Wealth International, Limited (trustprofessionals.com) : Where There’s W.I.L., There’s A Way

February 2008 Selected Offshore News Clips

(Especially noteworthy articles’ dates highlighted in gold.)

February 4, 2008

And a big opportunity looming in China.

Legendary investor Jim Rogers adds his voice to the chorus of those outright predicting bad things ahead for the late, great U.S. economy. A hefty portion of Rogers's fortune comes from predicting megatrends correctly and betting heavily on his predictions. When he says "I just see things getting much worse this time around than I expected," one had best pay attention. Likewise, when he welcomes the correction in China-related shares it is a good time to be taking a look there.

You might expect Jim Rogers to be gloating a little bit. After all, the famed investor has been predicting a recession in the U.S. economy for months and shorting the shares of now-tanking Wall Street investment banks for even longer. And with fears of a recession sparking both a worldwide market sell-off and emergency action from Federal Reserve chairman Ben Bernanke, Rogers again looks prescient -- just as he has over the past few years as the China-driven commodities boom he predicted almost a decade ago began kicked into high gear. But when I reached him by phone in Singapore the other day there was little hint of celebration in his voice. Instead, he took a serious tone.

"I am extremely worried," he says. "I have been for a while, but I just see things getting much worse this time around than I expected." To Rogers, a longtime Fed critic, Bernanke's decision to ride to the market's rescue with a 75-basis-point cut in the Fed's benchmark rate only a week before its scheduled meeting (at which time they cut it another 50 basis points) is the latest sign that the central bank is not willing to provide the fiscal discipline that he thinks the economy desperately needs.

"Conceivably we could have just had recession, hard times, sliding dollar, inflation, etc., but I am afraid it's going to be much worse," he says. "Bernanke is printing huge amounts of money. He is out of control and the Fed is out of control. We are probably going to have one of the worst recessions we have had since the Second World War. It is not a good scene."

Rogers looks at the Fed's willingness to add liquidity to an already inflationary environment and sees the history of the 1970s repeating itself. Does that mean stagflation? "It is a real danger and, in fact, a probability."

Where the opportunities are.

... [D]espite his gloomy outlook for the U.S., he still sees opportunities in today's world. In fact, he sees the recent correction as a potential gift for investors who know where to head in global markets: China. Rogers has been fascinated with China ever since he rode his motorcycle across the country two decades ago, and he has been a full-fledged China bull for several years. In December he published his latest book, an investor-friendly tome titled A Bull in China: How to Invest Profitably in the World's Greatest Market. And that same month he sold his beloved Manhattan townhouse for $15.75 million to a daughter of oil tycoon H. L. Hunt and moved his family full-time to Singapore -- the better to be closer to the action in Beijing and Shanghai. (He bought the New York mansion 30 years ago for just over $100,000; not a bad return on his investment.)

But in a November interview I conducted with Rogers, he admitted that he was rooting for a serious correction in China to cool off an overheating market and bring back prices to a reasonable level. With the bourses in Shanghai and Hong Kong both some 20% off their recent highs as of late January, Rogers says he is starting to consider new investments.

"I am delighted to see what is happening in Shanghai and Hong Kong," he says. "As I have said, if things had not cooled off, the Chinese market was in danger of turning into a bubble. I find this most encouraging. The government has been doing its best to try and cool things off. Mainly they have been trying to deal with real estate but it is having an effect on stocks, too. I would suspect the correction is not quite over in China. But I am gearing up. I did not put in any orders for tomorrow but I am starting to prepare my list of things to buy in China. Whether I buy this week or this month or this quarter, who knows. But I am starting to think about buying new shares in China for the first time in a while. And I am not thinking about buying in America."

Ultimately, Rogers does not think that the troubles in the U.S. will be much of a drag on the prospects for the People's Republic. "Anybody who sells to Sears or Wal-Mart is going to be affected, without question," he says. "Some parts of the Chinese economy are going to be untouched, however. They won't even know America's in recession. They will not care if America falls off the face of the earth." ...

What is on Rogers's China watch list?

What is on his China buying list? Rogers says it will depend in large part on which stocks come down to the right level, but he is keeping his eye on certain high-growth sectors including tourism, agriculture, power generation and airlines.

The pullback in commodity prices on recession fears has not dampened his enthusiasm for resources investments, either. More like a cyclical correction in the middle of a long-term bull market. "Certainly some commodities are going to be affected," says Rogers. "But it is not as if the markets haven't figured this out. Remember the old expression: 'Dr. Copper is the best economist in the world.' Well, Dr. Nickel and Dr. Zinc figured out a few months ago what I thought I had figured out, that we were going to have a recession. Nickel is already down 50%. Other commodities may fall more. But I do not see the economics of agriculture being much affected at all. Maybe there will be a few less cotton shirts bought. Maybe there will be a few less tires bought. But the supply is under more duress than the demand."

Once again Rogers draws on the 1970s in his analysis. "Think about the story of gold in the '70s," he says. "Gold went up 600%, and then it started correcting. It went down nearly every month for two years, nearly 50% from the high point. And everybody said, 'Well, that is the end of the gold market. It was just a fluke. It's over.' It scared everybody out. And then gold turned around and went up 850% from that level. This is what happens in markets. But the fundamentals of the secular bull market in commodities are not over any more now than they were for gold in the '70s."

Rogers has not covered his shorts in the investment banks or Citigroup.

Where he expects the pain to be most intense is on Wall Street. He says he has not covered his short positions on the investment banks or Citigroup and will not for a while. "Those things are going to go way, way, way down," says Rogers. "The investment banks are down now because of the problems in the credit market. Wait until the effects of the bear market come along. If you just go back and look at other bear markets, investment bank stocks have gone down enormously. We have not gotten to that stage yet. It is going to bring their balance sheets under duress. This is going to get much worse. But that is where there have been excesses for the past decade or so. And whenever you have a bear market come along the great excesses of the previous period are the ones that get cleaned out the most."

He will be watching -- from Singapore.

His point about how a bear market devastates the great excesses of the previous period has proven out time and again. A short list from U.S. stock market history would include the small concept stocks of the late 1960s, the "Nifty 50" large growth stocks of the early 1970s, energy stocks in 1980, small technology stocks in 1983, and dot-com + telecommunication stocks in the late 1990s. In each case losses of 80% or more were common after the group peaked.

There is a particularly debilitating double-whammy setup that comes into play during excesses: (1) The stocks get overhyped and overvalued, and thus are subject to normal market corrective forces. (2) The high valuations attract capital into the affected market sector, which fuels spending in the industry and temporarily boosts "fundamentals" while simultaneously creating excess capacity. When reality sets in, earnings and all the projected growth rates Wall Street heedlessly used to sell the IPOs on the way up both fall -- and disappear entirely for the lower quality companies in the sector. Multiples contract. Wall Street abandons its former favorite sons (which is great come buying time, when that time eventually comes around). Depending on how fast the capital stock becomes obsolete, the excess capacity can pressure margins and earnings for years.

To complete the list of areas of obvious excess from U.S. stock market history, add the financial stocks in 2005-06. The most flagrant excesses from the financial sector such as the subprime mortage lenders have already been wiped out. (Note that the allegations of fraud coming out here now, after the fact, are typical hangover symptoms of excess being corrected. No one cares on the way up, when everyone is still making money.) Citigroup and the investment banks are nominally more respectable than the subprime brokers, and certainly have more political support -- too big to fail and all that. But they have a lot of unaccounted-for bad assets and, characteristic of financial companies, a lot of leverage. A lethal combination. Thus Rogers's bet that there is more downside there.

February 4, 2008

Another triumph of bureaucratic shortsightedness over sense and substance. When U.S. companies choose to self-insure, they have traditionally been allowed to deduct allowances for future losses, i.e., additions to loss reserves, for tax purposes -- just like a regular insurance company. The fact that one corporate subsidiary is insuring another is a legal issue, but not a substantive one. Now the IRS proposes to allow allow deductions for actual cash losses only. Perhaps the IRS plans to allow the full expensing of capital investments as well? We thought not.

The IRS has scheduled a hearing for the 29th February to listen to concerns from the U.S. captive insurance industry that new tax rules will drive captive insurers offshore. A regulation proposed by the IRS last year would end the allowance of deductions for loss reserves by single-parent captive insurance companies that file income tax returns on a consolidated basis with their parent corporation. But, according to the Self-Insurance Institute of America, a national trade association representing companies involved in the self-insurance and alternative risk transfer, this proposal would have a negative impact on tax revenues for the U.S. government, and would simply tempt captive insurance companies to move to established offshore domiciles such as Bermuda and the Cayman Islands.

"Numerous judicial decisions have made it clear that the intent of legislators was to permit captive insurers to deduct losses on an accrual basis, not a cash basis," SIIA President-Elect Dick Goff pointed out in a letter to the IRS last year ... "The use of administrative procedures for consolidated tax returns to eliminate this ability to deduct losses on an accrual basis circumvents the legislative and judicial intent," Goff's letter added, citing six court rulings in favor of the captive insurance industry on this issue.

