papers is actually authorized to do so. In addition, the airlines or their contractors (or sub- or even sub-subcontractors) have the right, under the proposed rules, to do anything they like with your personal information including, “keep copies of your passport ... as long as they like, use it, publish it, broadcast it, sell it, rent it, or pass it on to whomever they please.... [T]hey would have no obligation to get your permission for any of this.”

Aside from the privacy issue, this is the DHS. Their past performance is an indication of future returns and we can look forward to true travel nightmares beginning February 19, 2008. Just think about the mess that occurred when CBP demanded that travelers to Canada and Mexico have a passport. Multiply that by orders of magnitude to imagine what travelers will be facing.

You have until October 22, 2007 to submit written comments through the Docket Management System. The docket number is TSA-2007-28572. The Identity Project at Papers Please is working to prevent your government from robbing you of your right to privacy in your movements.

Link here.


Many people say winning the lottery, buying a big house in the suburbs and having children are the things that happiness is made of. But Harvard professor Dan Gilbert said for many, that may not be true. “We have a society full of Dear Abby’s that tell us what our sources of happiness is,” Gilbert said. “The problem is some of them are wrong.”

Gilbert said having more money can change people’s lives but it does not necessarily make them happier. “It’s a real surprise to most of us who think that winning the lottery will solve all our problems and it does,” he said. “It solves five problems and gives us five new ones.”

Then there is the dream house. Many feel the need to move far from their jobs so they can afford that big house. Gilbert said the problem is people get accustomed to the new house, and it does not bring them much happiness day in and day out. What they do not get used to is the commute, which can be a daily source of frustration and stress.

Finally, the kids. Gilbert said in general, children are a tremendous source of happiness, but it comes at a price. “Children are a little bit like heroin,” he said. “Heroin makes you very happy but it also erases all of your other sources of happiness. You are no longer interested in food, or sex, or money, or theater.”

So what will make you happy? “Spend more time and money on social relationships,” Gilbert said. “They are the primary source of human happiness.” Gilbert also said to invest in experiences rather than things. The memories from a great vacation will last forever, but a flat screen will eventually be replaced and forgotten. Gilbert said education and religion are also strong predictors of happiness. But he added that it is more about the community and the opportunity they provide than the degrees or the actual faith.

Link here.
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