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HOW TO AVOID THE TRAPS WHEN SETTING UP YOUR OFFSHORE BUSINESS
“Imagine your own offshore company: doing business, tax-free, and anonymously, on a palm-shaded island. This can all be yours ...” At least, that is what less-than-fully-honest offshore promoters may tell you. The reality, especially if you live in a high-tax country like the United States, is somewhat different. Offshore companies can give you some significant benefits, but reducing your taxes is not usually one of them. So what is the point of having an offshore company? They are used for many reasons:
A cautionary tale for IBCs.
The most commonly used structure for an offshore company is an international business company (IBC). IBCs may issue shares in registered or, in some jurisdictions, in bearer form. There is no requirement that accounts be audited, and meetings can be held anywhere in the world, if they are held at all. It is not necessary for the IBC’s directors or officers to reside in the jurisdiction where it is formed. Generally, there is no information publicly available on beneficial owners or managers. Most countries with IBC legislation are in low or no-tax jurisdictions and income from the IBC, particularly if earned outside the country of formation, generally is not taxed in that jurisdiction.
But for U.S. persons doing business overseas, IBCs usually are not the best choice. IBCs came under attack in the 1990s by high-tax countries because of their use as a vehicle for tax evasion and money laundering. Today, U.S. citizen or resident shareholders are required to comply with extensive reporting obligations:
That is just for starters. If you own 50% or more of the IBC’s shares, the IRS will categorize it as a “controlled foreign corporation” (CFC). And if a CFC earns passive income, U.S. shareholders of the IBC cannot defer tax on the income. Even if you find a way to overcome the CFC rules, if more than 50% of your IBC’s assets are considered passive investments, or 75% or more of its income comes from passive sources, the IRS has another trap. It is called the “passive foreign investment company” (PFIC) rules. That means more paperwork, more forms to file, and very unpleasant tax consequences for the shareholders. You can read about these tax consequences here.
The shortcomings do not end there. The low 15% income tax rate on long-term capital gains and dividends is not available. Losses on investments cannot be allocated against gains until the IBC is liquidated. Any U.S. investments result in double taxation. Plus, the basis of the stock does not step-up to its fair market value at the death of a shareholder for estate tax purposes. So it is highly problematic for U.S. persons to defer tax on income from passive investments using an offshore structure without using a variable annuity or life insurance policy. IBC’s do not even provide much in the way of asset protection. Creditors can simply seize the stock you own in the IBC, and even liquidate it. That is not exactly “bulletproof”.
Offshore limited liability companies (LLCs) provide a better way.
Offshore LLCs are taxed as partnerships, if there are multiple owners, or disregarded entities, if there is one owner, under U.S. tax rules. In both cases, the profits or losses of the LLC simply “flow through” to the individual owners (members) in proportion to their ownership interests. LLCs have three major advantages over an IBC:
It is best if the LLC is managed by a non-U.S. resident manager. That makes it virtually impossible for a U.S. court to obtain jurisdiction over the LLC’s management. Also, beware of using single-member LLCs for asset protection. The primary purpose of the charging order is to protect non-debtor members from being forced into a partnership with the creditor of a debtor member. If there is only one member in a single-member LLC, then there are not non-debtor members to protect.
There are some situations where an IBC may be a more suitable entity than a LLC, with respect to its U.S. owners. For example: (1) If your company is engaged in a non-passive business like manufacturing, then both tax deferral and asset protection could be achieved via an IBC or electing to have an LLC taxed as a foreign corporation. (2) If foreign legislation requires the use of a corporation or does not recognize LLCs. (3) If you need free transferability of ownership interests, which an LLC inherently lacks.Link here.
WHAT THE END OF EASY-MONEY INDUCED STUPOR WILL LOOK LIKE
It is impossible to tell when the world’s stock markets will finally wake up from their easy-money induced stupor, but one thing is clear. When they do so the initial break will look like last Tuesday. A modest event of no apparent global significance will cause a stock market drop that cascades around the world. Last Tuesday’s break may or may not have started the climacteric sell-off, but that sell-off cannot be long delayed.
More interesting than the unanswerable question of when precisely a crash will occur is that of which sectors will be worst affected, which relatively unscathed. Current market thinking appears to be that since the crash originated in China, that market is due for a significant downturn, and that emerging markets in general are overpriced and due for a fall. That view fails to reflect an intelligent appraisal of where the true economic vulnerabilities are.
Japan will benefit from an unwinding ...
Japan, first, is said to be economically feeble and in dire danger of falling back into devastating “deflation” if interest rates are increased one iota from their current 0.5%. That is more or less the opposite of the truth. Japan’s market is so liquid that it has for the past 2-3 years been used as the borrowing currency for the international “carry trade” engaged in by hedge funds, whereby a low interest rate currency is borrowed and the proceeds invested in a high interest rate currency. 20% of the proceeds of this simple-minded profit scheme can be skimmed off by the hedge fund managers while its profitability lasts. So attractive has this trade been that it is popularly supposed to have been responsible for the yen trading at levels far below its purchasing power parity, and for dollar bond yields being apparently permanently below the already skimpy returns on short term paper and close to zero in inflation-adjusted terms.
The Achilles’ heel of the carry trade is the yen exchange rate. If the yen strengthens too far against the dollar, the carry traders, who mark their positions to market, are forced to reveal a huge loss as their yen liabilities are worth more than their dollar assets. The whole thing is a vast game of “chicken”. While the yen continues weak and interest rates low, the carry trade continues attractive, but a sharp strengthening in the yen or – apparently less likely – a rise in yen interest rates would make carry traders’ profits collapse, and almost certainly cause a panic of position closing that itself would cause the yen to strengthen much further. That suggests Japan’s economic position is considerably sounder than it looks. The seeming contradiction between very low yen interest rates and apparently tightish Japanese liquidity is explained by the hedge funds’ nefarious activity in sucking all the liquidity out of the yen market and dumping it in the dollar one.
Looking at Japanese economic activity and price trends overall, it is clear that short term yen interest rates should be in the 2½%-3% range and long term rates somewhat higher. At current levels, Japanese savers are getting ripped off. Once the carry trade is ended, the BoJ will need to raise short term rates rapidly, to prevent a burst of inflationary speculation in Japan itself. Of course, the BoJ could have ended the carry trade any time it wanted, simply by raising short term rates, thus restoring the Japanese economy to its accustomed stability and abolishing the subsidy currently flowing from Japanese savers to international hedge funds, but one must not expect such wisdom from central bankers. In any case, once the carry trade has ended, Japan will be an island of stability, with moderate asset prices, continuing solid real growth, and expansion concentrated in the domestic rather than export economy as the yen strengthens to its proper value above $1=Yen 100.
... while the U.S. and the U.K. will be hurt.
Just as Japan will benefit from the unwinding of the carry trade and emerge unexpectedly strong, so the U.S. and big borrowers of dollars will become unexpectedly weak, with their economies and stock markets faring worse than people predict. Long term interest rates will rise, which Ben Bernanke will attempt to counteract by lowering short term rates. However he will find himself unable to do much because of an entirely unanticipated upsurge in inflation. His reassurances to the market that all is for the best in the best of all possible worlds, already utterly fatuous, will finally be seen as such by denizens of Wall Street – who will ensure, as they face bankruptcy or more likely 20-year jail sentences, that Bernanke will not survive their departure.
Needless to say the U.S. housing market, already suffering from its orgy of overbuying in 2001-05, will go into terminal collapse, probably taking Fannie Mae and Freddie Mac with it (oh, one hopes so!) and houses will thereafter be nice and affordable until about 2025. Outside the U.S., Britain, so proud of its position at the epicenter of the overblown speculations of world finance, will find its economy in collapse and London house prices dropping by more than half over the next 5 years. Only the Russian mafia, accustomed to stealing their money directly rather than through mere financial manipulation, will remain in London, more or less safe from Vladimir Putin, propping up the West End housing and luxury goods markets to a limited extent by their vulgar excess.
Western Europe will suffer less, but will feel some pain.
Western Europe will suffer less than Britain and the U.S., but will nevertheless feel the pinch as the world economy overall goes into a downturn. Needless to say, the EU’s reaction will be one of protectionism. The Smoot-Hawley tariff of 2008, causing a lengthy world depression and untold hardship, will emerge from Brussels not Washington. However the German and French strengths of high quality products sold at premium prices will remain. Their markets will suffer but in the long run they will emerge little weakened, smug in the knowledge that Anglo-Saxon capitalism was always bound to lead to ruin.
Emerging markets will bifurcate.
Emerging markets will bifurcate, depending on their financial and economic positions. Those relatively prosperous countries in Asia with rapidly growing productivity and little debt (or, in the case of Taiwan, a net asset position internationally) will do fine, benefiting from rising dollar and yen interest rates on their net asset positions and losing only modestly from increased protectionism – their relatively high value-added products will remain essential to a West that has hollowed out its manufacturing base. Most of these markets do not have excessively high P-E ratios so will survive nicely with only a modest market downturn.