The letter also indicated that the proposed regulation would have unintended consequences that would have an adverse affect on U.S. industry: "In the long run, the Proposed Regulation ... will not enhance government revenues. Captive insurance companies will be encouraged to move offshore where they will not be required to pay U.S. income taxes. With this movement offshore, U.S. jobs will be lost to offshore domiciles, and the related payroll taxes, personal income taxes and state premium tax revenues will decline," Goff warned. ...

This matter, as usual, is another one that taxing authorities ought to look at but seldom do very deeply. Sensible or not, fair or not, will the measure end up raising revenues ... presumably the intent of the proposal? The SIAA would not be screaming if it would be costless to circumvent the measure, but there are just too many relatively easy ways to do that to think that companies will meekly just pay up. For instance, companies could combine forces to get around the "single-parent" criterion. Even simpler, the parent could just stop filing income tax returns on a consolidated basis. This sounds like a good idea in any case. Insurance is a very different business from the main one in most cases. Why consolidate?

A deeper issue here -- note the "intent of legislators" language in the protest -- is the tendency of the IRS, and other Executive Department agencies, to override the law as written and enforce it as the damn well please. As always, it is the cop with the gun that says what the law is. Your remedies or appeals come later. Certain IRS employees have been extraordinarily persistent in going against the clear instructions of Congress (they must take their cue from the top). A couple of years ago, some Clinton Administration holdovers in the IRS kept proposing to share information on interest and other earnings earned by foreigners with the laters' home governments. The whole idea was inimical to U.S. economic interests, depending as it does on the kindness of foreign investors. But it was a proposal that would not die.

Goff and members of SIIA's government relations team have presented their case to members of Congress, congressional staff and high level officials from the Department of Treasury and IRS, and the group claims to have had two "very positive" meetings: one with Senator Max Baucus, Chairman of the Senate Finance Committee, which has jurisdiction over this issue, and another with top officials of the IRS and Department of Treasury that included the author of the proposed regulation.

If the proposal is so counterproductive that even arch anti-offshore pointman Max Baucus gets that, then it must be pretty ill-advised.

While Bermuda and the Cayman Islands remain the leading captive insurance domiciles, with about 870 and 750 registered companies respectively, the industry has been on the rise in the U.S. Captive insurance holdings have more than doubled over the last 5 years and over half of the Fortune 1,500 companies in the U.S. utilize a captive, according to Active Captive Management (ACM), which specializes in the formation and management of captive insurance companies for small and medium size companies. However, the industry fears that this trend will be reversed if the IRS succeeds in forcing through its proposed regulation on deductions.

We can think of other ways to adapt to the proposal if the IRS pushes it through. A whole separate, legally unconnected insurance company, "UIC", could be created whose sole purpose is to cover the losses of Company "X". UIC and X have a profit sharing agreement where if UIC's profits exceed a given level because, e.g., of favorable loss development trends, it can send those profits back to X. No cross ownership, just a contract the accomplishes the same thing. See our educational piece on contracts for more ideas along this line.

February 4, 2008

For those out job hunting, at home or abroad, here are a couple of simple tips that smack of good common sense, whatever position you are applying for in whatever company.

Think you would like to work for one of the 100 Best Companies to Work For? Good luck. A few require applicants to jump through peculiar hoops, like the notorious test at Microsoft that poses questions like, "How many golf balls can fit in a school bus?" and "How would you move Mount Fuji?"

At most of the 100 Best, however, the main hurdle is one of sheer numbers: The average company on the list has 15,853 employees and gets 96,062 applications each year. Not only that, but the overwhelming majority prefer to promote from within ... so you are also competing against insiders. But ... [i]f you have got the right stuff, and follow these 10 rules, you just might have a shot.
  1. It helps to know someone. Almost all of the 100 Best rely heavily on employee referrals. Principal Financial Group and many others get about 40% of their new hires this way. At Wegmans it is a family thing: About one in five employees is related to at least one other staffer.
  2. Play up volunteer work on your resume. These companies are enthusiastic about community outreach, and they prefer to hire people who are too.
  3. Get ready to interview and interview ... and interview. The process varies wildly from one company to another, but you could be facing a series of 12 to 15 one-on-one chats or one long interview with a panel of up to 50 current employees.
  4. Unleash your inner storyteller. By far the most popular interview style is what is known as behavioral, meaning that you will be asked to describe troublesome situations in past jobs and tell exactly how you handled them.
  5. Do creative research. A proven way to stand out from the hordes of other candidates is to know more about the place and the industry than your rivals. A Google search will not do it. Says Jay Jones, recruiting manager at Alcon Laboratories: "Detailed research, including talking to our customers, is so rare it will almost guarantee you get hired."
  6. No lone rangers need apply. By and large, the 100 Best want team players. "I actually count the number of times a candidate says 'I' in an interview," says Adobe's recruiting director Jeff Vijungco. "We'd much rather hear 'we.'"
  7. If you have moved around a lot, be ready to explain why. A checkered past will not disqualify you, but most of these companies are looking for people who want to build a career over the long haul. Be persuasive about why you are ready to settle down here.
  8. Be open to learning new things. Showing passion is a must, and most of the 100 Best pride themselves on creating "learning environments," so talk about the skills you would like to acquire or polish. A turnoff: declaring that you are already the best at what you do.
  9. If at first you don't succeed, don't give up. Almost every Best Company keeps track of what FedEx calls "silver medalists" -- people who barely missed getting hired -- and alerts them to new openings. If possible, register on the company's website. Four Seasons, for one, has hired people seven or eight years after an initial meeting.
  10. Don't coast on their reputation. One final tip: Do not apply for a job just because the company is on our list. In the words of Mike Gallagher, HR director at SAS Institute, "We know we have a reputation as a great place to work. But if the reason you want to work here is that you want subsidized day care or a great gym, you won't last." Or, for that matter, make it through the first round of interviews.

Related to hint #9, the author once heard someone report that he did not even open the first resume anyone sent him. He waited to see if the applicant tried another time, and another. However, he had to modify that screen when nobody tried a second time!

February 12, 2008

Doug Casey probably thinks the "severe recession" forecasters are flaming optimists. Casey has been forecasting a "Greater Depression" for a long time now. Accompanying this, he believes that gold, and especially selected gold mining stocks, are "going to the moon." Not surprisingly, he sees no reason to alter his views on those possibilities now.

If you credit Austrian School economic theory, which I certainly do, you are forced to believe that the business cycle exists. The business cycle is driven largely by government intervention in the economy, in the form of taxes, regulation and, most importantly, currency inflation. These things give false signals to businesses and investors, which cause distortions in the market, and misallocations of capital. When, inevitably, the errors start to be corrected, the result is an economic downturn.

It will be called a "recession" if the government succeeds in preventing widespread bankruptcies and unemployment through one more dose of inflation. Or it will be called a "depression" if today's economic tempest slips out of the government's control. From a financial point of view, a depression is a period when the distortions of an inflationary boom are liquidated -- a mass die-off of the economically misbegotten. From an economic point of view, it is a period when the general standard of living decreases significantly.

The point is that the more highly taxed, regulated, and inflated an economy is, the more likely that it is eventually going to experience a real depression. Perversely, the more control a government has, the longer it can put off the day of reckoning. But the longer the artificial structure is propped up, the bigger the mess will be when it eventually collapses. From my point of view, what will happen next is almost written in stone. The only real question is: When?

In 1980-82 things almost did go over the edge. But the recession was serious enough, and some subsequent extraneous positive events (the collapse of the USSR, the coming of age of China and now India) were significant enough to pull things out.

One could write a book about the 1980-82 recession and subsequent recovery. To us, the salient feature of the recovery was the institution of the regime that has continued to this day and now shows signs of coming unglued: The rest of the world lends money to U.S. consumers and governments (the business sector can still self-fund in aggregate), who then buy lots of stuff. In other words, massive worldwide fiscal stimulus. Keynesian economic theory prescribes paying down post-recovery those debts assumed during a downturn, but -- surprise -- the U.S. governments and consumers decided it was a lot more fun to keep spending and not bother paying off debt. The Paul Volker monetary medicine, ca. 1979-82, was sufficiently strong, and the overinvestment in capital goods during the 1970s sufficiently large, that people could pretend inflation was not a significant threat for a whole generation.

But now, more than a generation after the last serious crisis -- and four full generations after the Great Depression -- I think there are lots of reasons to be afraid. Very afraid.

Am I predicting the Greater Depression may be upon us? Let me preface my response with a disclaimer. I am not a fortuneteller. But my gut feel is: Yes. I am not going to mount all manner of statistics to buttress the assertion. My point here is to draw your attention to the fact that there is a lot that is likely to go wrong besides the central problem of the business cycle, a problem that is now evidenced in the collapsing housing sector and all the pain associated with that collapse.

The "other" problems now include the Forever War against Islam, Peak Oil, increasing political control over virtually all aspects of life, the potential for social unrest (within the U.S. Mexican community, for instance), the historically high level of foreign holdings of U.S. dollars, a rise in nationalism and protectionism, etc. While not always obvious, all of these things are related, so it is likely that when one of them starts running out of control, so will the others.

What will, in fact, happen? Nobody knows, including me. But I am quite afraid we are in for truly stormy weather in the next few years. Most people are not adequately, or even at all, aware of this prospect.

