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OFFSHORE TAX BREAKS, LOW SETUP COSTS, INFRASTRUCTURE LURE HEDGE FUND MANAGERS TO CAYMANS
William Grayson, the president of EGM Capital, a hedge fund firm in San Francisco, has never set foot on the Cayman Islands, but he knows that sun-baked Caribbean haven quite well. That is because he set up one of his funds in the Caymans, where lucrative tax breaks and fabled financial secrecy have made this British territory a magnet for hedge fund managers. “All of the offshore jurisdictions are competing against each other to provide the most hospitable regulatory landscape, and the Caymans are really coming on strong,” Mr. Grayson says. “As a hedge fund manager, you just might be deciding whether you want to golf or scuba-dive more.”
In as little as two weeks, and for about $35,000 in fees, hedge funds can set up shop in the Caymans – just a fraction of the time and up to 1/10th the price of incorporating a fund in drearier climes like Delaware. While speed and bargain prices are big attractions, the real draw, say analysts and Congressional investigators, are Caymans-based corporations and partnerships that allow major investors to avoid taxes of up to 35% that the IRS levies on unearned business income. Cayman tax laws also help American fund managers legally defer domestic taxes on their personal profits by channeling them offshore through their funds.
The biggest of the three islands that make up the Caymans, Grand Cayman, is only 22 miles long and, at its widest, 8 miles across. But the territory’s tax advantages have turned it into one of the linchpins of the estimated $1.5 trillion global hedge fund business. As recently as a decade ago, regulators and law enforcement officials regarded the Caymans, 480 miles south of Miami, as a hotbed for money laundering and other dubious financial schemes. Today, it is the corporate home for what the Cayman Islands Monetary Authority estimates to be three out of every four of the world’s hedge funds. “The thing that’s different about Cayman is that the regulators realize that hedge funds are a business, rather than just something to regulate,” says Michelle Kline, a principal at Genesee Investments, a hedge fund based in Bellevue, Washington.
For their part, Cayman officials, regulators and private-sector lawyers, bankers and accountants say that there is nothing illegitimate about how the territory supports offshore finance, and that it is a system that is unfairly tarred and much misunderstood by its critics.
The Caymans’ ascent as a hedge fund haven coincides with recent calls by American legislators for greater oversight and taxation of hedge funds as well as greater scrutiny of the tax status of private equity firms. As legislators like Senators Carl M. Levin, Democrat of Michigan, Charles E. Grassley, Republican of Iowa, and Max S. Baucus, Democrat of Montana, also make renewed calls for a broader crackdown on financial abuses in offshore tax havens, the Cayman government has continued spending heavily on high-profile lobbyists, public relations firms and well-connected lawyers to persuade the world’s senior financial officials and regulators that the Caymans has outgrown its past as a center of financial high jinks.
A Treasury Department spokesman declined to comment on specifics, but said that the agency “is concerned about abuses offshore and in keeping open channels of communication.” While much of the hedge-fund rush to the Caymans involves taking advantage of tax structures that are well within the law, some veteran financial experts say they worry that the number of hedge-fund entrants there may tempt some to operate outside the law.Link here.
THE RIGHT TO SURRENDER U.S. CITIZENSHIP
As a national political issue, expatriation is hardly new. In the Foreign Investors Tax Act of 1966, Congress decided to make an issue of expatriation. Lawmakers tried to impose onerous taxes on exiting wealthy Americans who relinquished their U.S. citizenship “with the principal purpose of avoiding” U.S. taxes, a highly subjective intention that was virtually impossible to prove. The IRS could not prove such “intent” and very rarely even tried.
A 1996 anti-expatriation law inspired by a Forbes article asserts limited U.S. tax jurisdiction for a period of 10 years over persons who renounce their U.S. citizenship “with the principal purpose of avoiding U.S. taxes.” Also covered by this law are permanent resident aliens (“green card” holders) or anyone else who has resided in the U.S. for any eight of the preceding 15 years. Tax avoidance is presumed to be the true purpose if, at the time of expatriation, an expatriate’s net worth exceeds $2 million or he or she paid an annual tax bill exceeding $124,000 annually for the past five years. The figures that are indexed for inflation. However, with proper planning, it is relatively easy to avoid U.S. taxes during this 10-year period.
The lengths to which politicians will go to penalize expatriates is demonstrated by a never enforced provision of U.S. law, also enacted in 1996 that permits the Attorney General to bar from returning to the U.S. anyone who renounces their U.S. citizenship to avoid U.S. taxes. In this manner, Congress barred individuals exercising their legal right to avoid taxes along with narcotics traffickers, terrorists and those suffering communicable diseases. These Draconian laws not only involve retaliatory government acts against resistance to high taxes, but poses possible human rights violations guaranteed by others laws and even the U.N. Human Rights Charter. It is worth noting that the U.S. Supreme Court repeatedly has affirmed the right of U.S. citizens to end their citizenship as well as the right to enjoy dual citizenship.
In reality, this political frenzy probably reflects collective envy more than any sense of patriotism by Americans or their congressional representatives. Expatriation is not as serious a problem as some pretend. Fewer than 800 Americans, rich or poor, have formally given up their citizenship in recent years. Most expatriates surrender their U.S. citizenship because they are returning to their native land or marrying a non-U.S. citizen.
Long before you formally give up your U.S. citizenship, you should reorder your financial affairs in such a way as to remove from possible government control and taxation most, if not all, of your assets. Here are the steps you must take:
Tax expatriation – it is complicated, but it could save you millions in taxes.Link here.
U.S. TRUST INDUSTRY AWAITS SUPREME COURT TAX VERDICT
Deductibility of fees incurred by trust managers is at issue.
The U.S. Supreme Court has agreed to hear a case involving the deductibility of fees incurred by trust managers, with the verdict promising to have widespread ramifications for the U.S. trust industry. Oral arguments in the case are scheduled for December.
The case of Knight v. Commissioner of Internal Revenue, comes to the Supreme Court on appeal from the Second Circuit U.S. Court of Appeals in New York. The outcome of the case rests on whether the court decides that trustees may deduct fees paid to outside advisors in the course of managing assets in the trust, and if so, how much. Trustees may deduct fees, known as trustees’ commissions, for managing trusts, but the lower courts have been unable to agree whether fees paid to investment advisors such as banks are deductible. The issue is complicated by the fact that the law seems to be being applied differently across the states, with some allowing the trustee to fully deduct the outside advisory fee, and others arguing that the expenses do not qualify as above-the-line deductions, and are subject to the standard 2% miscellaneous deductions limitation, as stipulated in the Internal Revenue Code.
The case was brought by Michael Knight, trustee of the Rudkin Trust, who claimed a full deduction for the trust’s investment management fees based on an earlier Court of Appeals decision. However, he subsequently lost the case in the U.S. Tax Court, and an appeal to the Second Circuit was dismissed.