But the major constituents of the EMBI+ emerging markets debt index, primarily Latin America and Russia, will find life very difficult. Finance will become more expensive and harder to come by, and the phone will no longer be ringing with offers from international buyers for their dodgier assets. With a world downturn, commodity prices will be weak. Since most of these countries have not established themselves properly in non-commodity exports their economic and financial positions will deteriorate rapidly. At that point, many of these countries will come to regret bitterly their insouciance about property rights, whether of Western investors or of their own middle class. Except for those few countries which have nurtured their domestic savings base and not overspent (one thinks of Colombia and to a lesser extent Chile) it will be too late.
The Middle East, too, will suffer from declining oil prices, and relapse into its customary status of angry penury, only occasionally interspersed with bouts of spectacularly wasteful consumption. That leaves India and China, which fall neatly into no category, being neither the Idle Apprentices of Russia and Latin America nor the Industrious Apprentices of Korea, Taiwan and Singapore. Although industrious, they will be hit harder by world economic downturn and protectionism, because their products are mostly commoditized and substitutable by domestic goods as tariff barriers rise.
Moreover, both countries have cash flow problems. In China, the $1 trillion of bad loans in the banking system is only covered up by the extraordinary willingness of U.S. investment banks and their clients to invest in dodgy Chinese banks they know nothing about. Without the enthusiasm of Wall Street the Chinese banks will quickly run out of money and undergo a very expensive forced recapitalization by the state, probably involving loss of most of the domestic Chinese savings base.
In India, the government has planned for 9% economic growth on average over the next 5 years, and has demonstrated by an 18% increase in spending in this week’s budget together with tax rises that it means to spend as much as possible of that growth itself. Of course, even without a world downturn that policy would be economically suicidal in the long run. With a downturn the suicide will arrive more quickly and more thoroughly. India will suffer a severe liquidity crisis in its domestic economy, resulting in a sharp and unexpected recession. Where it goes from there will depend on politics.
Was this week’s hiccup the beginning of the big downturn? Who knows! But that downturn cannot now be long delayed, so wise investors will prepare for it, rearranging their portfolios accordingly.Link here.
RICH VENEZUELANS HEADING TO FLORIDA
They call it “Plan B”. As Venezuelan President Hugo Chavez further tightens control of the country’s economy, wealthy Venezuelans who once thought they could live with his socialist edicts are turning to their backup plan – flight to the U.S., particularly Florida. Venezuelans have long gobbled up condos and pre-construction deals in Florida as investments, but the latest buyers want homes where they can live and business properties that will help them earn a green card.
“First the people who come are the businessmen in the highest circles, then the losing politicians, then the military and then the professionals,” said Miami-based immigration attorney Oscar Levin. “You’re beginning to see the (Venezuelan) professionals.” This latest and largest potential group of emigrants say they fear the effect Chavez’s socialist policies will have on the economy and on proposed educational reforms that could mirror the ideologically imbued education of Chavez ally and mentor Fidel Castro.
“There is so much insecurity, political insecurity, economic insecurity,” said Venezuelan Miguel Medina, a business executive who moved to the Miami in August. “You don’t know if a contract you signed today will be honored by the government in the future ... This was definitely my plan B, but it was time to do the plan B.”
Between 2000 – a year after Chavez took office – and 2005, the number of Venezuelans living in the U.S. doubled to about 160,000, according to the latest U.S. Census numbers. Nearly half live in Florida. But those numbers are deceptive. In 2005 400,000 Venezuelans came to the U.S. on business and tourism visas. It is unclear how many stayed. Colombia, with nearly twice Venezuela’s roughly 27 million residents, sent the same number that year.
Anecdotal evidence suggests even more are seeking to come here since Chavez’s recent nationalization of Venezuela’s largest telecommunications company and the electricity sector. Chavez is threatening to expropriate supermarkets, stores and other businesses caught hoarding food or speculating on prices. Medina said six family members visited him in the last two months seeking ways to relocate to the U.S. Unlike previous cycles, those seeking to leave and bring their money to the U.S. now are coming from around Venezuela, not just from Caracas, said Medina, an account executive for the credit group ExpoCredit.
About 33,000 Venezuelans received some kind of work visa to come to the U.S. in 2005. Those who come are received with open arms in Miami, where their money is welcome and the Cuban exile community views Chavez as the next Fidel Castro. But moving to the U.S., even for the wealthy, is not simple. Medina moved his family to the Miami three years ago, but it took him until last summer to tie up financial ends, obtain a visa and a job in Florida. And while Venezuelan emigrants cite the political and economic instability of the country as their main reasons for leaving, many also talk of rampant and random violence.Link here.
U.S. JUSTICE DEPARTMENT TAKES AIM AT IMAGE-SHARING SITES
Internet surveillance push accelerates.
The Bush administration has accelerated its Internet surveillance push by proposing that Web sites must keep records of who uploads photographs or videos in case police determine the content is illegal and choose to investigate. That proposal surfaced last week in a private meeting during which U.S. DoJ officials, including Assistant Attorney General Rachel Brand, tried to convince industry representatives such as AOL and Comcast that data retention would be valuable in investigating terrorism, child pornography and other crimes. The discussions were described by several people who attended the meeting.
A second purpose of the meeting in Washington, D.C., according to the sources, was to ask ISPs how much it would cost to record details on their subscribers for two years. At the very least, the companies would be required to keep logs for police of which customer is assigned a specific Internet address. Only universities and libraries would be excluded, one participant said.
Attorney General Alberto Gonzales has been lobbying Congress for mandatory data retention, calling it a “national problem that requires federal legislation.” Gonzales has convened earlier private meetings to pressure industry representatives. And last month, Republicans introduced a mandatory data retention bill in the U.S. House of Representatives that would let the attorney general dictate what must be stored and for how long. Supporters of the data retention proposal say it is necessary to help track criminals if police do not immediately discover illegal activity, such as child abuse. Industry representatives respond by saying major Internet providers have a strong track record of responding to subpoenas from law enforcement.
Last week’s meeting represents the latest effort by the Bush administration to increase the ability of law enforcement and intelligence agencies to monitor Internet users. Since 2001, the administration has repeatedly pushed for more surveillance capabilities in the form of the Patriot Act and a follow-up proposal that – if it had been enacted – would have given the FBI online eavesdropping powers without a court order for up to 48 hours. Often invoking terrorism and child pornography as justifications, the administration has argued that ISPs must install backdoors for surveillance and has called for routers to be redesigned for easier eavesdropping.
In practice, some Web businesses already make it a practice to store personal information forever. Google stores search terms indefinitely, for instance, while AOL says it deletes them after 30 days. David Weekly, a San Francisco-area entrepreneur who founded popular Wiki-creation site PBWiki.com, said the Justice Department’s proposal would be routinely evaded by people who use overseas sites to upload images. If the proposal were to become law, PBWiki would already be in compliance, Weekly said.Link here.
PLACES IN THE SUN
Offshore financial centers are booming. The best of them are more than just tax havens.
If the deal over North Korea’s nuclear-weapons program holds, Kim Jong Il may be able to indulge his penchant for fine wines and Hollywood blockbusters again. Banks around the world had severed ties with North Korea after America last September blacklisted a Macau bank accused of doing business with the hermit kingdom, making foreign money tighter for the Great Leader. But a move towards more normal relations with America could help restore the flow. The financial system is modern warfare’s newest front. In a globalized economy money moves instantly and anonymously across borders. This can benefit terrorists, drug traffickers and rogue nations in need of cash. Keeping such customers out of the world’s sprawling financial system is becoming ever harder.
Financial regulators have another big concern. The huge growth in the use of esoteric derivatives and the rise of hedge funds have made it increasingly difficult to understand where financial risk lies, partly because much of it is hidden away on islands with variable supervision. But the most vexing problem that highly mobile financial flows pose for governments is that when they cross borders they may take tax revenues with them. This is particularly serious for rich Western countries, who have launched a raft of initiatives to strengthen the international financial system against financial crime, financial contagion and tax evasion. The idea is to prod financial centers worldwide to adopt international best practice on bank supervision, the collection of financial information and the enforcement of money-laundering rules.
One group has become the object of special scrutiny is offshore financial centers (OFCs). These are typically small jurisdictions, such as Macau, Bermuda, Liechtenstein or Guernsey, that make their living mainly by attracting overseas financial capital. They offer low or no taxes, political stability, business-friendly regulation and laws, and above all discretion. Big, rich countries see OFCs as the weak link in the global financial chain. In the past OFCs have indeed permitted various dodgy doings. Critics think their dependence on foreign capital encourages them to turn a blind eye to crime and corporate fraud within their borders. Many corrupt leaders have looted their countries, helped by the secrecy offered not just by certain tax havens but also by some onshore financial centers – a point often ignored by the OFCs’ critics. The accounting scams at Enron, Parmalat and Tyco were made easier by complicated financial structures based in OFCs, but also in onshore centers such as Delaware.