I suggest you stay with the approach we advise that has a foundation in gold and carefully selected gold stocks. As I am in for the long haul at this point, selling only reluctantly and when absolutely necessary to keep Caesar mollified or for portfolio rebalancing, I still view any weakness positively.

Making mid-stream adjustments to your portfolio based on these buying opportunities is important. Being bold when others are timid can make a big difference. In my opinion, gold is not just going through the roof in the next few years. It is going to the moon. And gold stocks are a leveraged way to capitalize on it.

February 13, 2008

Sometimes you wonder just what it takes to disprove a theory.

An professor of ours, back in the 1970s, was discussing some published summaries of attempts to empirically verify just how well a certain hallowed academic financial markets model fit with the real world. At one point he stopped and remarked, "Sometimes you wonder just what it takes to disprove a theory." That pithily sums up a certain propensity in academic social sciences: It acts like the man searching for his keys under a street lamp because that is where the light is, even though he lost them in an alley a block away.

Persistant divergence from reality does not prevent academics from getting published and then tenured, and generally hustling up a career out of the whole flimflam. You only need a presentment that persuades others playing the same game to admit you to the club. Indeed, if reality intruded too harshly, academe it would lose some of its considerable charms. But when academics actually believe their theories and are given the opportunity to apply them, and force them down the throat of a reluctant world if necessary ... then the troubles begin.

If acedemia is related to, and funded, in a like manner to opera its capacity for mischief is circumscribed. No one expects it to turn a profit. We just ask that it not drain too much of the treasury while generally contributing to "culture" -- which we are told, and in our heart of hearts believe, is good for us, and are willing to countenance as long as we are not forced to directly participate in it more often than biennially.

But imagine that Eisenstein, the Svengali-lite masked costume ball host in the comic operetta Die Fledermaus, gets to force everyone to attend his event. And then forces his guests to play out prearranged roles for his amusement (like vigorously insulting the local constable dressed as a vampire). And then when that causes problems, gets to dust off his hands with a perfunctory "I'll have to try this again, because the people did not end up all happy like they were supposed to." Then the farce stops being so funny. This is a frequent outcome when academics and the state feed off each other.

"This country has come to feel the same when Congress is in session as when the baby gets hold of a hammer," said Will Rogers. One would think we could all rest a little easier when the hammer is passed into the hands of a rigorously trained economist. But, it seems often not. An elegant but wrong-headed theory can be a dangerous thing. It acts like a hallucinogen that simultaneously begets blindness and lead-foot in motor vehicle drivers.

One of those wrong-headed but persistant theories loved by economists is that a weaker dollar will help reduce the U.S. trade deficit. There is absolutely no empirical validation of this theory. None. Yet, today we hear the latest verse, same as the first, that if only China would allow the yuan to appreciate vs. the dollar that would help reduce ... need we go on?

Forbes columnist Steve H. Hanke is a professor of economics at Johns Hopkins and a senior fellow at the Cato Institute, the "libertarian" think tank based in Washington, D.C. (certain senior spokespeople of which have been harshly critical of Ron Paul, but not Hanke to our knowledge). He has been a long-standing critic of the weak dollar advocates, and once more explains why the whole idea is "bunk". A noble mission, but you may as well be explaining to Ben Bernanke that trying to inflate your way out of an economic downturn is a bad idea. Or to a child that he or she should refrain from consuming candy because it can rot your teeth.

The Federal Reserve dramatically slashed both the federal funds target rate and discount rate twice in little more than a week, confirming that the central bank has thrown inflation fighting to the winds. The interest rate reductions also confirm the Bush Administration's (and the Fed's) cheap-dollar policy.

While this is bad news for inflation hawks, it is a delightful development for people who think the government should manage international trade. They believe that the U.S. trade and broader current account deficits reflect America's lack of competitiveness and are inherently bad. According to this thinking, a dollar devaluation is virtuous because it makes U.S. goods more attractive. Such thinking is common, even among some economists. It is bunk.

Just consider the most recent bout of dollar weakness. The trade-weighted value of the greenback has fallen 21% since 2001. So did this weakness in the currency create prosperity or even shrink the trade deficit? No. Since 2001 exports increased 78%, but imports increased even more, 85%. This left the trade deficit twice as large in the third quarter of 2007 as it was in the last quarter of 2001.

To appreciate just how ingrained the devaluationist bunk is, go back to 1971. That year Richard Nixon abandoned the Bretton Woods system of fixed exchange rates. He closed the gold window, imposed a surcharge on manufactured imports and demanded that other big industrial countries allow their currencies to appreciate against the dollar before he would remove the surcharge. They all did, leaving a foreign exchange system of 22 years' duration in tatters and giving the cheap-dollar mantra a comfortable home in Washington, D.C.

Did the Nixon cheap-dollar policy make exports grow faster than imports? Scarcely. The U.S. trade deficit has been in negative territory every year since 1975.

Nothing better demonstrates the impotency of devaluations in creating a trade surplus than the U.S.-Japan story. Starting with the Nixon Administration, the U.S. has pursued a two-pronged strategy: protectionist threats coupled with demands for a yen appreciation (that is to say, a cheaper dollar). Amid this madness there have been some intervals of lucidity. The first Reagan Administration (1981-84) and the Clinton Administration (after April 1995) embraced a strong-dollar policy. The trend, though, is in line with the mercantilist view that dollar weakness is something to be sought after. Since 1971 the yen has appreciated 240% from its Bretton Woods value (360 to the dollar) to its value today (106 to the dollar).

According to the devaluationists, that cheapening of the dollar against the yen should have worked wonders on the U.S. trade deficit and in particular on the two-way trade deficit with Japan. That did not happen. The U.S. trade deficit not only kept growing, but Japan's contribution to it ballooned from 26% in 1977 to 58% in 1991. (In 2000 China overtook Japan as the largest contributor to the deficit. Now Japan accounts for only 11%.)

With the U.S. trade deficit continuing to pose a "problem," both the Bush Administration and the Fed turned to that old discredited antidote, a cheap dollar. The main thing that has changed since the early 1990s is that the U.S. trade deficit has become bigger in absolute and relative terms, and China has replaced Japan as the target of protectionist wrath. Will the current cheap-dollar ploy change the U.S. trade and current account picture? No.

Truths in economics boil down to accounting principles, as immutable as the laws of physics. Our current account deficit is equal to the sum of two quantities: the excess of private investment over savings and the government deficit. The last 10 years can be divided into three periods. In the late 1990s the public sector was in surplus, and the current account deficit was the result of an investment boom coupled with a savings drought.

With the end of the dot-com surge in 2000, the private sector's contribution to the current account deficit shrank. But the slack was more than made up by the government's spendthrift habits. By late 2003 the real estate boom had kicked in, and both the private investment-savings gaps and government shortfalls were contributing mightily to current account deficits.

Trade imbalances are all about net-savings propensities, not changes in exchange rates. As the coming recession gathers force, the private investment rate will slow and the savings rate will increase, closing the investment-savings gap. At the same time, government deficits will probably creep up. On balance the current account deficit may well ease a bit. Unfortunately, however, this development will not stop the irrational agitation for a cheap dollar.

February 13, 2008

Does the Republican Party have aces up its sleeves?

Paul Craig Roberts was Assistant Secretary of the Treasury during Reagan's first term, Associate Editor of the Wall Street Journal, and has held numerous academic and think tank appointments. After having been pickled in the brine of these high status uber-establishment positions surrounded by neoconservatives for so long, one would expect him to now be a vocal apologist for ruling class interests and empire. Gratifyingly, he has instead become a major and courageous defender of civil liberties, and harsh critic of the neoconservatives and other foes of freedom.

Here Roberts brings up the enigma of the Republican Party's apparently suicidal nomination John McCain for president. Americans are sick of the Iraq war, yet the Republicans nominate a visible and unapologetic warmonger. Polls and the 2006 election results show that most Americans are sick of Bush, yet the Republicans nominate someone who basically promises more of the same. What gives?

Roberts writes: "What the American people and the Democrats have not understood is that a party with an agenda could care less for the facts. ... [T]he Brownshirt Party is fueled by the neocon ideology of American (and Israeli) supremacy." Agenda or not, how do they intend to implement their agenda if they are apparently destined for massive electoral repudiation? Mr. Roberts has a few ideas.

The Brownshirt Party has chosen John "hundred year war" McCain as its presidential candidate. Except for Cheney, Norman Podhoretz, and Billy Kristol, McCain is America's greatest warmonger.

In a McCain Regime, Cheney will be back in office with another stint as Secretary of War. Norman "Bomb-bomb-bomb-Iran" Podhoretz will be Undersecretary for Nuclear War with General John "Nuke them" Shalikashvili as his deputy. Rudy Giuliani will be the Minister of Interior in charge of Halliburton's detention centers into which will be herded all critics of war and the police state. Billy kristol will be chief White House spokesliar. The whole gang will be back -- Wolfowitz, Perle, Wurmster, Feith, Libby, Bolton. America will have a second chance to bomb the world into submission.

With the majority of voters sick of war, sick of lies, sick of fraud from the Federal Reserve and Wall Street, and sick of stagnant and falling incomes, McCain is poised to capture 20% of the vote -- the Christian Zionists, the rapture evangelicals, and the diehard macho flag-waving thugs who believe America is done for unless "Islamofacists" are exterminated.