While the case is not anticipated to have a great effect on the U.S. trust industry in terms of lost business, the verdict is expected to reach far and wide in terms of how trustees and their accountants approach the issue of tax. “The issue is relevant to every single trust and estate that files an income tax return,” said Jeffrey N. Pennell, a law professor at Emory University in Atlanta. “The dollar amount may not be great in any given trust, but the applicability of the issue – it is everywhere.”Link here.
U.S. FEDS CAN SEIZE HALF OF HOUSE IN POT CASE
Court rules wife’s interest in house cannot be seized because of husband’s conviction.
A Connecticut woman who has maintained that she was not aware of her husband’s hobby of raising marijuana in the basement will get to keep her half of their house, a federal appeals court has ruled. The 2nd Circuit U.S. Court of Appeals ruled that Harold von Hofe has to forfeit his interest in the home to the federal government. However, his wife does not have to because she was not actively involved in her husband’s marijuana cultivation.
“The record is devoid of any evidence indicating her use of drugs or her involvement in any criminal activity whatsoever,” the appeals court wrote. The appeals court indicated that Kathleen von Hofe did know about the presence of the plants and did nothing to stop her husband’s “horticultural hobby,” but that her culpability falls at the low end of the scale.
Von Hofe and his wife were charged in 2001 after police raided their home and found 65 marijuana plants, glass smoking pipes and other items associated with growing marijuana in the basement. Harold von Hofe, formerly a high school teacher, admitted to raising marijuana for himself and to bartering the drug for home repairs, though he did not sell it. He pleaded guilty to manufacture or distribution of a controlled substance. Kathleen von Hofe, a nurse, pleaded guilty to possession of a controlled substance, though she told a jury that she only pleaded guilty to the misdemeanor to save her two sons, claiming local authorities had threatened to press charges against her sons if she did not enter a plea. Both avoided prison time and received suspended sentences and probation.
The federal government then moved to seize their property, a ranch home they have lived in since 1979 that is valued at $248,000. After a federal judge cleared the way for the house to be forfeited, the von Hofes appealed the decision, saying the forfeiture violated the Excessive Fines Clause of the Eighth Amendment to the Constitution. While affirming the forfeiture of Mr. von Hofe’s interest in the house, the Appeals Court vacated the forfeiture of Ms. von Hofe’s interest. “Not only would forfeiture extinguish her substantial equity,” the court wrote, “it would amount to an eviction, destroying her right to maintain control over [her] home, and to be free from governmental interference, ... a private interest of historic and continuing importance.”
The von Hofes’ attorney, Jonathan J. Einhorn, said a possible result is that Kathleen von Hofe will have to secure a mortgage for the government’s half-interest in her home. “We won the appeal for Kathleen, so she ends up owning half-interest with the government,” Einhorn said.Link here.
WALL STREET WANTS YOUR RETIREMENT PLAN
But you do not have to play by their rules.
The purveyors of investment pornography on T.V. keep saying how great the markets are. They are claiming that this market will be different this time. “This is not a bubble, and there is no way it can burst.” I get a really sick feeling in my stomach when I hear them say that, mostly because I know better.
So what does this have to do with your retirement plan? EVERYTHING!! Over the last few years, I have met too many individuals who lost 50%, 60% even 70% of their retirement plans when the last bubble burst. These individuals all had the best intentions, but many of them listened to their domestic brokers when it came to picking investments. That was their first mistake.
Wall Street always lobbies for your investment assets, and your retirement plan is one of their primary targets. They want you to pour your life savings into substandard equities and investment products. Quite simply, they want to control your money and make the most they can on it. Think about it. If you buy a piece of property in Panama with your IRA, how much does your stockbroker make on that deal? Not one penny. So he may tell you it is a bad investment, or you should invest your assets in “safer” investments. He may even tell you it is illegal to invest your retirement plan in offshore real estate. I have heard them all.
Last week, I heard one of the bigwigs for Merrill Lynch say “The expected 12 month return on the S&P 500 is 7%.” My first thought was, “Really – 7%? That’s it?” Once you strip away fees, inflation and the decreased purchasing power of the dollar, you are left with miserable returns. Possibly even negative returns! Plus, you have to consider the incredibly high levels of the market, which translates to additional risk.
Here is blunt and harsh truth. Wall Street has its own rules. And in their game they get to control all of your money. They do not want you to invest freely anywhere in the world. They only want you investing with them. That way they can make fees on an ongoing basis. Wall Street has set up your retirement plan so you can only pick from a basket of predefined mutual funds they offer. Never mind that 80% of all mutual funds and managers underperform the market. That means even if the market does go up 7% odds are you will not make that.
But you do have some options. I am happy to report that the U.S. government just changed rules for retirement plans. You can now invest even more freely with your retirement plan and you can make dramatically higher contributions.Link here.
SHORN ON THE FOURTH OF JULY
The history of taxation is mostly a history of rising taxes. It makes depressing reading. Tax increases tend to accelerate as the right to vote is extended to more people. It may take time for this process to be evident, but rarely does it take longer than one generation. In no nation has this process been more true than the U.S. Yet the history textbook writers have successfully told the story as if the reverse were true.
When I was in graduate school four decades ago, I wrote a paper on then-current academic opinion – the opinions of specialists in colonial American economic history – regarding the burden of colonial taxation in 1775, i.e., the cost of funding the British Empire. Here is what I found. The total tax burden imposed by the British Empire on the colonies in 1775, as distinguished from the taxes imposed by colonial legislatures, was approximately 1% of national income in the North, and about 2.5% in the South. The main burden was from customs duties placed on non-British imports into the colonies. These were tariffs, i.e., sales taxes on imports. Against this “intolerable tax tyranny” of 1%, the colonists were persuaded by political organizers to revolt. They fought and died for seven years. They won in 1783.
From 1783 until 1788, they enjoyed virtually tax-free living at the national level. The national government could only beg states to pay taxes voluntarily. They paid very few. This produced a growing economy and generally stable politics. This story has not yet filtered down into the American history textbooks.
After 1783, a small group of young men who had exercised national leadership during the Revolutionary era were discontented. State governments offered no opportunities for lasting fame. They also wanted a national government that could impose taxes that Americans would have to pay – an end to voluntarism. So, they organized a political convention in 1787 to change all this. They were successful. The voters supported the replacement of the Articles of Confederation. The new national government could impose customs duties and luxury sales taxes, most notably on whiskey.
Americans in 1788 chose to be taxed by their very own national government, which was nearby and powerful, despite the fact that they had fought a revolution against sales taxes on non-British imported goods, imposed by a distant government which had proven itself nearly impotent in collecting direct taxes in the colonies. The voters got what they wanted: national taxation with representation. George Washington in 1794 then got to command the largest military force of his career – 13,000 men. He led them into Western Pennsylvania to crush a tax revolt against the Federal whiskey tax. You say that you did not hear the story told in this way? Let me fill in some gaps. ...