But the most obvious use of OFCs is to avoid taxes. Many successful offshore jurisdictions keep on the right side of the law, and many of the world’s richest people and its biggest and most reputable companies use them quite legally to minimize their tax liability. But the onshore world takes a hostile view of them. Offshore tax havens have “declared economic war on honest U.S. taxpayers,” says Carl Levin, an American senator. He points to a study suggesting that America loses up to $70 billion a year to tax havens. The Tax Justice Network, a not-for-profit group that is harshly critical of OFCs, reckons that global tax revenues lost to OFCs exceed $255 billion a year, although not everybody believes it.
Business in OFCs is booming, and as a group these jurisdictions no longer sit at the fringes of the global economy. Offshore holdings now run to $5-7 trillion, five times as much as two decades ago, and make up perhaps 6-8% of worldwide wealth under management, according to Jeffrey Owens, head of fiscal affairs at the OECD. All this has been very good for the OFCs’ economies. Between 1982 and 2003 they grew at an annual average rate per person of 2.8%, vs. 1.2% for the world as a whole. Bermuda is the richest country in the world, with a GDP per person estimated at almost $70,000, compared with $43,500 for America. On average, the citizens of Cayman, Jersey, Guernsey and the BVI are richer than those in most of Europe, Canada and Japan. This has encouraged other countries with small domestic markets to set up financial centers of their own to pull in offshore money – most spectacularly Dubai but also Kuwait, Saudi Arabia, Shanghai and even Sudan’s Khartoum, not so far from war-ravaged Darfur.
Globalization has vastly increased the opportunities for such business. As companies become ever more multinational, they find it easier to shift their activities and profits across borders and into OFCs. As the well-to-do lead increasingly peripatetic lives, with jobs far from home, mansions scattered across continents and investments around the world, they can keep and manage their wealth anywhere. Financial liberalization – the elimination of capital controls and the like – has made all of this easier. So has the internet, which allows money to be shifted around the world quickly, cheaply and anonymously. The growth in global financial services has helped too. Financial services are in essence the business of managing data. “It is zeros and ones,” says Urs Rohner, the chief operating officer of Credit Suisse. These zeros and ones can be traded, structured, lent and sold anywhere. Profits can be booked almost anywhere, too, and are increasingly being shifted to OFCs.
The growing importance of the financial-services industry in many economies means that a greater chunk of profits and concommitant tax liabilities are easily moved offshore. The taxman also has to worry about non-financial companies that are acting like financial ones. The main profit engine for General Electric, a large American conglomerate, is its finance division. Non-financial companies run pension funds and stock-option plans for their employees across the world, manage their corporate treasuries in myriad currencies and increasingly employ esoteric financial products such as derivatives to hedge risks and raise money. All of these activities can be set up in OFCs and often are, supported by an army of lawyers, accountants and investment bankers.
OFCs are often portrayed as financial parasites that survive by diverting tax and other revenues from “real” economies, offering a haven for tax cheats and money-launderers. Some of this undoubtedly goes on – but it goes on in big onshore economies as well. Businessmen and wealthy individuals insist that OFCs can play a legitimate role in reducing tax liabilities. The business community in particular argues that in a fiercely competitive global economy where national tax regimes can vary widely, minimizing tax payments is a competitive necessity and OFCs are one solution. OFCs themselves insist that they are specialist financial centers and have far more to offer than just low taxes. The big risk is that “globalization is perceived to be rigged against the average citizen,” says David Rosenbloom, formerly the international tax counsel at the Treasury Department in America.
Critics also worry that OFCs do not supervise business within their borders tightly enough, which gives crooks an opportunity to enter the global financial system. OFCs themselves will admit that in the past regulation in many offshore jurisdictions left much to be desired and bad money found its way in with the good. OFCs argue that this has changed and their supervision is now at least as good as onshore, sometimes better. Libertarians say that tax, regulatory and other competition is healthy because it keeps bigger countries’ governments from getting bloated. Others argue that OFCs may be an inevitable concomitant of globalization. Some academics have found signs that OFCs have unplanned positive effects, spurring growth and competitiveness in nearby onshore economies.
Countries try to discourage investment in tax havens through the tax code and pour resources into tracking down tax cheats. But close one regulatory loophole and lawyers will open another. Convince one OFC to co-operate in the fight against tax evasion or financial crime and another will take its place. International organizations have launched various initiatives to try to get OFCs to tighten supervision, cooperate more with foreign governments to catch tax cheats and, at least in Europe, eliminate “harmful” tax practices. OFCs think such initiatives are designed to force them out of business. The countries that set these standards “are an oligopoly trying to keep out smaller competitors. They are both players and referees in the game. How can they be objective?,” asks Richard Hay, a lawyer in Britain who represents OFCs.
What is clear is that globalization has changed the rules of the game. It has produced many benefits for rich countries, but has also provided more opportunities for tax leakage, which explains their anxiety over OFCs. OFCs, for their part, have by and large done well out of globalization. Two decades ago, they were mainly passive repositories of the cash of large companies, rich individuals and rogues. Some jurisdictions still ply this trade today. But the best of them have become sophisticated, well-run financial centers in their own right, with expertise in certain niches such as insurance or structured finance.Link here.
THE 2006 ANNUAL GLOBAL RETIREMENT INDEX
For the 6th year running, Panama comes out on top in International Living’s Annual Global Retirement Index. Panama’s top ranking again this year comes as no surprise to us. We remind you often of the advantages and attractions of the world’s top retirement haven. In brief: The country currently boasts the world’s most appealing program of special benefits, discounts, and perks for foreign retirees (see below). It is easily accessible from the U.S. Its cost of living is low. Its landscapes and coastlines are beautiful. Its population is friendly and welcomes foreign residents and investors. And its capital city, Panama City, is without peer in the region.
This is still the developing world, no question, but in Panama City you can enjoy all the amenities and conveniences of First World living. A friend in the country for the first time as I write reports, “The grocery store where I shopped this morning is better than my grocery store back home in the States. It had everything ... including special French cheeses ... even French butter ... and an impressive selection of wines from around the world.”
The infamous pensionado program.
Panama’s pensionado program is without serious competition worldwide. If you can document a minimum monthly pension of $500 (plus another $100 per dependent), you are eligible for a long list of perks, including:
Before I go further reviewing for you the final rankings of this year’s Index, I want to make two points. First, no place is perfect. Every country, including Panama, has its drawbacks and downsides. We assume you realize this and point out particular disadvantages or challenges when appropriate but, generally, focus on the benefits each destination offers. Second, numbers can be misleading and ours, in cases, are subjective.
To prepare our annual survey each year, we begin by sourcing statistics on everything from real estate to special benefits, from culture to infrastructure, and from climate to health care from official government websites and Interpol data. We use the numbers we search out on the web as a starting point. Then we move from the Internet to the streets for the real-life story. We ask our correspondents and contributors living and spending time in each country included in the Survey to review our compiled data – and to give us the real scoop. Our roving Euro Editor Steenie Harvey, for example, had this reaction to the original Climate numbers: “Poland has a better climate than Cyprus? Tell THAT to the Poles!”
We adjusted accordingly nearly every figure we had collected in our internet research, based on feedback from our in-country experts. The numbers you see presented here, therefore, began as compiled, government-approved statistics, and then went through our filters. We believe they are far more representative of real life in these places than any numbers you will find on the State Department or World Bank websites.
Dwell in the Valley of flowers and eternal spring. Or escape to the beaches.
Back to Panama. Panama City is lively, sophisticated, cosmopolitan, and historic. It is also hot. This is reflected in its low score in the Climate category (28 points). But the good news is that it is not hot and humid countrywide. For mild, spring-like temperatures year-round, escape to the interior of this country, to the mountainous Chiriqui region. Specifically, we recommend the little town of Boquete, at the base of the tallest peak in Panama, an extinct volcano called Baru. The surrounding mountains are covered with coffee, banana, mango, palm trees, and wildflowers of every tropical color. The Panamanians call it the “Valley of flowers and eternal spring.”
On May 31 of this year, Boquete was featured in a Reuters report (“Pensioners seek paradise in Panama mountain idyll”). The article included an interview with Michigan-born Casey Koehler, who moved to Boquete last year. The reporter also interviewed others who had moved to Boquete, attracted by its temperate climate and low cost of living. The conclusion in the article was resounding. All interviewees agreed that they are living in Paradise, and spending far less than they would back in the States – $3,800 a month less in Casey Koehler’s case.
Or perhaps you are dreaming of a home at the beach and do not mind the heat. Cross the Canal from Panama City, continue over the Bridge of the Americas, then onto the Pan American Highway for 50 miles, and you are beach bound. The beaches here are wide and perfect for surfing, snorkeling, swimming, and fishing. This part of Panama is known as Arco Seco (dry arc), because it is an arc-shaped region along the Pacific Coast where it rains significantly less than it does in the rest of the country. These beach towns are quiet and restful during the week, then often jam-packed and lively on the weekends. These are not rustic fishing villages. Still, it is possible to find a little beach house to call your own, with all the modern conveniences, for less than $100,000.
Malta and New Zealand place 2nd and 3rd.