The accumulated lies, deceptions, war crimes, the shame of Abu Ghraib and Guantanamo prisons, Bush's police state assault on civil liberty, countless numbers of Iraqi and Afghan men, women, and children murdered for the sake of American and Israeli hegemony, and the collapsing U.S. economy indicate a political wipeout for the Brownshirt Party. In a country with an informed and humane population, the Republican Party would be reduced to such a small minority that it could never recover.

What will happen in America? Polls show that Americans have had it with Bush, and the 2006 congressional election showed that the voters have had it with Republicans. But the Republicans have seen the message and ignored it, and the people and the Democrats have continued to tolerate and to enable that which they claim to oppose.

Meanwhile Bush holds on to his determination to find a way to bomb Iran, dismissing along with the neocons the unanimous National Intelligence Estimate that there is no Iranian weapons program, just as Bush and the neocons dismissed the Iraq weapons inspectors who reported truthfully that Saddam Hussein had no weapons of mass destruction. What the American people and the Democrats have not understood is that a party with an agenda could care less for the facts.

The Democrats are far from pure, but they lack the fervor and determination that only ideology can provide. The Democrats might have issue-specific ideologies, but they lack an over-arching ideology that makes it imperative for them, and only them, to be in power.

In contrast, the Brownshirt Party is fueled by the neocon ideology of American (and Israeli) supremacy. The neocon ideology of supremacy is more far-reaching than Hitler's. Hitler merely aimed for sway over Europe and Russia. The neocons have targeted the entire world.

Neocons have prepared plans for war against China. They are ringing Russia with military facilities and paying millions of dollars to leaders of former constituent parts of the Soviet Union to sign up with NATO, which the neocons have turned into a mechanism for drafting Europeans to serve American Empire.

All this work, the neocon Project for a New American Century, the costly wars in Iraq and Afghanistan, the demonization of Iran, Hezbollah, and Hamas, the ghettoization of the West Bank and Gaza, the police state measures that Bush has succeeded in putting on the books, the concentration of power in the executive branch, these are successes from which the Brownshirts will not walk away.

Possibly the neocons and their Brownshirt followers are so delusional that they do not realize that their glorious aims are not shared. Maybe they are no different from Americans, maxed out on credit and unable to make mortgage payments, who believe that next week they will win the lotto. On the other hand maybe the Brownshirts have a plan. What could the plan be?

They can steal the election with the Diebold electronic voting machines and proprietary software that no one is allowed to check. There are now enough elections on record with significant divergences between exit polls and vote tallies that a stolen election can be explained away. The Democrats have been house trained to acquiesce to stolen elections. The voters, whose votes are stolen, dismiss the evidence as "conspiracy theories."

Or what about a well-timed orchestrated "terrorist attack" to drive fearful Americans to the war candidate. False flag events are stock-in-trade. Hitler used the Reichstag fire to turn German democracy into a dictatorship overnight.

And what about the widespread spying on Americans? The Bush regime's explanation for its violation of the Foreign Intelligence Surveillance Act makes no sense. Bush's violation of the law is clearly a felony, grounds for impeachment, arrest, indictment, and a prison sentence. Moreover, no intelligence purpose was achieved by Bush's illegal acts. The FISA law only requires the executive branch to come to a secret court to explain its purpose and obtain a warrant. The law even allows the executive branch to spy first and obtain the warrant afterward. The purpose of the warrant is to prevent an administration from spying for political purposes. The only reason for Bush to refuse to obtain warrants is that he had no valid reason for the spying.

Does this mean that during the presidential campaign we will hear from Attorney General Michael Mukasey that candidate Hillary is under investigation for a Whitewater-related offense, or that candidate Obama is linked to an alleged crime figure or Islamist?

The neocons control most of the print and TV media, and the right-wing radio talk hosts are no friends of Democrats. As Americans have fallen for every other fraud perpetrated upon them, they are likely to be suckers as well for "investigations" or rumors of investigations of the Democratic candidate. Hillary is widely disliked and easy to distrust. Obama is a new face with which voters have little experience. He is partly black and has a funny name.

John McCain is a graduate of the U.S. Naval Academy. His father and grandfather were admirals. On his 23rd bombing mission over North Vietnam in one of America's orchestrated wars, he was shot down and injured. He was a POW for 5.5 years, and tortured by the North Vietnamese.

McCain has been in Congress and thus in the public eye since 1983. The only scandal with which he is associated is that he was one of "the Keating five," one of five senators associated through campaign contributions with S&L owner and real estate investor Charles Keating and alleged interveners in his behalf. Keating was entraped by prosecutors, but was later exonerated by a federal judge.

Adolf Hitler never had the support of a majority of the German electorate. In the November 1932 election, he received 33.1% of the vote. His peak was March 6, 1933, with 43.9% following the Reichstag fire a few days before on February 27, blamed on the communists. Hitler's minority support in a democracy did not prevent him from becoming dictator of Germany.

February 17, 2008

In what has to be considered a somewhat incongruous, if not ironic, development, the Islamic prohibition against interest-based lending has by default forced Islamic banks to engage in fairly conservative and sound investment practices. Which turned out to be a good idea in an era of historic credit excesses. Islamic banks were not entirely immune from the worldwide real estate bubble virus, but their ability to leverage their exposure -- especially via the alphabet soup of securities backed by mortgage loans -- was limited by their requirement to comply with Islamic law (sharia).

"Give a man enough rope and he will hang himself," goes an American proverb. It certainly seems to have applied in spades to American banks, and, really, the whole American financial system. Given that this outcome derives from human nature more than anything unique to the American psyche, it is hard to believe the Islamic financial players would not have accomplished similar feats of self-immolation if given more time. But at this point in history, by virtue of their plodding towards the cliff at a tortoise-like pace, because they had just barely learned to walk, while everyone else had been running towards it like mad hares, the Islamic banks are able to pull up short when they see everyone else disappearing into the abyss.

Islamic banks have been largely shielded from the U.S. mortgage crisis, which may even open doors for expansion beyond traditional strongholds in Arab and Asian markets, Bahrain's central bank governor said. Islamic banks should have shunned collateralized debt obligations linked to subprime, or high risk, mortgages because such complex instruments do not comply with Muslim law, [said] Rasheed al-Maraj ...

Islam bans lending on interest and trading of debt. Scholars vet every stage of a transaction to ensure compliance with sharia, or Islamic law, making it unlikely that risks were lurking in the balance sheets of unsuspecting lenders, he said. "In Islamic banking, there is no black box that needs a genius to unwind it," Maraj said. "Many of these conventional products that have been under stress lately are very complex and need special risk management tools. In Islamic banking you will not have this kind of thing. Some of these products would not be sharia accepted."

Global conventional banks from Citigroup to UBS have written down more than $80 billion in credit market losses since October as defaults on subprime mortgages triggered a credit crisis that threatens to tip the U.S. economy into recession. By contrast lenders in the Gulf and Malaysia, the global hubs of Islamic finance, have barely reported any subprime related losses. ...

"This does not mean that Islamic finance is risk free. We still have some concern about the concentration of risk ... There is a lot of focus on real estate," Maraj said, adding that tools to allow Islamic lenders to hedge risk should be developed.

The subprime crisis could provide the Islamic banking industry with greater opportunity for growth, both from conventional retail customers looking for an alternative, and also from the collapse of Western asset prices. "Maybe Islamic banking will be a safe bet for them," he said. "I think opportunities exist in the United States and Europe as a result of this financial distress. The high valuation of the assets will come down."

Spoken like a seasoned vulture investor, Mr. Maraj seems to understand the idea better than most Western bankers that asset price deflations follow a credit-based inflation.

February 19, 2008

If the U.S. were on fiscally sound financial footing, a lot of the warnings we at W.I.L. make directly or publish in our blogs would be essentially abstract for most people. It is the nature of the government beast to try and steal a little more today than it did yesterday, and a little more still tomorrow. But if you are already fat and happy, your greed for more resources and power is somewhat countervailed by a fear of pushing things too far and upsetting the whole scam. Thus the proclivity is towards piecemeal, quasi-stealthy, theft rather than knocking over the whole neighborhood via armed robbery.

On the other hand, with government finances out of control and deteriorating further our warnings should command more focus. It is the difference between living in a hurricane-prone location and a receiving a hurricane warning -- time to set aside theory and get ready for some serious practice. In a fiscal death spiral, the fine points regarding plucking feathers from the goose without inducing a squawk devolve to grabbing as many feathers as you can while the goose is still around. Coming up for air from the whirlpool of metaphors: The likelihood of government policies such as capital controls, hyperinflation, more taxes, etc. -- and thus the need for active asset protection measures -- is related to the soundness of its finances.

Here, PrudentBear.com's Martin Hutchinson provides a superbly pithy abstract that encompasses fiscal policy theory, public choice theory as it applies to taxation and government spending, and a history of U.S. federal taxation and government finances. He follows that up with some guessing about possible paths from here -- from the known disaster of the U.S. under the Bush Administration to each of the three major presidential candidates left standing.

It was revealed [the end of January] that the George W. Bush administration intends to present a budget showing deficits of $400 billion for each of the fiscal years to October 2008 and October 2009, at a time we are close to an economic peak. Given a normal recession, that means the next "trough" deficit will probably be over $1 trillion. The final report card can now be written on the fiscal management of the Bush administration, the primarily Republican Congresses since 2001 and the Federal Reserve Chairmen of the period. One's only regret in writing it is that no grade lower than F has been discovered.