When the textbook writers coined the phrase, “No taxation without representation,” they baptized its opposite, “Taxation with representation.” I am willing to make a deal with the IRS. I will give up my right to vote in U.S. elections if the Federal government will cut my taxes to 1%. I will even pay 2.5%, because I live in the South. How about you?Link here.
DON’T WAIT FOR A REGIME CHANGE. INVEST IN CUBA NOW
Last summer, while the dictator who has ruled for almost half a century lay hospitalized with intestinal problems, two men at the University of Miami started planning for the post-Castro era. Jorge Piñon, a former BP executive, and Jaime Suchlicki, former director of the university’s Research Institute for Cuban Studies, created the Cuba Business Roundtable to provide U.S. businesses with information they will need should America end its now 46-year-old embargo against the Castro regime. The group has 24 unidentified member companies. “We are telling people this will not be like eastern Europe,” Suchlicki says of a postembargo Cuba. “It is going to be gradual change.”
Prior to the 1961 embargo 80% of Cuba’s trade was with the U.S. Today the Netherlands and Canada are the two biggest recipients of Cuban exports (mostly metal ore, sugar and tobacco). Cuba imports petroleum, grain and electrical equipment from Venezuela and China. The U.S. is the only country that bars its citizens from doing business in Cuba and with Cuban entities.
With 11 million people Cuba is smaller than communist Vietnam, with 85 million people, and, of course, China, with 1.3 billion. And Cubans are too poor to buy most imported goods, limiting any initial postembargo market for consumer products. The per capita gross domestic product in 2006 was $3,900, according to U.S. government figures. “You are not going to have 20 Home Depots and 20 Wal-Marts,” Piñon says.
It is the location and natural resources that attract. Cuba gets 2 million visitors a year and will appeal to hotel companies and cruise operators, as well as to corporate farmers in need of equatorial sunshine. As for its resources, joint ventures in Cuba with the nickel and cobalt industries brought in $1.3 billion in 2005, while estimates of offshore oil reserves are at 5 billion barrels and of natural gas reserves at 10 trillion cubic feet.
Thomas J. Herzfeld started his Herzfeld Caribbean Basin Fund (NASDAQ: CUBA) in 1994, with the ticker CUBA (no coincidence). He put up $10 million and underwrote it through his brokerage firm. Nasdaq-listed shares of the closed-end fund, whose investments are primarily in U.S. stocks and companies in Mexico, the Cayman Islands and Panama, are down 11% this year to date but up 17% a year since inception. Morgan Stanley Capital International’s EAFE Index of foreign stocks shows has gained 12% a year since Herzfeld launched his fund. With $16 million in assets this tiny fund sells at a steep 36% premium to net assets. That alone makes it a bad buy; 3.4% in annual expenses is another reason to stay away.
But you can knock off the fund’s positions. The biggest: (1) Florida East Coast Industries (NYSE: FLA) is a holding company with interests in real estate and railroads. (2) Consolidated Water, a seawater-desalination plant operator. (3) Seaboard Corp. (AMEX: SEB), a pork and shipping firm. (4) Watsco (AMEX: WSO.B) sells air-conditioning, heating and refrigeration equipment. And (5) Royal Caribbean is a cruise line. Herzfeld tells investors that a postembargo Cuba is all about the ABCs: “A” for aircraft, air-conditioning, autos and agriculture; “B” for boats, buildings, boatyards and banking; and “C” for cigars, casinos and cement.
Florida East Coast fits none of those categories. Herzfeld likes it because it runs the main freight railroad between Jacksonville and Miami, a likely key line for goods in a postembargo Cuba. He thinks the company would operate a rail barge to and from Cuba, whose railroad gauge is the same as in the U.S. This stock sells for an expensive 57 times its Thomson IBES 2007 consensus earnings forecast.
Seaboard operates most of the container ships in the Caribbean and has a hand in the food business, so it is already positioned to take advantage of any increase in trade in the region. Herzfeld’s fund holds positions in two cruise companies: Royal Caribbean and Carnival. Roughly half the revenue of each operator comes from the Caribbean. Herzfeld says that revenue would double once access to Cuba was granted. Another holding, Trailer Bridge (NASDAQ: TRBR), is a trucking and marine-freight company that just won a deal to ship Ford vehicles to Puerto Rico. Trailer Bridge has only $112 million in latest 12-month revenues, but Herzfeld likes it because its ships have shallow drafts. Only 3 of Cuba’s 14 ports have water at least 65 feet deep.
While America sits on the sidelines, there are 258 foreign joint ventures and 115 cooperative production contracts currently in Cuba. Among these are Canada’s Sherritt International, which has invested more than $500 million in onshore oil and gas exploration. Oil companies from Spain, India, Malaysia and Norway, as well as Sherritt, now hold 16 offshore deepwater blocks off Cuba. Lloyd’s of London has been in the reinsurance business in Cuba, while Telecom Italia is a shareholder in Etecsa, Cuba’s national phone company.
“We are seeing the post-Castro era unfold right before our eyes,” says Kirby Jones, founder and president of the U.S. Cuba Trade Association. Its economy is a wreck, but Cuba’s location and resources have great potential.Link here.
INDIA’S OUTSOURCING SECTOR BOOSTED BY TAX RULING
Case involves business presence, transfer pricing, considerations.
India’s Supreme Court has said that outsourcing activities carried out by a unit of Morgan Stanley in India are not liable for Indian taxes, in a case that was being keenly watched by other major multinationals with operations in India. The Supreme Court was of the opinion that Morgan Stanley Advantage Services (MSAS) was not liable for tax in India since it was a back office processing unit, and did not constitute a permanent establishment in the country.
“There was no agency PE as the PE in India had no authority to enter into or conclude the contracts. The contracts would be entered in the U.S. The implementation of those contracts only to the extent of back office functions would be carried out in India,” the judgment stated. However, the court also said that the parent company would have to pay an appropriate “arms length” price to the Indian subsidiary, otherwise tax could be imposed.
The ruling is likely to be viewed with some relief by the numerous other multinational companies which have outsourced their back office and administrative functions to India. The outsourcing industry has been a boom sector for the Indian economy in recent years, but the tax authorities have been unsure on the tax status of such companies, known as “BPOs” (Business Process Outsourcing firms). Tax uncertainty was heightened when the Indian government notified firms in 2003 that a BPO would be liable for income tax on earnings which related to their parent company’s core business. The BPOs opposed the move, arguing that the services being provided were sold to foreign customers, and that therefore foreign firms should be liable for tax.Link here.
ARE PRIVACY AND ADVERTISING INCOMPATIBLE?
In “A Race to the Bottom: Privacy Ranking of Internet Service Companies”, Privacy International spray-paints the façades of landmark companies that line today’s Main Street on the Web. The painted colors are assessments of each company’s performance on privacy issues. Though the rankings are colorful, what they say is not pretty.