Malta, which is, in fact, twin islands of Malta and Gozo, takes silver in the 2006 Retirement Index. Steeped in history and tradition, these small islands, with near-perfect climates year-round, offer a simple, relaxed lifestyle. The cost of living remains low on these islands, and permanent foreign residents can take advantage of a 15% tax rate. Property taxes do not exist. Crime, too, is practically nonexistent. The locals are helpful and friendly – and everyone speaks English. You can fill your days with golf, tennis, sailing, and horse riding.
Only a mile of sea separates Malta from Gozo, but the two islands are distinctly different. If you enjoy people, choose Malta. This bursting-at-the-seams island is effectively a city-state. Home to about 30,000 inhabitants and a miniscule 26 square miles in size, tranquil Gozo, on the other hand, provides a nostalgic escape. This is a world of deep-blue seas and hidden coves, green fields and scattered windmills, church spires and ancient, sleepy villages. Home prices on Gozo are cheaper than in most parts of Malta, but word is getting out. Its flat-roofed, honey-hued stone farmhouses today are changing hands for around $150,000.
Our 3rd-place winner has a fly in its retirement soup. New Zealand is not in the market of attracting foreign retirees, but rather is looking for younger, professionally qualified immigrants. To obtain full-time residency here, you must qualify through a point system, with points awarded the younger and more qualified for particular types of work you show yourself to be. But you will have no trouble spending up to six months a year in the country. And the reasons to want to spend time there are many. Indeed, New Zealand scores well in every category in our survey except special benefits for retirees.
In addition to its magnificent scenery and an array of activities to keep you busy and fit, New Zealand has a low cost of living, an English-speaking population, great infrastructure, and one of the world’s highest “healthy longevity” figures. Not only can you go from the beach to the mountains – seeing tropical forests and snowy scapes in the same island – but when it is winter in the U.S., it is summer in New Zealand. Divide your time right between the two, and you could enjoy an endless summer. Nature-lovers are spoilt for choice with all the national parks, bird sanctuaries, and stunning natural phenomena, from geysers to snowfields to primeval forests. Furthermore, New Zealand hides some of the best real estate bargains in the world. According to the Real Estate Institute of New Zealand, the average house prices as of June 2006 is $190,000. The country also imposes no capital gains tax.
Uruguay moves up to 4th place.
Uruguay is a paradox. South America’s second-smallest country, about the size of Missouri, looks like Europe and feels like Europe. But its price tags will remind you that this is the Third World. Wedged between Brazil and Argentina, Uruguay has the lowest poverty level in Latin America, the longest life expectancy, and (as of October 2004) the second lowest level of corruption. The literacy rate is 98%. Uruguay sits in the Southern Hemisphere at about the same location that North Carolina occupies in the Northern, and it has four seasons. The average daytime high is about 85° F in summer (December through February), and the low is 65° F. In winter, highs run around 60° F, with lows near 42° F.
Just across the river from Buenos Aires, Montevideo is a big city with a small city charm. It is a South American capital that feels like Europe. Perhaps most remarkable, it is an attractive city where you can still buy a small apartment for less than $30,000. In fact, Mercer HR Consulting recently named Montevideo the second least expensive city in the world.
Uruguay’s pros include modern, first-world infrastructure, excellent highways, drinkable water, good communications, and stunning beaches. During high season, it is fun and lively. During low season, it is quiet and peaceful. Prices for just about everything are excellent. But it may be too slow for some during low season.
Mexico rounds out the top 5.
Our parents retired to Florida and Arizona. Today’s baby boomers are heading South of the Border. Mexico is the United State’q closest neighbor to the south (to state the obvious), and at no other time in the long history of that relationship have the benefits of living and investing in Mexico been more apparent, or easier to take advantage of. Not only for U.S. citizens, but Canadians and Europeans, too.
Mexico has it all – rich culture, perfect climate, affordable living, not to mention mountains, beaches, deserts, and just about everything in between. Geographically and culturally, this country is enviably diverse - from little silver mining towns where the winding streets seem to run straight up into the clouds, to fishing villages where the boats land in the morning with the giant snapper you will have for lunch. For all these reasons and more, Mexico is one of the world’s top destinations for retiring. This makes it not only a great lifestyle choice but also one of the hottest real estate investment markets in the hemisphere.
Beaches, mountains, deserts, forests, plains, and fertile valleys…sophisticated cities and quiet villages. Once you have made the decision to move to Mexico, you are left with the mind-boggling decision of where, specifically, to settle. To help start you on your way to your new life in Mexico, below are the 10 places we think make the most sense for expatriate living in this country, based on criteria such as health care, climate, infrastructure, and housing costs.
SIR JOHN AND THE HONG KONG EXPERIMENT
“Money goes where it’s treated best.” ~~ Wriston’s Law
I submit the story of arguably the finest leader the 20th century ever produced. His greatest quality? He left things alone. He called his approach “positive non-intervention”. It is the story of a man whose legacy legitimized the laissez-faire economic policies of Milton Friedman and the University of Chicago boys. According to the Chicago approach, intervention almost always did more good than harm.
Our hero set the bar as Hong Kong’s financial secretary throughout the 1960s. Sir John James Cowperthwaite was born in 1915 in Britain. Before joining the Colonial Administrative service in Hong Kong in 1941, Cowperthwaite studied economics at St. Andrews University and Christ’s College in Cambridge. Cowperthwaite arrived in Hong Kong immediately following World War II. That was a good thing. Roughly four years of Japanese occupation had taken its toll. Manufacturing ceased. Inflation soared. Tens of thousands were cast in the streets. Many more were deported to the Mainland. By the war’s end, only 600,000 of the original 1.6 million citizens remained.
Unlike most British colonies at the time, Hong Kong did not receive its freedom immediately following the war. The reason was simple: Hong Kong sat right next door to communist China. So while the Brits sat at home channeling their energy around their newly enlightened pampers-to-pampers welfare state, Cowperthwaite stepped back. He took his hands off the Hong Kong economy. Personal taxes were kept at a maximum 15%. Government borrowing became an oxymoron. There were no tariffs or subsidies. He managed to reduce the red tape to a level on which a new company could be registered with a one-page form.
Cowperthwaite’s intrinsic distrust for government enabled him to prevent even the highest bureaucrats from keeping figures on the rate of economic growth or the size of GDP. He reasoned that, “If I let them compute those statistics, they’ll want to use them for planning.” In his very first budget speech, he said, “... in the long run the aggregate of decisions of individual businessmen, exercising individual judgment in a free economy, even if often mistaken, is less likely to do harm than the centralized decisions of a government; and certainly the harm is likely to be counteracted faster.”
During his “do nothing” tenure, the island only six times the size of our Washington, D.C., with no natural resources of which to speak of, witnessed a 50% rise in real wages and a two-thirds fall in the number of households in acute poverty. From 1960 to 1996, Hong Kong’s per capita income rose from about one-quarter of Britain’s to more than a third larger. Thank you, Sir John.
While the 20th century history books exalt the purveyors of active Government intervention – names like Churchill, Keynes, Roosevelt, and Wilson, I offer you this: money will flow where it is treated best. And I think you will be hard-pressed to find any other place in the world that treats money better than Hong Kong. The highest tax bracket comes in at 17%. Individuals are only assessed on annual employment income. Dividends and capital gains are not taxed. Real estate assets may be passed down generations without any tax liability whatsoever. And like many progressive tax systems, Hong Kong grants allowances for certain deductions like charitable contributions. When you consider Hong Kong provides arguably the world’s greatest municipal services in a relatively crime free environment, you will be hard pressed to find a more favorable tax policy anywhere in the world.Link here.
A FRESH LOOK AT COSTA RICA FOR RETIREMENT
For many years, Costa Rica has been touted as one of the top retirement havens in the world. With a stable democracy, growing economy, government friendly to foreigners and tropical climate, as well as incredible natural beauty, it rightly earned the phrase, “the Switzerland of Latin America.” Is this still true today? Are retirees still coming here? Should they still consider Costa Rica?
To many people, there appear to be less expensive retirement destinations such as Panama or Nicaragua. To others, Costa Rica has become too touristy. Still others believe Costa Rica is overrun with “gringos”. I want to debunk these notions, and others, and suggest that Costa Rica is still a terrific place to retire, or to start new life in if you are not yet retired, particularly if you choose your location and activities carefully.
Can I afford Costa Rica?
I have been living in Costa Rica for about a year and a half but have been in and out the country frequently since 1989 and based my extensive travel throughout the country in conjunction with my “Boomers in Costa Rica Retirement Tours”, I have found that there are still inexpensive areas in which to live, particularly if you stay away from the close-in suburbs of San Jose. Take, for example, the wonderful city of San Ramon in Alajuela province, an agricultural town of 70,000, situated on the northwest edge of the Central Valley. Home to three former presidents including “Don Pepe”, who abolished the army in 1948 and set in motion the basis for today’s robust democracy, San Ramon offers a peaceful environment in which to live yet it offers all of the services of a larger city. It is also only 40 minutes to the international airport in Alajuela, one hour to San Jose and 40 minutes to the Pacific Coast.