Budgetary management in a democracy is damn difficult, to be fair. The voting public gets only the most vague and generalized benefit from spending cuts, while the affected lobbies and interest groups are energized to their maximum squawking intensity by the idea that their precious budget handouts or tax reliefs might be removed. On the other side, tax cuts are inevitably skewed towards the wealthier taxpayers, since they pay most of the tax in the first place, but no amount of electoral juggling can lead the wealthy to form an electoral majority.

If taxation and government spending had no economic effect, as people believed between the 1950s and the 1980s, and elections determined the share of output retained by the state, the equilibrium political state would be something like Sweden, in which the state takes around 60% of GDP and doles it out in an egalitarian manner in health, education, pensions, disability payments and other benefits. The private sector would be limited to food and consumer goods in which there was no plausible rationale for state management (even alcohol is a state monopoly in Sweden, for example, and is inordinately expensive).

However in practice, increasing the size of government damages economic output, in three ways. First, resources are diverted from the economically optimized (by the price mechanism) private sector) to an area where decisions are made on a political basis, so are generally nowhere near economically optimal. Second, increasing marginal tax rates is subject to a severe law of diminishing marginal returns on the supply side. At low rates a small increase will produce only modestly less than would be expected by a linear analysis. But a high marginal rate, above 40% or so, a sharp increase has repeatedly been shown to be counterproductive in terms of revenue raised, often producing a reduction in revenue where an increase had been expected. Third, institutions that are subject not to the disciplines of the market but to the imperfect controls of a large government bureaucracy become corrupt, and that corruption, which is proportionate to the resources controlled, represents pure loss of output to the economy as a whole.

Thus even in honest pious Scandinavia the big government nirvana has been proved suboptimal, and in a country with a U.S. or Mediterranean level of graft it would quickly descend into chaos. The problem is then that the adverse economic effect of a large public sector is inchoate and diffuse, whereas the forces tending to enlarge it are ever-present and powerful. The Founding Fathers, almost all of them wealthy men, were very aware of this problem and attempted to limit the expansion of the federal government, partly by making the income tax unconstitutional. 19th Century economists helped by establishing a consensus that budget deficits were bad, thus limiting the ability of government to grow without inflicting immediate pain upon the taxpayers.

However in the early 20th Century, the progressives, economically more or less illiterate but appalled by the sight of nouveau-riche businessmen consuming conspicuously, removed these barriers. First they passed the Sixteenth Amendment, allowing an income tax. Then they discovered the joys of Keynesian economics, which de-linked revenues and expenditures, allowing budget deficits and spending to be justified as economic "stimulus" whenever the economy was performing at less than 105% of capacity. Control of the Federal Reserve System enabled them to remove the short-run monetary constraints that had previously prevented over-expansion, and the road to larger government was cleared. The Great Depression and intermittent wars fueled the increase. Expansions of government that would have been impossible in peacetime were justified as emergency measures, and then embedded in the system, so as to persist after the emergency ended.

By the late 1970s the economic costs of ever-increasing government had become obvious both in Britain and the U.S., and the political consensus in favor of it was defeated by two determined leaders, Margaret Thatcher and Ronald Reagan. [Reagan's reputation here is far greater than deserved, but he certainly talked a good game.] That defeat was only temporary however, as demonstrated by the failure of their successors John Major and the Bush family and the rise to prominence of supposed "Third Way" leaders in Tony Blair, Bill Clinton and, as it turned out, George W. Bush.

Blair and Clinton discovered simultaneously that much of the cost of increasing government could be disguised for many years, if it was done gradually and combined with an excessively loose monetary policy. They were assisted providentially by the Internet communications revolution, which allowed an increasing proportion of the world's consumer goods to be produced in low wage economies at declining costs -- this prevented the surge in consumer price inflation which would otherwise have been inevitable.

Bush came to office promising a reduction in the size of government and in particular a tax cut, both traditional Republican policies strengthened by Reagan's success in the 1980s. Instead Bush, recently described by his former chief speechwriter Michael Gerson as a "large-hearted man" -- at least with other people's money -- indulged in an orgy of feel-good social policy. Notably there was the "No Child Left Behind Act" of 2001, which vastly increased the federal government's intrusion into education without noticeable positive results and the Medicare Part D of 2003, which was also hugely expensive since it lacked effective cost controls. The largeness of Bush's heart even extended to his Congressional colleagues, whom he allowed to carry on veto-free in an orgy of pork-barrel spending and outright corruption without precedent in the history of the Republic.

Even Bush's tax changes had little or no supply side effect. His 2001 bill lowered top rates of tax only modestly, while including so many sops to populism that its effect was at best that of an equivalent sized Keynesian stimulus. In 2003 he passed a genuinely supply side measure, reducing the top rate of personal tax on dividends to 15% and thus their total taxation to around 50% from the exorbitant corporate plus personal rate of 61% they had previously borne. Even then, he did it wrong. He should have made dividends fully tax deductible at the corporate level, which would have leveled the playing field between different types of investors and removed almost all the incentives to business tax evasion. If he had done that, paying for it by capping the deductibility of home mortgage interest at around $10,000 per annum, and perhaps closing a few other corporate tax loopholes, he would have truly have increased the value and productivity of U.S. business, while quelling the speculative boom in housing that is proving so unbearable to unwind.

Now Bush is running into the next downturn proposing a mindless Keynesian fiscal stimulus, with an unrealistic economic forecast of almost 3% economic growth in 2008 and 2009 and deficits in those years at close to record levels. Since the swing in the budget deficit from 2000 to 2004 was over $600 billion, and the U.S. economy is bigger now, it seems inevitable that the bottom of the recession will see a federal budget deficit of over $1 trillion, with all the financing difficulties and economic distortions that will cause. In short, whatever the size of George W. Bush's heart, it is clearly bigger than his brain.

As the primary season has proceeded, we are beginning to see into the future. The picture is not entirely negative. On the Republican side, the likely winner is John McCain, a man with innumerable drawbacks and unpleasantnesses but one pretty solid virtue: He appears to be more fiscally responsible than the incumbent, harking back beyond the supply-side showboating of the 1980s (which was always to some extent smoke and mirrors as far as fiscal balance was concerned) to the successful budget-trimming Presidency of Gerald Ford. McCain's solution to soaring medical costs is to reduce them through increased competition. His solution to expanding the military is to reduce the gold-plating and log-rolling in the Pentagon. Faced with a trillion dollar deficit, his likely solution would be to cut back spending sharply and impose a [punishing] tax increase. Faced with inflation rocketing into double digits his likely solution would be to fire Ben Bernanke. One can live with such an approach, uncomfortable though it would be.

On the Democrat side, the picture is less clear. Hillary Clinton, the front-runner, appears to have her husband's vice of sharp practice without his virtue of fiscal prudence. While she might save some money in Iraq she would spend all of it and more on social programs. Faced with a trillion dollar deficit, her twin solutions would doubtless be to impose a tax increase that was as redistributive as possible, albeit with loopholes for her campaign donors, and to hire Wall Street to push the envelope of deficit financing techniques through securitizing the Washington Monument. Double digit inflation would be pushed into the future and blamed on others, as it was from 1973-79.

Then there is Barack Obama. On the surface, his policies are almost as expensive as Clinton's, though he might be more determined in reining back overseas military adventurism, thus achieving a larger saving there. On the other hand, his principal economic advisor Austan Goolsbee is a senior business professor at the University of Chicago, so presumably has a good economic grasp. Interestingly, Obama has now been endorsed by Paul Volcker, in 1979-87 the only really useful Fed Chairman ever, who killed (but alas not permanently, thanks to his feckless successors) the double digit inflation of the 1970s. Assuming Obama listens to his advisors and the most eminent of his supporters one can thus have some confidence that his solutions to a trillion dollar deficit and double digit inflation would be intelligent, but not what they would be.

Looks like a two out of three chance for a decent solution, or thereabouts. But even minimally competent and forward-thinking economic management, in both the administration and the Fed, would have avoided the problems in the first place.

With Ron Paul's chances having been reduced from tiny to infinitesimal, there is no candidate left who promises to implement a truly constructive approach to the whole giant mess. Moreover, none of those left have included in their platforms the halting, never mind the reversal, of the destruction of civil liberties.

Keep one hand on your wallet. And, ideally, the wallet should only contain spending cash. Too many want to take it from you, and too few will help you retrieve it if taken.

February 24, 2008

One hears that more Americans than ever are considering or planning to move overseas, or have already done so -- many with no intention of ever returning. How does this anecdotal evidence translate into real numbers? According to a Zogby International poll, as many as 10% of American households are "seriously" looks to leave the U.S.

1.5 million U.S. households are preparing to move out of the U.S. The vast majority of emigrees are in their 20s, 30s and 40s. And some may never return. No, we are not talking about the next major deployment of National Guard units to the Middle East. In fact, none of the emigrants are government workers or corporate employees leaving for temporary overseas assignments. This is a group of malcontents and adventurers. They consist entirely of private citizens and their families packing up and leaving the good ol' USA solely at their own initiative.