Nobody in the “interim rankings” (PDF) gets the top (green) mark for “Privacy-friendly and privacy enhancing”. The bottom (black) mark, for “Comprehensive consumer surveillance & entrenched hostility to privacy”, goes to just one company: Google. Here is the color-band system by which each service is rated:
|Privacy-friendly and privacy enhancing|
|Generally privacy-aware but in need of improvement|
|Generally aware of privacy rights, but demonstrate some notable lapses|
|Serious lapses in privacy practices|
|Substantial and comprehensive privacy threats|
|Comprehensive consumer surveillance & entrenched hostility to privacy|
None of the ranked companies were spared rebuke. As mentioned, no one earned a green mark. BBC, eBay, LastFM and Wikipedia were award blue marks. Yellow marks were awarded to Bebo, Amazon, Friendster, LinkedIn, LiveJournal, MySpace (“A mixed bag, with some strong protections and lot of ambiguities.”) and Skype (“Lack of contact details is problematic. Lack of openness about software capabilities is problematic.”). Orange, “Serious lapses in privacy practices”, mark companies included Microsoft (“Have embedded privacy into many product and service designs, but terrible track record ...”), Orkut, Xanga and You Tube (“Considering the size of YouTube and its owners, the vague information about sharing of personal information with affiliated companies leaves much to be desired.”)
Even further down the rankings, with red marks, were AOL, Apple, FaceBook, Hi5, Reunion.com (“Data sharing is dangerously vague. ... Historical ethics problems.”), Windows Live Spaces (“Uses almost every means identify users and track movements.”) and Yahoo (“Lack of information on search and IP data is problematic. Poor track record.”). In singling out Google for a black mark, PI comments, “Track history of ignoring privacy concerns. Every corporate announcement involves some new practice involving surveillance. Privacy officer tries to reach out but no indication that this has any effect on product and service design or delivery.”
Privacy International says, “We are increasingly concerned about the recent dynamics in the marketplace. While a number of companies have demonstrated integrity in handling personal information (and we have been surprised by the number of ‘social networking’ sites which are taking some of these issues quite seriously), we are witnessing an increased ‘race to the bottom’ in corporate surveillance of customers. Some companies are leading the charge through abusive and invasive profiling of their customers’ data. This trend is seen by even the most privacy friendly companies as creating competitive disadvantage to those who do not follow that trend, and in some cases to find new and more innovative ways to become even more surveillance-intensive.”
The idea here is not just to expose shortcomings, but to put pressure on these services. But one wonders ... why would all these companies suck so badly at respecting privacy? I believe there are two reasons: (1) Growth in adoption of advertising-based revenue model that Google pioneered, and now provides for millions of companies, and (2) Absence of privacy (or any) control on the user’s side other than refusal to cooperate. There is a failure of imagination around business models other than retailing and advertising. Especially advertising. There is a pile of money in advertising. Google is moving toward a de facto monopoly on the business, if it is not there already, with a market share of just under 50% and rising. Making advertising of this sort work best requires maximizing intelligence about users.
The second problem is that online privacy as we know it today is almost entirely at the grace of the vendors we deal with. The terms are theirs. We accept them or not, but that is about it. We cannot, for example, make a global assertion of anonymity to the world, and then selectively reveal pieces of identity information to vendors, on a private and need-to-know basis that we determine. For the most part we have those privileges when we shop at stores in the physical world. But in the online world we can be tagged and tracked like animals and never know it.
These conditions will stay out of our control as long as we continue to believe that markets are about supply chasing down and “capturing” demand. There has to be a better way – one that serves demand at least as well as it serves supply. Whatever that better way is, advertising is part of the problem, not the solution. Even as Google and others put millions more of us into business, it is still the advertising business. And that business is driven entirely by its supply side. Follow the money.
We cannot leave privacy solutions entirely up to large suppliers. We can only solve privacy problems by equipping individuals with better ways to control and reveal private information while also finding what they want in the networked world. Until we do that, Privacy International will still be ranking sites with colors other than green.
Patrick Peterson spent a year obsessively pursuing the criminals behind a giant spam attack. He never found them, but he learned a lot about fighting spam.
Patrick Peterson was at home in San Francisco on Memorial Day 2006, idly checking work e-mail, when he received an alarming message on his Palm Treo. Peterson heads technology at IronPort, which makes hardware and software that can block spam and virus-carrying e-mail before it hits corporate networks. The e-mail said that IronPort’s operations center was seeing spam activity like it never had before. The surge went on for two more weeks and turned out to be a single, coordinated blast – 20 billion messages in all – designed to drive gullible buyers to 14 e-commerce sites, like MyCanadianPharmacy.info and ExclusiveCaviarOnline.com, hawking fake Viagra, Rolexes and Russian caviar.
Peterson, who has been in Internet security for 7 years, figured it had to be the largest spam attack in history, likely the work of an organized crime ring out of eastern Europe. Estimates based partly on typical consumer response rates to spam offers peg this ring’s annual revenue at $100 million. “This was an entirely new level of sophistication,” says Peterson.
He started to obsess about who could produce such a spam onslaught without being detected. Then he dug a little. Then more. Then even more. So began the strangest and most frustrating year of Peterson’s 39-year-long life. In the course of his spam hunt he broke several laws, engaged the help of shadowy hackers, hid months of activity from his wife and boss, neglected work and ended up losing half his annual bonus. He contacted 20 agents in nine government agencies in the U.S., China, and India but failed to engage any of them in a serious quest for the culprits. In the end he never found out who did it. The only tangible evidence from his dive into the spammer’s world are 17 piles of paper on his office floor and an envelope stuffed with fake Viagra pills shipped from phony addresses in India and China.
Peterson joined the security industry wanting to be a hero. “In security, you can have big impact,” he says. His recent hunt was not a total waste of time. IronPort, which was acquired last month by Cisco for $830 million, has used tricks derived from his research to reinforce its filters against organized spam attacks. Peterson says knowing how the enemy operates makes him a better spam fighter.Link here.
GENERAL MOTORS’ MARKET LEADERSHIP HAS COME COURTESY OF THE PLUNGE PROTECTION TEAM
The powers that be are evidently more worried about the subprime mortgage crisis than they let on.
Two hedge funds, managed by Bear Stearns, are on the verge of liquidation due to making highly leveraged bets on securities backed by subprime mortgages. Bear Stearns’s woes have investors worried that any negative developments in the credit markets will also drag down the whole stock market – which has become quite volatile since the bad news from Bear Stearns surfaced. The ripple effects of the subprime-mortgage implosion will continue to roil the credit and stock markets, but is the subprime-mortgage bust truly large enough to drag down Wall Street with it? If the recent performance of GM’s stock is an indicator, the Working Group on Financial Markets (aka the Plunge Protection Team) is answering this question with a resounding “yes”.
As Karen De Coster and I asserted in our essay General Motors, Market Engineering, and “Confidence” Protection, the Working Group manipulates GM’s stock in order to prop up the Dow Jones Industrial Average so as to maintain investor confidence in the stock market, Wall Street, and the economy in general. Indeed, based upon our assertion, GM’s stock definitely has big shoes to fill. In light of GM’s stunning performance, during the exact period of Bear Stearns’ hedge fund catastrophes, the “General” is strutting up and down Wall Street as if he is Big Foot ... with members of the Plunge Protection Team peering from behind the curtain in delight.