San Ramon also offers a wide variety of lots for building one’s retirement dream home, either in the mountains or stunning ocean view properties. Prices for land remain low with some lots as inexpensive as $15,000 for a one-quarter to one-half acre lot, to $75,000 for an incredible ocean-view lot on 2.25 acres. With another $60,000 to $75,000, you can have an incredible ocean view lot and house, complete with all the services you need, for under $200,000. If you can do without ocean views, you will pay even less – perhaps around $100,000 or so for a nice lot and home. Property taxes are only 0.25% of the registered value of your property. I paid $66 in property taxes for an entire year! If renting is more your style, you can still find nice two-bedroom, modest homes for rent for under $200/month. Low housing costs combined with very low prices on food and utilities makes San Ramon an excellent bargain.
The towns of Grecia, Sarchi, Atenas and Puriscal offer excellent value as well. You just need to know where to look or link up with an experienced and knowledgeable local or gringo to help you out. Eating out costs perhaps a $1.50 for breakfast, $2.00 for lunch, and then, splurging for dinner, perhaps $4-6. Of course, if you visit some of this country’s wonderful outdoor markets, you will find the freshest meats, fruits and vegetables, and can cook for yourself and spend even less.
What about medical care?
Some foreigners living in Costa Rica complain that the medical system here is overcrowded and it often takes hours to see a doctor. Yes, in some areas there are less doctors per capita than in the U.S. but but not everywhere, and often times relates to people who have elected to get on the “CAJA” system, which is the most basic health insurance program, run by the government, to which most Ticos belong. Once you leave the San Jose area, even if you are on the CAJA, the lines lessen and more often than not, you will form a great relationship with an English-speaking doctor who is well-trained, and in some cases, will even make house calls. There are also other privately-run programs that allow you to see any doctor and even these programs are much less expensive than insurance programs in the states. Costa Rica also has several outstanding hospitals that provide the same level and quality of service that you would find in the U.S.
What about all the tourists?
Costa Rica certainly is a well-traveled tourist destination, with over 1 million visitors a year. If you visit the beaches at Manuel Antonio, the rain forest of Monteverde, or Arenal Volcano during the dry season, yes, you will see many North Americans and Europeans. However, living here, particularly in towns such as San Ramon or Grecia, you would hardly know it is the tourist season. Actually, visiting tourist destinations during the off-season is a significant benefit of living here, particularly given that prices are significantly less than during the high season.
Costa Rica does count among its residents some 40,000 North Americans, mostly from the U.S. They come for a variety of reasons from wanting to leave their corporate careers for more meaningful work to just wanting to retire and enjoy a slower, relaxed pace of life that Costa Rica offers. While these expatriates are scattered throughout Costa Rica, most of them live in the suburbs surrounding San Jose such as Escazu, Santa Ana and Cuidad Colon. Quite a few ex-pats live in beach communities up and down the Pacific Coast while a smaller number of people live on the Caribbean coast. However, many people are beginning to take note of the smaller towns in the Central Valley. These towns and pueblos offer a relaxed pace of life, reasonable property prices and an overall lower cost of living. So, you can live in Costa Rica and not feel overrun by gringos or the high prices in other parts of the country.
Historically, Costa Rica was a country primarily attractive to retirees. Many people have made the successful transition from a corporate career in the states to running a bed and breakfast, managing a surf shop, offering tours, investing in real estate, and more much. Costa Rica is a very business-friendly country and the opportunities here are still endless.
Like any developing country, particularly one with a rainy season for part of the year, and with trucks and cars sharing the same, often two-lane road, it can be hard to maintain the roads in perfect condition all the time. Fortunately, under the new administration of Nobel Peace Prize winner, President Oscar Arias, significant steps are being taken to address these concerns. Costa Rica has come a long way in infrastructure improvements, and it is only getting better.
While one can get by without knowing much Spanish, you will have a better experience if you try to learn at least some key words, phrases and sentences. In addition, befriending a Tico will go a long way in helping you get things done here. I could not get by without my “Tico connections” and my Spanish is getting better all the time.
There are poor people here but it is nothing like the abject poverty found in Nicaragua or Honduras. Costa Rica also has not experienced the gang warfare that is rampant in El Salvador, Nicaragua, and Honduras. Housing and land may be much cheaper in these countries, but is it worth paying less to live if you experience power cuts for six to eight hours each day (as is the case in Nicaragua lately) or more importantly, live in fear? I have also found that the people are much more welcoming to us gringos than in other countries in the region, and do not just befriend us for our money. They are very hard working, genuinely interested in learning about North Americans, and for us, it is not hard to integrate into Costa Rica society. They are friendly people indeed!Link here.
TAX HAVEN NON-SENSE AND DECEPTION
There seems to be a huge amount of non-sense and some outright deception about the impact of tax havens and the alleged abuse of tax havens. The following comments are offered as an attempt to provide some balance to the arguments of those who rail against U.S. persons with foreign income, particularly in a so-called tax haven.
The U.S. imposes an income tax on the world wide income of our citizens and permanent residents, regardless of where the income is earned. If it is earned in a country that also imposes income taxes, the U.S. provides for a tax credit to avoid double taxation. But if the income is earned in a country that has no income tax (or a low rate of tax), the U.S. collects a tax on that income as if it were earned in the U.S. We do allow for a limited exemption from U.S. tax for earned income in foreign countries – but most of the U.S. citizens who work outside the U.S. pay substantial taxes to foreign countries. The tax credit is not allowed on foreign excluded income, so that apparent tax break does not really cost the U.S. any significant loss of tax dollars.
U.S. corporations that operate in multiple countries are permitted to defer tax on income earned in a low tax country so long as the income is reinvested in the business and not used as passive investments. This is done to partially compensate for the disadvantages imposed on U.S. companies in competing with companies based in other countries.
Many decades ago, it was legal and possible to move assets offshore and to invest them on a tax-free basis until the money was returned to the U.S. But various laws have removed those tax breaks. If a U.S. investor opens a foreign bank account and buys various offshore investments, the U.S. investor is obligated by law to pay taxes on the income earned by those investments. Many times, the U.S. investor is encouraged to put his assets into a foreign corporation or an international business company (IBC) and to make the investments through the corporation or IBC. But the U.S. tax law already requires the U.S. shareholder of a foreign corporation to pay taxes on the income of a foreign investment holding company or a foreign corporation controlled by U.S. persons.
Some people seem to believe that the use of a foreign trust is some kind of tax shelter, but it is not a legal way to avoid taxes. The U.S. person who puts assets into a foreign trust that has any current or future U.S. beneficiary is obligated by law to report the income earned by the foreign trust and to pay taxes on that income.
Virtually every other country in the world imposes income taxes on a territorial basis. Income earned in their country is taxable. Income earned outside their country is not taxable. But the U.S. insists on taxing the income of its citizens, permanent residents, corporations, partnerships, trusts and estates no matter where the income is earned.
Those politicians who rail against alleged losses of tax revenue because of tax havens are either not aware of the scope of the U.S. tax laws, or are intentionally dispensing non-sense to pander to the public’s lack of awareness of the current system. The only people who are evading taxes offshore are outright crooks and those who are not concerned about complying with the U.S. tax laws. More laws will have no impact on those who choose to ignore the existing laws. Claims that closing up tax haven loopholes will somehow generate revenue to be used for domestic spending is political propoganda that is totally contrary to the facts. We do not need more laws to prevent tax evasion offshore. We have more than enough laws already.Link here.
WHERE TO LOOK FOR FREEDOM IN AN UNFREE WORLD
Harry Browne showed the way.
March 1 was a day of nostalgia and sadness for many advocates of individual liberty. It marked the first anniversary of the death of Harry Browne. Harry was one of the late 20th century’s most articulate champions of personal freedom.
Harry burst onto the national radar in 1970 with the publication of his prescient bestseller, How You Can Profit from the Coming Devaluation. In this book, he predicted that in the wake of 35 years of government manipulation in gold prices, the U.S. would be forced to default on the Bretton Woods Agreement, stop selling gold to foreign central banks at $35 an ounce, and devalue the all-powerful U.S. dollar. Harry’s explanations of money and economics were brilliant in their simplicity. He accurately predicted the consequences of devaluation. He urged readers to buy gold, silver and the Swiss franc as a hedge against devaluation. His book rocketed to the top of the national best-seller lists, seeding a new “hard-money” industry of books, newsletters and conferences that flourished and linger to this day.
While Harry’s investment books (he wrote eight more) and newsletters enjoyed wide success over the following two decades, his most important and longest-lived work was not about investments at all. His 1978 best-seller, How You Can Find Freedom in an Unfree World, spoke to all who struggle against the over-arching walls of government, the legal system, the social customs and mores of our cultures, and the interpersonal relationships that seem to restrict our personal freedom.
Harry’s lovely and beloved wife Pamela has kept his work alive through his website. To commemorate the anniversary of his passing, last week she announced that How You Can Find Freedom in an Unfree World, which has been out of print for the past few years, is now available for download. For those who struggle to achieve individual sovereignty, it is an opportunity to add a very perceptive and compelling work to their library of libertarian thought.