This news comes from a Zogby International poll of 115,000 Americans conducted over the past two years. Bob Adams, CEO of New Global Initiatives, commissioned the poll when he realized that no reliable database tracks the movement of Americans out of the country. A recent Barron's article, written by Bob Adams, breaks down the Zogby/New Global Initiatives data as follows: Adding it all up, some 10% of all U.S. households are looking to leave the country, while another 11% are considering living outside the U.S. at least part time.

... I reached Bob one evening at his home in Panama. "It's happening," says Adams when asked about this new wave of emigration. "And we really cannot say exactly why." While Adams's survey includes destinations anywhere in the world, his personal area of interest is in Panama. While there has always been a permanent American presence in Panama, Adams says the recent immigrants are different from previous ones. Ten years ago, the typical American ex-pat in Panama was likely to be a retiree who had previously been in the country. ... These older ex-pats frequently used the words "tropical paradise" to describe why they moved to Panama.

Regarding the type of immigrants arriving in Panama, a change has occurred in recent years. Adams says today's immigrants tend to be a lot younger, professionally employed and more likely to meld into the international community than earlier transplants. When asked, these folks generally say they moved to Panama for adventure, a lower cost of living, or to escape the growing intrusiveness of the American or European political and legal systems.

Adams's interest in the topic of American emigration is the result of serendipity. Having lived and worked overseas for four decades, Adams decided it was time to settle down. He identified Panama as the best candidate. As he was preparing to move, he noticed the poor quality of Web sites catering to potential immigrants to Panama. So he set up his own site, RetirementWave.com. He intended to create an impromptu guide to assist likeminded people in the decision to move to Panama. But it quickly turned into an unpaid job responding to inquiries from interested parties worldwide. Adams realized he may reach an audience that extends beyond Central American real estate investors.

Why do people leave home for strange foreign lands? While a handful might claim to leave for political or religious reasons, most seek greater economic opportunity. ... CNBC anchor Erin Burnett recently interviewed Adams. "In the last 10 years, the amount of pasture accessible to Americans has greatly increased, and it is a lot greener than it ever was," said Adams. A replay of this interview is available on the New Global Initiatives Web site. ...

If people emigrate to find economic opportunity, might Adams's survey portend bad news for the U.S.? Current U.S. GDP is $44,000 per person versus Panama's $8,000. It seems unlikely that people are leaving for immediate financial gains. Still, Panama is a young country demographically, with a median age of 26. Panama's GDP grew at an 8% clip last year. It does not have the U.S. baby boomers' $55 trillion unfunded pension liability. Neither is it involved in difficult, expensive Middle East nation building. There may be quite a few 20-40-year-old Americans willing to sacrifice current income for future opportunity in countries like Panama. Only time will tell ...

February 24, 2008

Make a shopping list.

Bear markets are a good time to wait for stocks on your buy list to fall to prices that constitute values. Some will actually get there. Chris Mayer of Whiskey & Gunpowder even has a couple of ideas that look reasonable now.

Adversity breeds opportunity. That is how financial markets work. I am not sure if the global stock markets have suffered enough adversity lately to create really great opportunities, but I am keeping a close eye on the situation. And I would advise you to do the same. It is time to make a shopping list.

Back in 1986-1987, Bank of America wrote off $1.5 billion in bad loans, wiping out its reported earnings. Analysts asked Sam Armacost, the bank's president, where the problem areas were. Sam's classic response: "Have you got a globe?"

That is how it feels with today's mortgage bubble finally popping. Problems seem to crop up everywhere, with a long list of financial firms taking a beating from subprime losses. It is so bad out there that central banks around the world have been pumping tens of billions of dollars into the short-term credit markets.

Okay, so we know it is bad "out there" ... But are financial conditions so bad that there is not one single stock to buy? In the stock market carnage of 2000, for example, you could have picked up any number of oil and gas companies on the cheap. You could have bought REITs (real estate investment trusts), homebuilders and gold. These are just some examples. You did not even have to be particularly smart about which ones you bought. You just had to have the guts to put the money down and the patience to hang on.

Sometimes it is best not to try to predict where the market is going to go. My favorite investor of all-time is Marty Whitman, who runs the Third Avenue Fund. I looked back and read what Whitman wrote to his shareholders back in 2000. In April 2000, near the peak of the bubble, Whitman told his shareholders that the overall market was not important. He criticized Tiger Robertson, a successful fund manager, for closing his fund. Tiger wrote to his shareholders: "There is no point in subjecting our investors to risk in a market, which I frankly do not understand."

Whitman responded: "If understanding a market means, as it obviously means for Robertson, understanding fluctuations in securities prices, then I can safely state that I have been in the investment business for almost 50 years and I still do not understand markets -- never did, never will. Understanding the market belongs to the realm of abnormal psychology." Instead, Whitman advises focusing on understanding companies and specific investment opportunities. The rest would take care of itself over time. And even though the overall market appeared to be in nosebleed territory, Whitman wrote that many common stocks were "dirt cheap."

So where are those pockets of opportunity today? While the market trades at 18 times earnings, you can pick up Loews Corp. (LTR) today for only 11 times earnings -- less than 10 times the estimate for 2008. This is a company loaded with cash. It trades at a discount to NAV. Plus, you get the Tisch family, which has a great track record of creating wealth for shareholders. Over the last 25 years, the average annual return on Loews stock is 17%, versus only 11% for the S&P 500. So you tell me, does this stock really deserve to trade at only 60% of the market multiple?

Down in South America, the shares of Argentinean property developer, IRSA (IRS) [a memorable ticker symbol!], also seem very cheap. This owner/operator of commercial real estate sells for about 17 times earnings and 1.2 times book value. IRSA is also in good financial shape, with little debt and ample cash. But the real sex appeal of the stock is the fact that its real estate portfolio is worth much more than the current share price. Additionally, rental rates continue to increase as older leases expire. Therefore IRSA has many things I like: Tangible assets that sweat (or that throw off cash and increase in value over time), a strong financial condition and a cheap share price. What we have here is an asset story ... with a high-growth kicker.

February 22, 2008

Microsoft Office is an expensive, bloated, propriety, insecure morass. Microsoft periodically tries to force Office users to upgrade by inducing file format incompatibility between recent and older versions. This has just happened again, as by updating Office 2003 with Service Pack 3, users will no longer be able to open files in 24 older file formats. A hack can be used to unblock that denial of access ... this time. Finally, Microsoft is no friend of freedom or free enterprise.

OpenOffice.org is free and far more secure than Office, and its source code is openly published. It is bloated like Office, but at least addressing this over time is a priority. (Bloat-reduction has never, ever been a priority for Microsoft.) It is a cooperative endeavor among commercial and purely voluntary interests. Solveig Haugland, from a Web site called "Fanatic Attack" -- which promotes itself as being "about entrancement, entertainment, and an enhancement of curiosity" -- has written a how-to for setting up OpenOffice.org, and effecting a transition from Office.

It is time to switch. You have been thinking about it for a while. You have seen the PDF converter and sighed longingly. You have blushed before the skeptical glances of your open-source and anti-Microsoft friends who say "You are still using Microsoft Office?" You are looking at your budget and wondering why you would pay to get Microsoft Office 2007. And you have received Word 2007 files and have not been able to open them, so you know there are going to be some file format issues no matter what you do.

But you have not switched over to OpenOffice.org. Quite yet. I am here to help. Think of this as a virtual guide, the written version of me coming over to your house on a Sunday afternoon to help get to know OpenOffice.org and figure out all the things you are not quite sure about. Sit down with this article this weekend and in a few hours you will feel refreshed, open sourced, and able to hold your head high when you run into those roving gangs of open source supporters.

Why switch? You have your own reasons: price, or principles, or you are setting up a nice cheap Linux laptop for your daughter to use at school. Here are a couple things I like to talk about.

Spend your money on something important.

I realize that since I am targeting this article at individuals, that the upgrade or full price of Microsoft Office might not make or break you. But if it is you and your family, your small business, your volunteer organization that feeds homeless families, now you even more seriously need to look at the right way to spend your money. Microsoft Office is a habit, and many people do not even think about whether they need it. Here is your opportunity to rank it in comparison to other things you could spend $100 or $500 on, multiplied by the number of licenses.

You can do it. Don't fear the interface.

When you have been using Microsoft Office since the mid 90s, it is easy to think that learning another product will be too annoyingly difficult. Trust me. You can learn this. You have to learn new products all the time, whether it is the new bug entry system at a new job, or starting a job at Sun where all of a sudden you are using Solaris instead of Microsoft Windows, it is going to have to happen. There are differences, sure, but do not let that mental speed bump of fear let you think for a second you are not going to be able to figure it out. ...

What This Article Is About

What can I write in a finite article about how to use OpenOffice.org? I cannot cover everything you will need to know about how to use the program. But what I can do, in a lot less space, is give you what you need to make getting to know OpenOffice.org easier. I can give you settings to apply that will keep you from having problems in the first place. Not all of them, of course, but with a limited amount of information on how to set up the program, I can help you have a smoother, more enjoyable experience with the program. So that is what this is: setting up OpenOffice.org to make it work for you.

February 26, 2008

German bank regulators: “I see nothing! NO-thiiinnng!”