This second quarter has been a barnburner for GM’s stock. Through this period, the DJIA was up by 8.5% while GM was up by nearly 23%. Talk about market leadership. During the trading week of June 25th, when Wall Street was really feeling the heat of the Bear Stearns meltdown, GM’s stock closed the week up by 6.6%. The General is fearlessly spearheading the market’s charge upward. Moreover, during this hard-charging week, GM’s stock hit a 52-week high which tallies up to nearly a 43% gain from its 52-week low. GM most certainly served to steady a jittery stock market.
Interestingly enough, this magical week began with an upgrade from a Wall Street brokerage powerhouse. On June 25th, Goldman Sachs analyst Robert Barry put out a “buy” recommendation on General Motors citing his rather dull insight that “GM can make a compelling case to UAW members that material wage and benefit cuts are needed ... And we suspect members and retirees are increasingly amenable to such cuts.” The less than awe-inspiring recommendation was much less important than putting the prestige of Goldman Sachs’ name behind GM’s stock. And this is where, in my opinion, the heavy hand of the Plunge Protection Team has been exposed yet again.
So let’s connect a few important dots here. For openers, the four key members of the Plunge Protection Team (which reports directly to President Bush) are the Secretary of the Treasury, the Chairman of the Fed, the Chairman of the S.E.C., and the Chairman of the Commodity Futures Trading Commission. Henry M. Paulson is the current Secretary of the Treasury. Mr. Paulson used to be the Chairman and CEO of – you guessed it – Goldman Sachs. In light of this, it is highly plausible that Goldman Sachs’s buy recommendation was a political favor to help the Plunge Protection Team do damage control.
Now, let us look a little deeper into the company whose common stock Robert Barry so uninspiringly recommended to American investors ...Link here.
SURFING FINANCIAL CYCLES AND TRENDS TO SUCCESS
Recently, as I sat on the beach enjoying the warm southern California sun watching the surfers play in the waves, I began thinking how much surfing seems related to financial investing. The surfer, after paddling into the water, sits on his or her board and begins to study the waves coming in from the ocean. Knowing the large waves come in sets, the surfer is soon paddling down the face of a building wave. Once up on the board, the surfer surfs back and forth using the energy of the wave to maximize their potential. Then, as the wave begins to lose its energy, the surfer glides over the top and quickly paddles back out to catch the next big wave. Successful investing is in many ways very similar. It all comes down to understanding how investment waves work, which ones to catch, when to catch them, and when to get off.
This article is the third in a series aimed at providing thoughtful perspectives on protecting one’s self when it comes to investing and retiring either at home or abroad. The information is not designed to advocate investment strategies but provide educational information designed to assist readers in better understanding the financial world and making good decisions. The following discussion will explore two important aspects of investing and long-term financial success. First, the topic of financial cycles will be discussed using a historical perspective as a method of understanding how markets operate in cycles rather than in a linear fashion. The discussion will then move on to understanding current and future trends and how they can be used as a tool for positioning ourselves to succeed financially in the future. Finally the article will briefly reflect on the current cycles and trends and how they may affect us going forward.
The importance of understanding cycles.
The importance of understanding cycles can not be understated for the typical investor. If you asked the average investor, “what were the investment cycles of the past 50 years?” few if any would be able tell you. Our educational system does not teach this important information just as it often fails to prepare any of its students for the real financial world. In fact, much of the economic education we receive presents us with a linear view of the investment world. We are taught to believe that if we just keep investing “for the long-term” that in the end all will be fine and our portfolios will have been fruitful and multiplied. This mantra, designed and marketed by Wall Street and its brokers is great for assuring profits for themselves in good and bad times, but is it true for the average investor on the street?
The market is not linear but is in fact very cyclic. That the market is much like the seasons of the year with seasons of growth (Bull) and seasons of loss (Bear). It is by understanding the market as a cyclic entity that the investor can then act proactively to maximize and protect their financial nest egg. Much like the surfer who knows how to use the energy of the wave to maximize their ride and exit so as to not be crashed onto the shore. It is also important to remember that each of us have our own investment cycles as it relates to our life cycle.
By studying the markets from a historical perspective there seems to be about a 17 year cycle where particular strategies or investment classes will rise or fall. In the 50’s to mid 60’s stocks were king. From the 60’s to early 1980’s commodities became king and stocks tanked. In the late 70’s and through the 80’s the Nikkei became king as commodities crashed. Then from the 80’s through 2000 the stock market became king again. As you can see, understanding these cycles can greatly help you in maximizing investment returns. It can also help you to avoid being on the wrong side of a particular investment cycle as it relates to your life cycle.
Understanding cyclic downturns.
It is important to make a point about the nature of cyclic downturns and the common belief they are fast and hard – an event similar to the crash of 1987. The reality is Bear Markets tend to be long in duration with many deceptive upturns and downturns. This misunderstanding has led many an investor to stay in the market longer than they should have as it seemed (and they were told) the market had finally bottomed and was bouncing back. The bear market from 1966 to 1976 is a perfect example of a time when many investors stayed in stocks believing a bottom had been set and a new Bull was about to begin. Many investors lost 60% or more of their portfolio as they rode the bear all the way to the bottom. The commodities market of the early 1980’s is the same.
Trends are your friends ... maybe.
Even though the understanding of trends is important, it is not something many of do as part of our regular investment planning. When was the last time your financial advisor discussed the impact of Peak Oil on your portfolio? Or how the retiring of the Baby Boomers will affect stocks, bonds and real estate? Over the past few years I have posed similar questions to friends and family and found few have thought about such issues. Even fewer have ever had their financial advisors or brokers broach the topic. Generally, people rely on recent history in projecting forward their investment strategies. Having read the above section on cycles you can see how this might not be the best strategy.
Most of us are familiar with the old saying, usually offered up at the top of a bubble, that “this time it will be different.” We heard it in 2000 with the tech bubble when people said the stock markets would continue to rise a 20% a year for years into the future. Again, we heard this in 2005 with the housing bubble. The following discussion on trends will be presented under the caveat that this time it really is different. Each of the trends covered below are very different as we have never faced these issues in the history of mankind. We have never faced a world with 6.5 soon to be 9 billion people. We have never faced living with the truly finite resources of a small world with a huge population. We have never faced a world addicted to and dependent on an energy source that has peaked where demand will quickly outpace supply. We have never faced global warming or the ecosystem collapses we are now experiencing. And we have never faced a world in which our lives are dependent on a fragile global network where the failure of one link in this daisy chain can result in millions of people dying. As investors, and members of the web of life currently hurling through space on this little planet of ours, it is important to fully understand that things are really different this time. Unlike in the past (with the exception of nuclear war) this is the first time in history that our actions will affect both the planet and the lives of our children’s children.