Defining freedom as “the opportunity to live your life as you want to live it,” Harry guided readers through the turmoil each of us struggles with in our daily lives. These struggles included social restrictions, family problems, high taxes, bad relationships, the work treadmill and the ever-present incursions of government. In our personal relationships with our mates, friends, families, and our business relationships, Harry argued that most are bound by oppressive emotional and identity traps and boxes which are no more than the imaginary barriers of a belief system. Harry explained these traps and pointed out that you can explore alternative choices. His explanations of how to break free of our false assumptions led thousands of readers to count the book among the most important and life-changing they had ever read.
For those who consider taxation, regulation, and the myriad other intrusions of government to be the greatest challenge to individual liberty, the alternatives may seem far less obvious. Yet only misconceptions about the nature and power of government stop most individuals from enjoying true freedom. “No matter what happens, you’re smarter than the government,” he wrote. “You’re more flexible than the government. And you have more incentive to make your life work well than government employees have to make government work well – or even to make it work at all.” His first principle in dealing with government, then, is do not be awed by it. What little the government achieves depends on the voluntary participation of its citizens. The second principle is do not confront the government. Keep to yourself, do what you have to do.
“It can take time to accept the fact of your own sovereignty,” he concludes. “It can seem natural to assume that your future will be decided by others, that your purpose in life is to serve society, your country, or the world – as determined by others ... But you are sovereign. You rule one life – and you rule it totally.”Link here.
HOW THE U.S. WRECKED THE WORLD’S MOST ROBUST ECONOMY AND IMPOVERISHED ITS OWN PEOPLE
As I will support in this essay, imbalances and systemic problems have become so severe that the economic downtrend in the U.S. will almost certainly accelerate dramatically at some point in the months and years ahead. The natural question is “When, exactly?” – but due to unknowns, exact timing and velocity of markets and other dynamic social phenomena are inherently unpredictable. Trends, historical examples, and current data are knowable, however, and they all tell us a storm is coming. The economy may drag on with the appearance of quasi-normality for a while longer yet – it has already done so for longer than many expected. “Markets can remain irrational longer than you can remain solvent,” as Warren Buffett pointed out. But if economic timing and velocity are not predictable, the direction and amplitude of future economic events seem clear. Data strongly suggest that we are moving towards a Greater Depression, or perhaps something even worse.
This current and onrushing disaster is entirely the result of historically-typical and well-understood government dynamics and actions. Ordinary Americans have allowed, encouraged, and participated in these dynamics and actions because their understanding of government has been systematically and purposefully subverted, beginning with the adoption (via the Constitution) of a powerful central government and then especially with the push for Prussian-inspired government schooling in the 1800s. The political and corporate power elite have encouraged these same dynamics and actions because they personally benefit from them, directly and indirectly.
By now, the paradigm that Americans use to understand government has become so corrupted as to be massively out of sync with reality, to such an extent that Americans clamor for more of the same policies which caused the problems in the first place. If we are somehow able to avoid an epic melt-down of America’s economy (and perhaps the world’s), such a miracle would require a rapid and dramatic turnaround in the typical American’s understanding of the dynamics and effects of government action – it would require, in other words, the widespread adoption of a new paradigm. My calculation on the odds against that happening in time are a billion to one. I will be surprised if more than a small minority understand the reason for the problem even after America’s fall from economic grace.
You may disagree with my conclusions (most do), but the facts themselves are widely known and not in serious dispute. Intelligent, well-connected and well-respected people have issued warnings in recent years on the problem. These warnings have been reported in the media and then, for the most part, forgotten. The situation continues to grow more precarious, which makes the “soft landing” many are hoping for less likely by the day. As for when the crash will become too obvious to ignore or deny, again, many unknowns can trigger or affect the speed and nature of a great unwinding such as the one we now face. A few such possibilities are a nuclear U.S. attack on Iran, a domino of bank failures triggered by mortgage and other credit defaults, an acceleration of the world trend away from using the US dollar, China and other mega-creditors dumping their massive dollar holdings and using the cash to buy commodities and other real assets.
The tipping point could happen before this column is published, or not for several more years. I lean towards “soon” however. I will be surprised if we get through the next year (or even this year) without our current Rube Goldberg economy coming unraveled. I urge you to do your own research and analysis and come to your own conclusions, but please give this issue the time and consideration it clearly deserves.Link here.
WINDOWS VISTA – ARROGANCE AND STUPIDITY
Upgrading to Windows Vista has been banned by the U.S. Department of Transportation, the National Institute of Standards and Technology, the Federal Aviation Administration, technology giant Texas Instruments and other corporations and government agencies. These organizations are evaluating their options, but overseas it is turning into a stampede to get out of Microsoft software. School districts in the U.S. are starting to move entirely to Linux rather suffer the cost of upgrading Windows. Schools making this move have been surprised how easy it is and how much money is saved.
Leading computer maker HP is reporting “massive deals for Linux desktops” with corporate clients. Runner-up computer maker and long time faithful Microsoft ally Dell has been overwhelmed by demand and has started developing Linux desktop preloads for their notebook and desktop computers. Even that great bastion of the status quo, the Wall Street Journal, has published an article under the title “Linux Starts to Find Home on Desktops” (Business Technology, 13 March 2007).
Small business and consumer demand for computers with Windows XP is very high, but Microsoft has moved swiftly to make sure they cannot get it. No sane person wants Vista, so Microsoft is making sure they have no choice. It has becoming clear people are going to be holding on to their XP machines as long as they can. Chip manufacturers in particular face a damaging glut of memory and CPU chips because the anticipated Vista upgrade demand is not materializing. One gigabyte of RAM memory is the practical minimum for Vista (except Home Basic which will run in 500 megabytes).
Basically, Vista was designed with almost no consideration for the needs of Microsoft’s customers. Vista and its companion programs, Office 2007 and Internet Explorer 7, offer precious little Windows users want beyond what is in Windows XP, but plenty they do not want, including a confusing new user interface. Vista’s much ballyhooed security has already been shattered in various ways, and Microsoft’s “One Care”, intended to protect Vista from malware, has scored at the very bottom in independent tests of anti-malware programs. Microsoft’s DRM (Digital Rights Management) features not only interfere with your enjoyment of entertainment media you have purchased, but force you to have a much more powerful and expensive machine just to achieve XP level performance.
Why did they do this? Most new features originally planned for Vista were dropped in favor of one – a draconian DRM scheme. See my editorial “Vista – Broken by Design” for the details. All other features were of lower priority and the needs of customers were disregarded if they conflicted with DRM. Microsoft hopes to parlay secure DRM into a monopoly on distribution of so called “premium content”. Once they have lured the studios into the deal and established the monopoly they can dictate terms to the studios the way Apple dictated terms to the record companies based on the iPod success, but on a much larger scale.
Microsoft is depending on the unbounded greed of the media moguls to pull this off, but word is the moguls are starting to wonder if DRM is a good idea after all. It is causing them a lot of trouble, has done nothing to stop piracy, and has caused tremendous ill will and bad publicity. Clearly ill will is of no concern to Microsoft. A recent patent filing reveals they have a whole lot more pain and expense planned for you in the future.
Every business should be taking a long hard look at moving to Linux. Yes, there will be costs involved, and employees will gripe initially, but those who have done this find an overall cost savings. I find it hard to recommend Apple. Applications are limited and it is a closed proprietary environment run by a person of proven greed. It seems like jumping from the frying pan into the fire.
I understand that many small businesses are dependent on specialty software the publishers of which support only Windows, even if it will actually run on Linux. It is time to start pressuring them for Linux versions and/or support. If you happen to be such a software publisher, it is time for you to take a good hard look at producing Linux versions yourself. Microsoft has already killed a huge segment of the commercial software industry and you are on their list. Sooner or later it is your turn.Link here.
COPAN RUINAS, HONDURAS: RESIDING IN A TOURIST TOWN
Copan Ruinas is a village that is approximately 12 kilometers from the Guatemalan border in Honduras’s Western Highlands. There are 10,000 people living in the region and outlying aldeas (small villages) with 5,000 of these inhabitants living in the village itself. There are fewer than 40 foreigners who live here full time. The region is most famous for the the Maya Ruins for which it is named, which attract around 200,000 visitors a year (the definition of the word “Copan” is a bridge between two places, it is also believed to have been named after a Mayan indian chief named Copan Galeal, but there is no recorded history of this). But Copan Ruinas is now becoming known more and more for the coffee that grows in the outlying plantations and the coffee tourism it is starting to attract, as well as the Ruins.
Living in this mountain village and tourist area for 16 years as a “local” has been wonderful, and was a happy surpise as when I arrived here to take Spanish Lessons at the then brand new Spanish School. I fell in love with the mist-covered highlands and then fell in love with a wonderful Honduran restaurant owner/tour guide, got married, and stayed. These events all happened within a 6-week period and 16 years later it is all still magic.
My two story home whose veranda looks out toward the sunset every day cost me $5000 and has been my “nest” for 15 years. I often wonder how much it would take to reproduce this cottage in the United States with its flagstone paths, antique wood floors, and hand thrown tile roof. I think the view alone would probably be cost prohibitive for me and even with the inconveniences of sometimes losing electrical power, at times not having water (build a larger holding tank) the property is paid for and I, my husband, and 3 labrador retrievers, live on about $250 a month for food, utilities and telephone. This leaves a lot of left over for luxuries, if I so desire.