William N. Grigg's erudite, literate Pro Libertante blog -- "Observations and commentary from a Christian Libertarian perspective" -- seldom fails to reward careful reading. His conclusions on whatever news items he analyzes deserve to be labeled definitive as often as not. He is also the author of a new book Liberty In Eclipse. Here he weighs in on the stolen Liechtenstein bank data scandal.

Klaus Zumwinkel, former CEO of Deutsche Post -- the German postal service and parent of the DHL parcel delivery company -- lost his job last week. He may soon go to prison. His "crime" was to protect his legitimately earned wealth from the omnivorous socialist bureaucracy that afflicts Germany. He did so by opening a foundation in neighboring Lichtenstein, where his earnings were protected by the banking secrecy laws of that tiny (pop. circa 35,000) but heroic principality.

During his tenure as head of Deutsche Post, concedes the New York Times, Zumwinkel "helped transform [the postal service] ... from a stodgy state bureaucracy into a publicly listed logistics and freight-delivery powerhouse. ..." Despite operating within a thoroughly socialized business environment, Zumwinkel -- through the tenacious application of his considerable gifts -- added a great deal more wealth to his society than what he earned. Yet he is now being traduced by the German State as an enemy of society for the supposed crime of tax evasion. Even if he avoids prison, he will not get his severance.

Stefan Ortseifen is another German executive who is stepping down from a lofty post in Germany's corporate world. As head of the IKB, a Dusseldorf-based German bank, Ortseifen has presided over a lengthy series of government-subsidized catastrophes. In contrast with the huge net contribution to German wealth made by Zumwinkel, Ortseifen's ineptitude and mismanagement have destroyed billions of dollars' worth of capital, and his failing bank has devoured billions more in direct government subsidies.

With the serene confidence conferred by the knowledge that the taxpayers would absorb any losses, IKB invested huge sums in the sub-prime mortgage market here in the United States. As he did so, Ortseifen consciously defrauded investors, depositors, and the German public by assuring them that "uncertainties in the American mortgage market" would have "practically no effect" on the health of IKB's investments.

This was an obvious and vulgar lie, as would be recognized by any sentient being (or perhaps even Sean Hannity ... well, maybe not). ... At the very least, Ortseifen should be investigated for fraud and subject to both criminal and civi liability. Instead, he will be allowed to retire on his own terms and keep his pension, which is something north of $40,000 a month.

In propping up America's government-abetted mortgage mess, Ortseifen pissed away countless billions of dollars earned by other people. Zumwinkel's "crime," recall, was to send his own money abroad to keep it out of the hands of people like Ortseifen. Only to a mind entirely hostage to socialist assumptions -- and thus willing to abide the existence of an untouchable, unfathomably wealthy Nomenklatura -- could say that this makes any kind of sense.

In the decades since the advent of the Federal Reserve System in annus horribilis 1913, the entire world banking system has become intertwined with government -- both national and trans-national. Germany's banking system may be the most statist in the known universe ...

Going up the food chain from Ortseifen we find Ingrid Matthaus-Maier, CEO of the state-owned (and, therefore, unregulated) KfW banking group and a long-time member of the Social Democratic Party. The salary of this champion of social equity is $614,000 a year, all of it paid either directly by the taxpayers or from capital acquired through taxpayer subsidies. In exchange for this relatively modest (by international banking standards) compensation, Matthaus-Maier helped orchestrate the crisis now rippling through the German banking system. ... Germany's "public-sector banks speculated far more heavily than private banks in American subprime mortgage securities. Now these banks' beleaguered executives are calling on the government to bail them out from a disaster of their own making." [Der Spiegel]

O.K. -- by a show of hands, how many of you are surprised by this? Just one? Oh, right -- it's Hannity again ... Matthaus-Maier and Ortseifen "are perfect examples of the fatal mix of amateurism, greed and political protection that is symptomatic of Germany's state-owned, partially state-owned and public-sector banks," observes Der Spiegel. "It is an environment that can only thrive in the shadow of the state" -- and has drained scores of billions of dollars from the public treasury."

Once again, I wish to underscore the fact that these people were part of the parasite class -- State employees (the word "workers" does not apply) and executives of State-supported institutions. Their actions have destroyed huge amounts of confiscated wealth. But they are not the real criminals -- or so we are urged to believe. The real criminals, again, are those like Klaus Zumwinkel, "tax evaders" ("tax refugees" is a more honest term) who did what they could to protect their earnings from the confiscatory, punitive tax system that kept statist drones like Ortseifen knee-deep in strudel and strumpets.

Zumwinkel's arrest comes as a result of an operation carried out by the German Federal Intelligence Service (BND). A few years ago, the BND had a "walk-in" by a disgruntled ex-employee of Liechtenstein's LGT Group, a financial institution that specializes in setting up the type of foundations often used by German tax refugees. The spitzel offered the BND a CD-ROM containing data on German banking clients.

That information was proprietary, privileged, and protected by law. The individual who offered the CD-ROM to German intelligence was trafficking in stolen property. So the German spooks, pillars of Teutonic rectitude that they were, refused to accept it -- right?

Uh, yeah, right. And you will probably believe that there was never been an escape from Stalag 13. To purchase that stolen information, the BND shelled out $7.3 million in funds taken at gunpoint from German citizens, including Zumwinkel and others whose data was found on the CD-ROM. "The German government has used tax money to pay for a crime by a citizen of Lichtenstein," protested attorney Ferdinand von Schirach, a citizen of that stalwart Apline principality. "That's illegal."

Hans-Adam II, Lichtenstein's ruling prince (who is on record as saying that a tax rate in excess of 6% is "tyrannical"), quite properly condemned the crime as an "attack" on his country. Subverting Lichtenstein's laws and invading its institutions "does not solve the problems [Germany] has with its taxpayers," the prince correctly observed.

Like Switzerland and Luxembourg, Lichtenstein's banking secrecy laws date back to the 1930s, a time -- like the one nigh on arrival, I am afraid -- of global depression, ubiquitous socialist tyranny, and incipient world war. Those countries provided a safe haven for the assets of German Jews. And then, as now, those havens were denounced by German collectivists, both "right" and "left", for offering refuge to those seeking to escape "social justice" as conceived and implemented by Berlin.

"It's simply unacceptable to have tax havens in Europe that encourage capital flight and incite tax fraud," belched Ronald Pofalla, a high-ranking member of the German Conservative Union, at a Berlin press conference. "We must ensure that such refuges are shut." Although the account I read was silent as to whether that last phrase was accompanied with a stiff-armed, stiff-handed salute, that gesture would have been appropriate in the context.

German Chancellor Angela Merkel insists that Liechtenstein must revise its banking laws to make them more permeable by German authorities, and insists that the principality's "reputation is at stake" on its response to that demand. I do not know what the culture-specific equivalent of an upthrust middle finger would be, but whatever it is I hope that Liechtenstein's response could be summarized as such.

Once again, Merkel and Pofalla are described as conservatives. And from their perspective, "capital flight" is best addressed by prosecuting the productive -- such as Zumwinkel -- rather than purging the parasites, of whom Ortseifen and Matthaus-Meier are typical. And rather than cleaning out the State-abetted corruption and cronyism in Germany's banking system, Merkel's government is staging a propaganda spectacle intended to make tax refugees the scapegoats for that nation's coming depression.

It is worth studying these developments in Germany, if only to catch a glimpse of how things will soon play out over here as well.

Exactly, as we at W.I.L. have been warning for years. In the case of the U.S., "capital flight" will apply to anyone who tries to get assets out of the country -- even when the applicable taxes have all been paid in full.

UPDATE: Parasites and informants of the world, unite!

Apparently the Brits drive a better bargain than the Germans when dealing for stolen banking information: They only paid the snitch £100,000 for information on 100 British citizens who used the same bank in Liechtenstein to protect their wealth from Britain's esurient tax laws.

The Sunday Times of London offers some additional details regarding the source of this illegally obtained private information: "The suspected whistleblower, accused of stealing data from the bank, was sacked and convicted of fraud. He also offered data to tax authorities in America, Canada, Australia and France."

OK, we have to do a little semantic housekeeping here. A "whistleblower" is someone who, at personal risk, defies threats and pressure from corrupt superiors in order to reveal corruption, incompetence, and/or criminal wrongdoing. This guy is a disgruntled ex-employee and convicted criminal, not a "whistleblower". The bank he worked for did nothing illegal under the enlightened and commendable laws of its country.

Granted, the governments that afflict other nations do not like Liechtenstein's laws, but that is just hard cheese. It is going to be exceptionally interesting to see what use, if any, our own Leviathan makes of this stolen information.

February 26, 2008

Doug French reviews an interesting new book on investing, Your Money and Your Brain: How The New Science of Neuroeconomics Can Help Make You Rich. The "help make you rich part" really is more along the lines of rule #1 of making money: Don't lose it. (Rule #2 is always remember rule #1.) One of the ways to avoid losing money is to be aware of one's predispositions that would otherwise lead in that direction. This is where the book makes its major contribution ...