The following trends are best described as macro in nature. Meaning they are very large scale and will impact the world not just for years but decades. By understanding these trends you can plan for the future both in making good investments and in protecting yourself and family. Many investors make the mistake of looking at trends over the short-term losing sight of the more powerful macro trends. A perfect example are those who purchased gold and silver early in this bull run. After watching the daily ups and downs many sold in fear as soon as the market jumped way up or way down. The daily, weekly or monthly volatility drove them crazy. By understanding the larger trends and looking at long-term charts, others saw the volatility for what it was and have continued to ride the metals bull to its current high. The moral of the story is to keep a focus on the big picture. So let us look at a number of important trends.
The trends are quite ominous and foreboding yet within them are a lot of great opportunities for those of us who are willing to take the time to educate ourselves to the cycles and trends and then position ourselves to benefit from them. It is not rocket science but mostly common sense. You probably already possess a streak of contrarian spirit so the fact that this will likely conflict with the information handed out by the mainstream financial world should not be a problem. It might be for family and friends.
I hope you will sit down and think about each of these trends as well as explore where we are at when it comes to cycles. I believe it will be obvious that as things move forward there will be much greater focus on true, real assets. Where in the past 20 years paper assets were king, a new cycle has now begun and, if the trends mentioned above have anything to do with it, should last for many years into the future.Link here.
IS THE GRASS GREENER?
A tour of Nicaragua and Honduras fails to make Isla Margarita natives envious.
A few months ago I decided to check the merits of Panama vs. Isla Margarita where I am now living. This time in my wanderlust and never ending quest for the perfect affordable retirement and vacation destination I checked out Central America, specifically Nicaragua and Honduras. Roy, one of my business partners, decided to join me on my journey.
We flew from Isla Margarita to Managua with a change of planes in Panama City. Our tour of Managua was interesting but unexciting. There are still many reminders of the Sandinista era that tore Nicaragua apart in the late ‘70s. Lake Managua is dead. It is extremely polluted. In one area there are lakeside restaurants and a small park. Why anyone would want to dine near a cesspool was beyond our imagination. Luckily the city water supply comes from the nearby mountains and reservoirs. Later in the afternoon Roy and I went to the bustling Artisan’s Market. We found a good variety of handicrafts for sale for reasonable prices.
After several days spent exploring Managua it was time to move on. Everyone we met said Grenada was very popular, so we hired a taxi for a trip there. It is one of the oldest cities in the Americas and on the edge of Lake Nicaragua. Now I have to admit that Grenada is pretty. It is a restored Colonial city and many of the huge old Colonial buildings have been turned into hotels, B&Bs, shops, restaurants and other businesses. The focal point of downtown Grenada is the plaza or the Parque Colon. It is the pride of the city and very clean. Everyone we encountered was very pleasant and not “pushy”. A variety of hotels and restaurants line the square. We found these to be adequate for a tourist city, and several were very good. Most seem to be run or owned by expats from all over the world.
As luck would have it, we “stumbled” on a great source of local information for Gringos – Wayne’s Zoom Bar (Locally called Wayne’s World). Wayne is an American expat who is a veritable font of information, and a nice guy, too. He knows everything from real estate prices to what the taxi fees should be. Roy and I spent many pleasant hours drinking cold Tona beer and learning about Nicaragua from Wayne and his customers. It seems the days of any “bargains” in real estate are over. Anything in Grenada is priced pretty high for Central America. A two story 3 bedroom house on the edge of town in a “borderline” neighborhood that needs lots of work was $140,000.
While the prices might not be too high for some, our mission was to investigate affordable options for middle income people. One major problem we found was the cost of electricity. To air condition a house the size of mine – 3 bedroom, 2 bath – on Isla Margarita is about $65 a month). In Nicaragua it would be $300 or more. That is why most hotels, restaurants, and businesses there have no air conditioning and use florescent or low watt light bulbs. Add that to the price of gasoline @ $3.50 a gallon and living starts to get expensive. We checked out a couple of local supermarkets. Prices on some specialty products were comparable to those in the U.S., but most prices were considerably lower.
Eventually we made it to San Juan, and it was almost worth the trip. San Juan del Sur is charming in a ‘40s-‘50s kind of way. It reminds me of Key West back in those days with the brightly painted clapboard houses, corrugated tin roofs and narrow streets. San Juan is popular with tourists, retirees and “snow birds”. As usual, the retirees are making the price of real estate rise rapidly. We were told that about 300 “foreigners” owned property there. The bay is beautiful. It is very picturesque and surrounded by some very expensive homes. We talked to several people and everyone mentioned the frequent power outages and other infrastructure problems that private developers were “working on”. To be fair this place will probably boom in the next few years if they ever fix the roads.
After 10 days in Nicaragua we decided that there was no comparison between our Isla and this country. So on to Honduras ... We arrived in Tegucigalpa around noon. The airplane descent into the mountains is something else! Next day we set out to explore the city. After the heat of Nicaragua the temperatures in the 80’s were very welcome. There is what could be a beautiful river running through the city, but it is full of trash and garbage.
Tegucigalpa is an interesting city because it is built on hills and mountainsides. There do not seem to be any building regulations at all. If you look at the nests of phone and power lines along the streets it looks like a ball of snakes. We contacted a realtor and he showed us 3 properties. One was a 2 bedroom furnished apartment with no pool for $90,000. It was not bad. The two other properties were new townhouses (3 bed, 3 bath) and the construction was some of the worst I have ever seen in all my travels. The price was insane – $175,000 for each. The traffic in Managua was bad, but was nothing compared to Tegucigalpa! Driving is a nightmare there and trying to cross the street was downright scary.
We had plans to visit the Bay Islands but after talking to some people in the hotel who were from there, we decided to give it a pass. They recounted several stories about going without power for days at a time and the infrastructure damage that resulted from Hurricane Mitch still has not been completely repaired. We learned that one American recently bought a 1.5 acre lot for $300,000 – just the lot, no electric, water, sewer, etc. It did have an ocean view. One man who has owned a small (8 room) hotel on Utola for 18 years said he pays 35 cents a kilowatt hour for electricity. On Roatan it is about 30 cents per kilowatt hour. He said he would go elsewhere, but he owns about 65 acres there and is waiting for the island to become more developed. Phone service is sometimes nonexistent, same with internet. Most people have generators, but fuel is over $3.00 a gallon. Considering these drawbacks, we both decided that we would not want to give up what comforts we have on Isla Margarita to live there, and as an investment opportunity we thought the Bay Islands were already overpriced.
The bottom line is, we actually have an extremely good life on Margarita. The infrastructure is very good and we see efforts to improve even more. The roads are good all over the island and we have the cheapest energy in all of the Americas, and the cheapest gasoline and diesel at about 10 cents a gallon. Drivers are more courteous here and the traffic is manageable. Liquor is inexpensive here. A bottle of decent Rum is $2.50 and beer is about 23 cents a bottle. Excellent shopping malls and food stores, real estate prices are still reasonable, no volcanoes, no hurricanes, and the most beautiful women in the world.Link here.