Living here however, has been a lesson in patience. It is an experience that continues to fascinate me, even after all these years. It has made me more assertive, bilingual, artistic and more imaginative than I ever would have been living anywhere else. Dealing with and respecting cultural differences has been one of the more challenging aspects of living abroad, especially in a developing nation. If you can remember that you are the guest, basically, and Hondurans, especially those from the mountains, have their own pace, then this mountain village has unlimited possibilities for full time residents. Anyone whose desire to live in an area that is not jaded by overdevelopment and will willingly put up with a few inconveniences then this valley and Copan Ruinas is definitely a viable option. Tradeoffs for these few inconveniences are being able to sip locally-grown, hand-toasted, coffee on a veranda in one of the most breathtakingly beautiful, mystically enshrouded, mountainous regions of the world. Copan Ruinas as a lifestyle should really be investigated.Link here.
PANAMA, JERSEY, ISTANBUL AND SLOVAKIA THE NEXT BIG THING IN PROPERTY INVESTMENT
Panama, Jersey, Istanbul and Slovakia are expected to be amongst the best property investment areas over the next 12 months, according to a UK-based international property expert. According to Adrian McDermott, managing director for escapes2.com, Panama is already at the top of American investors’ list, and is now attracting interest from European investors.
“Property prices in Panama City are less than half that of American cities such as Miami, and coupled with the fact that the U.S. Dollar has been Panama’s currency since 1904 and given its current weak state, Panama looks a good bet for 2007,” said McDermott. He also pointed out that Panama’s low cost of living and its numerous incentives for retirees has helped the country to become the most popular choice for Americans looking to purchase property outside of their own country.
In Turkey, rapid migration to the city of Istanbul from within the country has pushed up demand for housing there, McDermott observed. He also noted that the purchasing power of Turks is about to expand because of legislation that is being passed to make land titles more secure, opening up the opportunity of loan to value mortgages. Furthermore, the high cost of borrowing from banks and a culture of raising capital by alternative means has caused developers to reduce their profit margins substantially in order to raise the required capital to get their projects off the ground. “For this reason Istanbul now represents great potential for Western Europeans as off plan development prices are considerably less than the completed projects’ local market value,” said McDermott.
Jersey in the Channel Islands currently has a strong rental market owing to a high proportion (27%) of residents living in rented accommodation and enjoys high rental yields compared to mainland UK, McDermott said. He also noted that contrary to popular opinion, there are no restrictions on nonresidents buying property to let on Jersey, and with the government aiming to boost its tax revenues by allowing more licenced workers into the island, property for purchase or rent will be in even shorter supply pushing up rental yields as well as increasing capital growth.
McDermott’s final choice is Slovakia, and in particular the ski resort areas in the Tatras mountains which have seen heavy government investment in recent times. The area is also served by an international airport and the country as a whole is enjoying a period of stability and economic growth, with GDP estimated to have expanded by 8% last year – the fastest in Central Europe.Link here.
LATVIA SCARE SPOTLIGHTS BALTICS
It is a curious and disturbing fact of current financial life that a message tapped into a mobile phone one morning in Riga, the capital of Latvia, can within hours trigger a run on the country’s currency amid rumours it is to be devalued. Latvia’s security police say the SMS came from fewer than 10 sources and appeared to be based on a newspaper article arguing, but not stating, the currency could be devalued via an adjustment of its peg to the euro. The message spread virally, urging people to sell the Lats, the currency, and to buy euros or dollars instead. Queues formed at Riga’s foreign exchange bureaux, which ran out of euros, intensifying a sense of crisis.
The peg to the euro held fast, but the uncertainty caused 3-month interbank rates to spike at 9% from a previous range of 3.5-4%. The central bank has intervened to support the Lats and raised interest rates. The security police say they have hauled in “bankers and workers from the money exchanges” for interrogation amid claims they perpetrated an attempt to destabilize the currency for personal profit. The results of the investigation will emerge after Easter.
This quirky, high-tech, rumour-driven saga highlights the increasing nervousness surrounding Latvia’s incredible 12% economic growth in 2006, and by extension the similarly high-octane performances of its Baltic neighbors, Estonia and Lithuania, up 11% and 8% respectively. The anxiety is readily explained by a heady combination of high growth, rising inflation, tightening labour markets, spiraling credit growth and large current account deficits in all three countries. Latvia’s current account deficit was 21.8% in 2006, Estonia’s 14.3%, and Lithuania’s 12%. Credit growth last year in Latvia was 57.6%, Estonia 35%, and Lithuania 56.6%.
Unsurprisingly given these numbers, the world’s leading credit rating agencies – Moody’s, Standard & Poor’s and Fitch – have stepped up their analysis of the Baltics and reached the same broad conclusion – they are showing signs of serious overheating and, as a result, the possibility of hard landings has escalated. More aggressive interpretations of the facts drew comparisons between the Baltics and the Asian economies before their crisis in 1997, reasoning that a hard landing in Latvia could trigger a contagion across the Baltics into countries such as Romania and Bulgaria.
While nobody dares rule this out, current thinking on this vibrant corner of northern Europe is more benevolent. The preferred comparison is with pre-euro Portugal, which experienced high growth, a pro-cyclical fiscal policy, rising inflation, a large current account deficit and rapid credit growth. When the cycle turned Portugal did not crash, but went into prolonged stagnation as overextended private sector balance sheets slowly adjusted.
The ratings agencies argue that the reason this is a more likely scenario for the Baltics is that all three economies have shown fiscal discipline with low levels of public debt and strong government finances. The amount of local currency debt held by foreigners is low and the banking system is almost entirely controlled by foreign banks, mainly Swedish. Moody’s emphasises that all three economies are members of the EU and pending euro members. “The comparison with Asia 1997 is misleading. It ignores the nature of EU integration, which lends support to a realistic real income convergence scenario and reduces considerably the risk of a sudden halt to external financing.”
While there are reasons to be cautious, the strangely good news for the booming economies of Latvia, Estonia and Lithuania is that if their politicians fail to implement proper policies to cool growth, they will probably face a Portuguese-style period of slow and painful economic adjustment – hardly an enticing scenario, but better than a full blown crash.Link here.
U.S. TELECOM TYCOON STARTS 9-YEAR JAIL TERM FOR TAX EVASION
Convoluted offshore structuring scheme unraveled. Sentence is longest ever handed out for tax evasion.
Walter C. Anderson, the telecommunications tycoon accused of evading $200 million in U.S. taxes, has been jailed for nine years by a federal judge in Washington D.C. – the longest sentence ever handed out for a case of tax evasion in the country’s history.
Anderson, who formed Mid-Atlantic Telecom when the industry was being deregulated in the 1980s, was accused of two counts of tax evasion and one count of failing to report $365 million in personal income in 1998 and 1999. He pleaded guilty to the charges in September 2006. Anderson was arrested in February 2005 at Washington Dulles airport while stepping off of a plane from London after an investigation unraveled a complex set of offshore entities, banks accounts and transactions designed to conceal income earned from his interest in companies he owned.
According to the Department of Justice, in October 1992, Anderson formed an offshore corporation named Gold & Appel Transfer in the British Virgin Islands (BVI) and hired a trust company to serve as Gold & Appel’s registered agent and sole director. Gold & Appel was said to be owned by another BVI company, Icomnet, previously formed by Anderson. Prosecutors believe that Anderson granted himself an exclusive option to purchase Gold & Appel shares for a nominal sum, insuring that no one else could own these remaining shares. By forming the corporations in that manner, neither the option nor Anderson’s name was recorded in the BVI’s public records. Prosecutors said that as a result, Anderson hid his ownership of the corporations that held these assets, but was still able to maintain complete control.
After other merger activity with telecommunications companies he owned, Anderson was said to have further obscured his ownership of Gold & Appel, by using an alias and forming another offshore corporation – Iceberg Transport, S.A. – in Panama. To disguise his ownership of this company, the DoJ said that Iceberg was created as a “bearer share” company, meaning that, unlike U.S. corporations, there was no central registry information on the company. Therefore, whoever had physical control over the actual share certificates was considered the owner.
Anderson allegedly received the shares, using his alias, in a mailbox drop in Amsterdam. Once he set up Iceberg, Anderson was then said to have directed the transfer of shares of Gold & Appel to Iceberg, and represented that Iceberg owned Gold & Appel. Anderson then hired a trust company and its employees to serve as registered agent for the company and as officers and directors of Iceberg, ensuring that he had complete control over it.
According to prosecutors, between October 1992 and July 1996 Anderson transferred his ownership interests in three telecommunications companies to Gold & Appel and Iceberg. In this way, when appreciated stock was sold, or other taxable events occurred, Gold & Appel and Iceberg not Anderson would appear to be the taxpayer. After these transfers were made, each of these telecommunication corporations became dramatically more valuable. Between 1995 and 1999, Anderson used the assets of Gold & Appel and Iceberg, which included the profits realized from these three telecommunication corporations, to invest in other business ventures. This generated more than $450 million in earnings for Gold & Appel and Iceberg during this period.