The days of defined pension plans are gone, unless you are a government worker. The rest of us are left to manage our own 401k's, IRA's and any other extra money that the government does not grab by overt taxation -- or the stealth variety of inflation. Unfortunately most people's brains are just not equipped for the task. Smart people make stupid financial decisions according to Jason Zweig, who takes us on a tour of the investor's brain in Your Money and Your Brain: How The New Science of Neuroeconomics Can Help Make You Rich.

Of course that "help make you rich" part is the kind of hyperbole that sells books and likely sends a dopamine rush to the brain of a book-buying investor. The brain has 100 billion neurons and only 0.001% produce dopamine, but "this minuscule neural minority wields enormous power over your investing decisions," cautions Zweig. One would think he would be more careful with the titling of Your Money and Your Brain.

Dopamine takes as little as 1/20 of second to reach your decision centers, estimating the value of an expected reward and more importantly propelling you to action to capture that reward. "We have evolved to be that way," explains psychologist Kent Berridge, "because passively knowing about the future is not good enough."

Of course the effect of all this is what Zweig refers to as "the prediction addiction." Humans hate randomness. We want to predict the unpredictable, which originates in the dopamine centers of the reflective brain, according to Zweig, leading humans to see patterns where none really exist. The whole technical analysis field that Wall Street embraces, is based upon the human desire to predict and when seeing two occurrences in repetition, people believe (or want to believe) that a trend is in process that, most importantly, they can profit from.

When Parkinson's disease patients are given drugs to allow their brains to be more receptive to dopamine, they have the insatiable urge to gamble. When these drugs are stopped, the gambling stops immediately. But unfortunately, when we get what we expect, no dopamine rush ensues. "A reward that matches expectations leaves your dopamine neurons in a kind of steady-state hum," writes Zweig, ... "[G]etting exactly what you expected is neurally unexciting."

So, like drug addicts, who need to take increasing amounts to get the same fix, investors must speculate in increasingly riskier investments to achieve the same dopamine kick. And unexpected gains really fire up the dopamine. Neurophysiologist Schultz explains that the "dopamine system is more interested in novel stimuli than familiar ones."

This, of course, explains a lot of risk-seeking behaviors outside of financial speculation.

Zweig also explores how humans are overconfident in their abilities. That our perceptions of investment risk are in a constant state of flux, depending on our memories of past experience, and most of our fears about finances are misdirected.

Okay, so to read Zweig, we are just a bunch of neurotic gambling junkies looking to get high from either playing slots, going to bingo night, or rolling the dice on penny stocks. What is a prudent person to do? You would be surprised. Sure, Zweig counsels us to put our money in mutual funds and forget about picking individual investments. But he goes further, stressing that we should try to find happiness. He says to breath deep to reach an inner calm, turn off the tube to stop envy, surprise someone with an unexpected gift raising both yours and the receivers dopamine levels, and try something new each week even if its just reading a different magazine to gain new perspective, are just some of Zweig's ideas. He also warns the elderly that aging makes us accentuate the positive and eliminate the negative, making old people susceptible to con-men, shysters and their get-rich-quick schemes.

Reading Zweig will not make you rich, but might help make you happy and keep you from going broke.

February 28, 2008

Forbes columnist A. Gary Shilling has been bearish on the worldwide economy, and thus on commodities tied into the economic cycle, for quite some time. Now, he warns, it is time to close out your long positions if you still have them.

The long and deep recession I have been forecasting has commenced, even though the statisticians have not called it yet. It was triggered by the subprime mortgage market collapse, as predicted in my June 19, 2006 column. The zeal for high investment returns that was born in the dot-com mania of the late 1990s did not vanish in the 2000-02 stock market bust. It came back to life in the housing bubble. Now we are paying the price.

The recession will continue at least until December. It will probably rank with the 1957-58 and 1973-75 declines, the worst of the 10 recessions since World War II. It will be global as exports sold to U.S. consumers shrink, thus slashing the primary growth source for the rest of the world. The decoupling theory said that emerging markets and other foreign economies can keep growing while the U.S. dips. The theory is about to be disproven.

My firm's analysis and my recent two-week trip to China convince me that China does not yet have a big enough middle class of free spenders to sustain growth in the face of weak exports. Define middle income as a family with at least $20,000 a year in the U.S. or $5,000 in China. By that definition 80% of Americans are in the middle or upper classes, but only 8% of Chinese and 5% of Indians.

Do not expect either the recent panicky cut in rates by the Federal Reserve or the hastily enacted tax rebates to save the economy. Interest rates are irrelevant when a scared lender withdraws amidst unknown and perhaps unknowable further writedowns and trading losses. Some of the rebate checks will be spent, but too late -- toward the end of the year when the recession likely will be bottoming. The rest will be saved by chastened consumers or used to reduce debt.

What to do? Sell or short commodities, perhaps via exchange-traded funds, stocks in companies that produce them or futures. Commodity prices, still high, are poised to fall hard as the worldwide recession takes hold.

Chinese demand, terrorism and talk of peak oil drove crude prices. Agricultural prices were hyped by biofuel's popularity, droughts and the prospect of a shift in demand in poorer countries from grain to meat. So institutional investors rushed into commodities, believing they are a relatively stable asset class like stocks and bonds. Individuals bought commodity-backed ETFs. That enthusiasm will soon be history.

With global recession, demand for industrial commodities and oil will fade. It will become clear that much of China's demand for commodities was not primarily to supply its citizens but to supply its export market.

No one will be talking anymore about how oil production is peaking. Look at Petrobras's huge oilfield discovery off Brazil and consider the gigantic energy supplies that will come from tar sands, nuclear, coal liquefaction and maybe shale. More supply equals lower prices. Good weather and weak ethanol prices may knock down ag prices. A recent report in Science magazine has discredited many biofuel schemes as environmental salvations. We are going to stop fueling our cars with taco ingredients.

My favorite commodity to bet against is copper. This is an excellent proxy for global industrial production since it is found in manufactured goods from cars to computers to faucets. The worldwide housing collapse makes copper prices especially vulnerable, as does the shift from copper tubing to plastics in plumbing. Copper's price on the New York Commodities Exchange was $1.90 two years ago. The Comex March 2008 futures contract is $3.56.

Unlike oil, copper has no cartel to prop it up. Because the metal is produced in developed countries and relatively safe emerging lands, no sudden shortage -- as we have seen with rioting in Nigeria's oil-producing area -- will suddenly tighten supplies and spike prices. ... Other industrial commodities are interesting on the downside, too, but copper is my best choice for a swoon.

Left unaddressed is what Shilling thinks about the monetary commodities gold and, to some extent, silver. If central banks succeed in preventing a credit contraction, but banks are unwilling to lend out funds to all the old outlets -- financial assets in their various and sundry manifestations -- will the price of commodities such as gold benefit?

February 26, 2008

Gary North says that the U.S. federal government, along with most (all?) of the Western central governments are going broke. Their budgets never go down, yet their policies steadily erode the tax base. This is the "elephant in the living room" that no one is talking about, at least in the political mainstream. Anyone who has even casually observed the current U.S. presidential campaign understands this point exactly.

People ask me: "When will we get our liberties back?" I always answer: "When checks from Washington D.C. no longer buy anything." An overnight collapse of the monetary system would be catastrophic. In contrast, the erosion of the dollar to zero over a decade or more would be liberating.

The government is going broke. All over the West, all national governments are going broke. This is the fundamental political fact of our age. This is the elephant in the living room. Two historians of international repute announced this scenario within a few months of each other: Martin van Creveld, in The Rise and Decline of the State (1999), and Jacques Barzun, in From Dawn to Decadence (2000). In their concluding chapters, both authors predicted the disintegration of the modern nation-state, and for the same two reasons: (1) the inability of the nation-state to defend its citizens from crime and violence: (2) the impossibility of the nation-state to fulfill its promises of income security to retired people.

The nation-state is steadily losing legitimacy. This is the political fact that the pundits refuse to discuss. Without widespread legitimacy -- respect that generates voluntary cooperation by citizens -- a civil government is doomed. It must resort to power, and the enforcement of power is costly.

The nation-state is growing broke. Local civil governments will then step into the gap. The break-up of the nation-state is assured. This will not be secession in the sense of an armed rebellion at the local level. It will be something far more fundamental: the disintegration of the nation-state. It will not be able to enforce its laws and collect taxes. That is always the end of a unit of civil government. ...

Government only grows. Budgets only grow. This guarantees the eventual breakdown of government. When tax resources cannot be expanded because government policies have reduced economic growth and therefore the tax base, the government can no longer fulfill its economic promises. This usually occurs very rapidly -- "without warning" for those who believe in salvation by legislation, which includes almost everyone. Those who have become dependent on welfare payments find that the government increasingly allocates scarce resources by (1) forcing people to line up or (2) making payoffs to officials. This was the two-fold solution in every Communist paradise.

When this happens, paralysis appears at the top. This creates opportunities further down the chain of command. This is the logic of secession by standing still. The local governments do not formally secede. They just cease cooperating with the national government. This was how the Roman Empire fell. Legitimacy shifted to local agencies of government. The central government maintained the illusion of sovereignty, but this was a sham, especially in the Western half of the empire after Constantine moved the capital to Constantinople.

When Byzantium replaced Rome, its rulers maintained their authority by stable money. For a thousand years, the government did not debase the gold coinage. The government survived. The Federal Reserve System will not do equally well. Neither will Washington.