FBI SECRET SPYWARE TRACKS DOWN TEEN WHO MADE BOMB THREATS
FBI agents trying to track the source of e-mailed bomb threats against a Washington state high school last month sent the suspect a secret surveillance program designed to surreptitiously monitor him and report back to a government server, according to an FBI affidavit. The court filing offers the first public glimpse into the FBI’s long-suspected spyware capability, in which the FBI adopts techniques more common to online criminals.
The software was sent to the owner of an anonymous MySpace profile linked to bomb threats against Timberline High School near Seattle. The code led the FBI to 15-year-old Josh Glazebrook, a student at the school, who this week plead guilty to making bomb threats, identity theft and felony harassment. In an affidavit seeking a search warrant to use the software, FBI agent Norman Sanders describes the software as a “computer and internet protocol address verifier,” or CIPAV.
The full capabilities of the CIPAV are closely guarded secrets, but here is some of the data the malware collects from a computer immediately after infiltrating it, according to a bureau affidavit: IP address, MAC address of ethernet cards, list of open TCP and UDP ports, list of running programs, operating system type and serial number, registered user (and company name, if any) of the operating system, current logged-in user name, and the last visited URL. Once that data is gathered, the CIPAV begins secretly monitoring the computer’s internet use, logging every IP address to which the machine connects. All that information is sent over the internet to an FBI computer in Virginia.
The CIPAV then settles into a silent “pen register” mode, in which it lurks on the target computer and monitors its internet use, logging the IP address of every computer to which the machine connects for up to 60 days. The FBI has been known to use PC-spying technology since at least 1999, when a court ruled the bureau could break into reputed mobster Nicodemo Scarfo’s office to plant a covert keystroke logger on his computer. (See article summary immediately above.) But it was not until 2001 that the FBI’s plans to use hacker-style computer-intrusion techniques emerged. A report described an FBI program called “Magic Lantern” that uses deceptive e-mail attachments and operating-system vulnerabilities to infiltrate a target system.Link here.
WOMAN CONTENT LIVING IN 84-SQUARE FOOT DREAM HOME
Talk about down-sizing! One woman is living in a house that you really have to see to believe. “It’s 84 square feet, so roughly the size of a parking spot. Actually, smaller than a parking spot,” says Dee Williams, who decided it was time to move. She was living in a 1,500-square foot home in Portland, Oregon but decided the house was not small enough. Yes, small enough.
Dee built the tiny cabin herself out of salvaged material. She picked the door out of a dumpster and retrieved the floors from a house fire. Dee’s new tiny home sits in her friend’s backyard. “In exchange, I do work on their house,” she says. It takes Dee five steps, sometimes four, to get from one end of her house to the other. “Two steps through the kitchen and you are in my living room. Two steps into the living room, you bang into the wall.”
Two solar panels provide electricity. A tiny propane tank allows Dee to cook in her $10,000 home on wheels. Do her friends think the 44-year-old hazardous waste inspector is crazy? “[W]ell, they had some questions for me!” she says.
The obvious question is, why? “A simpler life, time, more money. I don’t have a mortgage. I don’t have a big utility bill,” Dee says. Her monthly heating bill in the winter is $6, less in the summer. “I’m able to offer money to my family if they need it, (and to) my friends if they need it,” says Dee.
To get to her bedroom, she walks up a step ladder to her loft. “Every night I look at the stars and watch it rain over and over again. So this is it. Not much to it,” says Dee. And that is the point. Not much to it. Simple. Small. A dream house tinier than a parking spot. “Right now there is nowhere else I want to be!”Link here.
“TO SERVE AND PROTECT” ... AND CONFISCATE YOUR WEALTH
Since the founding of the American republic, federal and state laws have allowed authorities to confiscate property from individuals who were NOT guilty of a crime, and indeed, are never accused of one. It only needs to be reasonably assumed that the property was involved in a crime. This concept of “guilty property” is known as “civil forfeiture”.
Today, the federal government uses civil forfeiture laws to confiscate billions of dollars of property each year. Property allegedly purchased with the proceeds of or “facilitating” criminal offenses committed under nearly 300 separate federal statutes may be forfeited. State and local forfeiture laws rake in billions more in additional revenues.
Civil forfeiture in U.S. law began in 1789, the same year that the Constitution was ratified. Congress enacted a series of statutes that authorized the confiscation of ships or their cargoes for failing to pay customs duties and engaging in piracy. Later these statutes were used to confiscate ships involved in slave trade. Since then, civil forfeiture laws have expanded to encompass not only ships and their cargoes, but to property connected to hundreds of federal offenses. These laws have been repeatedly upheld by the Supreme Court, which as early as 1827 declared that “guilty property” could be confiscated, even from individuals entirely innocent of any wrongdoing. In 1996, the Supreme Court upheld the same principle, affirming a Michigan statute allowing the civil forfeiture of any property involved in a crime, regardless of the owner’s culpability, or lack thereof.
Since 1984, federal civil forfeiture laws have permitted seizing agencies to retain the assets they confiscate. And under the federal “equitable sharing program”, state and local police authorities may confiscate assets under federal laws that permit them to retain up to 80% of the seized property’s value. This procedure bypasses state laws that provide a constitutional barrier against the confiscation of property without a criminal conviction. It also gets around the state laws that require forfeited assets to be used for purposes other than law enforcement, like education. Direct disbursement of forfeited revenues to law enforcement agencies badly distorts law enforcement priorities. But in 1989, the Supreme Court declared that the government has a legitimate financial interest in maximizing forfeiture to raise revenue.
Civil forfeiture laws also provide the government with unique procedural advantages. A seizure or asset freeze is authorized in an ex parte hearing (without the defendant or defendant’s lawyer being present) before a judge, magistrate or administrator. Except when real property is involved, the property owners need not be informed of this hearing, and thus may not attend it, much less contest the seizure. Civil forfeiture can also proceed without an arrest, never mind criminal conviction, of the property owner. One study estimates that 80% of civil forfeitures do not result in criminal conviction, while another study estimates that 90% of civil forfeitures are uncontested by the property owners.
Imagine that your son and his friends are having a friendly game of poker in your basement, while you are away from home. If that game violates a state or local anti-gambling ordinance, police may be able to “arrest” your house and then confiscate it, even though you knew nothing about the illegal activity. If your teenager borrows your car and uses it to transport any quantity of illegal drugs – even a single “joint” – it can be confiscated. And since property, not life or limb, is at issue, the government does not need to prove its case beyond a reasonable doubt.
Law enforcement agencies nationwide have become increasingly dependent on forfeited assets to supplement their budgets. And they are not hesitant to use extreme measures to get “their” money. In one terrifying incident in 2004, sheriff’s deputies in Campbell County, Tennessee tortured a criminal suspect until he agreed to sign a statement agreeing to turn over his assets to the county. They did not realize that the suspect’s wife was secretly recording the incident. While torture may not be an everyday occurrence in civil forfeiture cases, there are thousands of documented abuses of the procedure.