Anderson was also charged with evading taxes in the District of Columbia and had claimed residency in the state of Florida, which does not levy income tax. Initially facing an 80-year prison term, Anderson will serve nine years under the terms of his plea agreement. Somewhat controversially however, U.S. District Judge Paul L. Friedman ruled that Anderson will not have to make restitution to the IRS of up to $140 million in unpaid tax because of a “poorly drafted” plea agreement. But Anderson was ordered by Friedman to pay $22 million in unpaid tax back the D.C. governmen, although this was only about half of the amount he actually owed.
Before the trial, Anderson had argued that the millions in assets that the government claimed belonged to him were actually in the ownership of the Smaller World Foundation, a charity he set up to promote causes such as world peace, family planning and space exploration. He has since declared personal bankruptcy and the government has been unable to seize any assets to repay the taxes Anderson evaded.Link here.
WHO WOULD BELIEVE?
On January 2nd of 1900, the Dow Jones Industrial Average closed at 68. If you had told those living at that time that in one generation Americans would be driving automobiles and that the world would be looking back on a war in which the Allied Forces consumed 12,000 barrels of oil a day, who would have believed you? On September 3rd of 1929, the Dow closed at 381. If you had told those living at that time that on July 6th of 1932, the Dow would close at 44 – lower than its value on January 2nd of 1900 – who would have believed you?
After hitting 991 in January of 1966, 13 years later, in August of 1979, the Dow closed at 885, and Business Week wrote a piece titled, “The Death of Equities”. If you had told those living at that time that the next generation would be surfing the web from their personal computers, who would have believed you? Who would have believed that median U.S. home prices would go from $64,000, in 1979, to $257,000, in March of 2006?
On February 20th, 2007, the Dow closed at an all time high of 12,786. One week later, the Dow saw its worst one-day loss in 7 years, outside of 9-11. So, was February 27th a worldwide wakeup call for investors or just one more bump on the road to higher markets? While we wait to see what happens, we must contend with the fact that, collectively, we have a poor track record of foreseeing substantial changes in the future. Time and again, history shows the circumstances that have led to manias and the attendant aftermath of these episodes. In fact, the record is so replete, that we must consider how large of a role denial has played in financial history. The headlines and media coverage after Tuesday, February 27th, only serve to exemplify this trend.
Though it has been around since the 1640s, little has been written on short selling. And, while many institutional players have had access to this tool through the hedge fund world, few people actually understand its value to investors. As recent events have caused some to consider the possibility that markets have a downside, I have decided to take this opportunity to revisit one of the managers that I interviewed for Riders on the Storm: Short Selling in Contrary Winds. As attested to by the Strunk Short Index, Robert B. Lang, Chairman and CEO of Lang Asset Management, is one of seven dedicated short-only managers in the U.S. at this time. I recently had the opportunity to ask Mr. Lang the following three questions.
(1) Dedicated short-sellers are extremely rare in our financial markets. Can you share some of your background and perhaps some of the experiences that led you to establish a short-only strategy?
Bob Lang: I started in the business in 1959, have managed portfolios since 1964, and started my own firm in 1980. I remember when the markets were bottoming in the mid-70s ... I remember calling prospects and telling them P/E (price-to-earnings) ratios were down to 7 or 8, dividend yields were better than 6%, and that the market had likely bottomed so I thought it was a good time to start buying. There was absolutely no interest. Well, times have certainly changed.
Though, I have historically operated on the long side of the markets, during the latter part of the 1990s, I could tell that the activities on Wall Street were becoming much more speculative. Security analysts were no longer performing their traditional roles as independent thinkers. They would just take the information given to them by the companies they covered and parrot it. Wall Street lost its way in a bullish tsunami. Since I had experienced multiple investment cycles, it became apparent that a significant opportunity was developing for contrarians ... it was time to move to the short side of the markets.
Since most participants have only experienced stocks going up, a bearish view was, and is, extremely unpopular. Only a handful of investors understand the bigger picture. Stocks are subject to cycles. One generation grows up with the understanding that stocks always rise. Finally, the market declines and a lot of people get hurt and the next generation look at stocks with contempt. So unless an individual investor is made aware of this pattern, they are inclined to go along with the current prevailing opinion. After the fact, that is once a decline unfolds, that decline becomes obvious in hindsight. But until then, most find it extremely difficult to “fight the crowd.”
(2) Since most investors have no experience with short selling, can you give us some basic lessons on how short selling works?
Bob Lang: Most investors buy stocks hoping that the price will rise. Short sellers, like Lang Asset Management, anticipate making a profit from declining prices. Expecting a drop in price, we sell the stock, and buy it back later at a lower price. The difference is our profit. How can you sell a stock that you do not own? When you sell a stock short, the broker lends you the shares from a buyer, who previously approved such an arrangement, and “delivers” them to you. As a short seller, you immediately sell the borrowed 100 shares. Later, when you buy the stock back (otherwise called covering), the broker returns the shares to the buyer, and all is settled.
Of course the stock could go up after you sell it, instead of down as you were expecting. You decide to buy the stock back (“cover” your short) in order to minimize your losses. You buy the shares back, and you have lost the difference between you sale and your purchase. The net result is not all that different from a situation where you had bought the stock, watched it decline, and then sold it. Unless the broker “calls” the stock back because he must return the borrowed shares to the owner for some reason, there is no limit on the amount of time you may remain short. But, having a stock called away is a highly unusual situation which usually only occurs with stocks that have a low level of liquidity. There are a few stocks that the broker cannot obtain, and in such cases, you may not short that particular stock.
There are only a very few pure short sellers, probably measured in the single digits, vs. many thousands of mutual funds and hedge funds. In my opinion, this endeavor requires a special aptitude, which is not easily transferable from the long side (without considerable experience).
(3) How does the client benefit?
Bob Lang: The same way one benefits if a stock rises. Most investors buy stocks hoping they will increase. The short seller makes a profit when the stock declines. When an overvalued market turns down, by definition most stocks decline, and portfolios that are short, increase in value. So, not only does the client not lose money, but by implementing this “hedging” strategy, he or she actually profits. Typically, as a measure of diversification, short selling is only done with a portion of a client’s total assets.
Unfortunately, millions of investors will never heed the words of Bob Lang or an article like this one. They continue to see warnings in their everyday lives, but take comfort in the fact that their friends and advisors are all doing the same thing. They ignore reality and trust theories that have worked well (for the last 3 decades) in an ever-expanding sea of credit. So why do most individuals, maybe even those reading this article, never take steps to protect their capital from a bear market?
In answering this question, I turn to a professor of geology at UCLA. As an evolutionary biologist, biogeographer, and Pulitzer Prize winning author, Dr. Jared Diamond addresses the “it can’t break” mindset in a story about individuals who live below a dam. According to Diamond, attitude pollsters ask people who live downstream from the dam how concerned they are about the possibility of the dam bursting. Naturally, those that live further away from the dam are less concerned about the dam breaking that those that live closer to it. But shockingly, from a few miles below the dam, where one would assume the fear would be the greatest, as we approach the dam, the concern about the dam breaking falls off to zero. Why?
Diamond notes that those that live closest to the dam, who are sure to drown if the dam breaks, must believe that the dam could not break in order to preserve their own sanity. This ability to suppress or deny thoughts that cause us great pain is known as psychological denial. Diamond suggests that this behavior, common to individuals, could apply to groups as well. The only way that investors will be able to take constructive financial steps before this credit cycle contracts, is to step outside of the powerful forces of the herd. From here, they can begin to address the unpleasant reality of that which is currently unfolding and how we got here. Denial will only lead to unnecessary losses and increased pain.Link here.
SHOULD YOU STILL BUY VALUE STOCKS?
After a 7-year run value stocks are pricier than ever. When it is Jeremy Grantham saying that, it is time to think about buying growth stocks instead.
At the end of the 20th century some starry-eyed investors spied the dawn of a new paradigm. Technology, productivity and the Internet knew no bounds, and so it was impossible to pay too much for a stock like Amazon.com or Cisco. Meanwhile, value stocks – those trading at low multiples of sales or book value – languished.
Today the situation has reversed. Everyone, it seems, is a fan of value. What does that tell you? Probably that you should sell value stocks and buy something else – namely, growth stocks. You pay extra, of course, for companies with better prospects, but not much extra. In today’s market, traditional growth companies like Microsoft and Johnson & Johnson are comparative bargains.
For evidence that value stocks are overbought we can find no better witness than Jeremy Grantham, a famous fan of the genre. A fan, that is, when value is indeed cheap. But it is not cheap now, he says. Grantham is the professorial chairman of Boston money management firm GMO. He knows from experience that growth and value spurts tend to run in 5- to 7-year cycles, and it is time for a change. “The last time one market segment won this consistently was growth’s final run from 1999 into early 2000,” he says. “And we don’t have to tell you how that party ended.”Link here.
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