Such incidents should come as no surprise. Civil forfeiture creates a conflict of interest in which police must choose between two contradictory strategies. Either they reduce crime or generate revenue. Given that confiscating assets is more lucrative – and safer – than chasing possibly violent criminals, it is not surprising that the revenue generation model is increasingly being followed by law enforcement agencies nationwide.
And this is just the tip of the iceberg. Under the USA PATRIOT Act, civil forfeiture can occur in a secret hearing, in which you have no right to present your side of the story. The government can even offer evidence that would otherwise be inadmissible if a court finds that complying with the Federal Rules of Evidence would jeopardize national security, and deems the evidence “reliable”. Thanks to federal judges who seal the records of the pending cases, America knows little about these forfeitures, which in many cases have nothing to do with terrorism.
Still worse, civil forfeitures under the International Emergency Economic Powers Act occur in a secret administrative hearing, with the victim having no opportunity to contest the decision in court. In 2006, the Supreme Court upheld this procedure.
What you can do to “serve and protect” your assets.
What can be done? The just course of action would be to abolish civil forfeiture in all of its vile forms. Short of that outcome, banning secret forfeitures and requiring all evidence offered in civil forfeiture proceedings to be subject to the Federal Rules of Evidence would be a good start. Another crucial reform would be to prohibit seizing agencies from retaining the assets they confiscate. And all seizing agencies should be subject to an annual outside audit to determine exactly what they have done with the funds they have confiscated.
Until then, the best thing you can do is keep your assets as far away from any possible civil forfeiture. A good place to start is by housing part of your wealth offshore. For one thing, offshore investments avoid the U.S. asset tracking network that permits investigators to easily identify a potential defendant’s assets. They also make it more difficult to recover, as most countries will not enforce U.S. civil forfeiture laws.
If you have been the victim of a civil forfeiture, an excellent source of information is the non-profit organization Forfeiture Endangers American Rights.Link here.
SAN CARLOS DE BARILOCHE, ARGENTINA IS A GREAT PLACE TO RETIRE
A crash in the Argentine economy in 2001 created political instability for awhile. To get hard currency into the treasury a lot of the real estate in the San Martin to Bariloche to El Bolson area was sold to foreigners. Property was priced in dollars (that should have been a hint). Now that the “Crisis” is over, Argentina wants their real estate back. They have stopped granting titles to Americans. The law now requires a minimum of 2 years permanent residency (which follows 2-3 years of temporary residency) to apply for title (to a foreigner). But they are denying title to Americans no matter what their status.
The Real Estate agencies still say “No Problem. You can buy whatever you want.” If you buy a house or even a lot, you will lose all or most of your money. (This applies to the Bariloche area. There are other regions of Argetnina without such restrictions on foreigners buying property.) If your retirement plans are formulated around buying a house immediately think Chile, which has simple, legal, access to a registered title. Americans can buy real estate with a passport and a Chilean government issued “Rut” number. Scenery that would cost millions of dollars in Argentina is available in Chile for a lot less.
However, for me and many others Bariloche Argentina is the place I want to live. I will pay rent happily waiting (and hoping) someday things will change. A home is more than a house and a city is more than a collection of buildings and streets. There is an ambiance to Bariloche that goes past the hospitality and the snazzy architecture. There is an energy here at the meeting place of land and Lago. The mountains surrounding the landward side of town are barren, stark and impressive. The mountains along the Lake and on the other side are as wild as any you will ever see. The backdrop is stunning with streets appearing to end in the lake. This is the heart of Argentina. As an American, you compromise your plans, follow their rules, and get to live in a very special place. To me it is worth it.
No one wants to be socially isolated. For many potential expats the fear of being cut off in a country where you do not speak the language keeps people home. When you buy a new car, suddenly you notice every passing car of the same make or model. Similarly, travelers and expats notice other foreigners. Hearing someone speak English can start a conversation. The fact is, you will meet more (and more interesting) Americans in Bariloche than you will in your routine in the States. The beauty and exciting activities like chairlift rides to mountain tops create a naturally romantic atmosphere. Surrounded by people having a good time is ideal for forming friendships and romance. People used to take a cruise for a chance at romance. Bariloche provides the same atmosphere in a hundred ways and places.
San Carlos de Bariloche is the future home of many Americans. Escapees and retirees are settling into long-term rentals all around the Lakes District. With crime and religious conflicts leading to anti-immigrant backlash in Europe, many expats from the States and European countries are moving towards the Lakes District. Bariloche, already a sophisticated little city, becomes a richer place for the newcomers. The restrictions on owning property are healthy attempts to control and regulate the population growth, and maintain diversity. Americans will come, play by the new rules, to enjoy living in Bariloche.Link here.
THE MOST UNDERVALUED CURRENCIES IN THE WORLD ARE FOUND IN ASIA
Over the last 12 months, my colleague Jack Crooks and I have staunchly agreed that Asia’s currencies are hugely undervalued. And at some point in the not-too-distant future, the Asian bloc will muster some big gains versus the U.S. dollar and even the euro. The latest foreign exchange reserves statistics in Asia once again confirm this forecast. Asia’s reserves reached a staggering $3.52 trillion in June, an increase of $57.7 billion over May. Any way you measure these numbers, they are simply awesome and point to a major revaluation in the future versus most world currencies.
What is even more compelling is how cheap these currencies have become over the last five years versus the almighty euro, British pound and even the Brazilian real, one of the top-performing global currencies since 2003. Asia’s currencies have declined vis-à-vis all three currencies over the last several years and are absolutely cheap when measured against not just against the U.S. dollar, but versus most currencies in Europe and parts of Latin America. The cheapest of these regional units remains the Japanese yen, a principle funding currency for the carry-trade since this global economic expansion began in late 2002.
The Japanese yen is still trading at an all-time low versus the euro – massively oversold vs. the European single currency and trading at a 20-year versus a basket of major currencies. At some point, the yen will commence a historical rally that will simultaneously flush out the carry-trade. In my book, investors looking to hedge their portfolios from market chaos might want to buy yen as portfolio insurance. When this trend reverses, it will yield enormous profits as most other financial assets decline at the same time.Link here (scroll down).
THE HAND OF FINANCE
Beginning in early-January, “It’s All About Finance” has been the underlying theme of almost every one of this year’s bulletins. For me, the important unanswered questions inevitably relate back to my December 2000 presentation “How Could Irving Fisher Have Been So Wrong?” Why are so many caught bullish – and completely oblivious to escalating risk – at major tops? And why is it that booms and bull markets cannot endure indefinitely? Clearly, the vast majority are today convinced they can and will. We are witnessing why they cannot and will not.
Well, booms inevitably falter at The Hand of Finance. In this distant past the post-Bubble post-mortem would simplify the state of things to “the money went bad.” People had lost confidence and “ran” from banks and the stock market. The credit wheels had ground to a halt and the abundant liquidity that seemed as if it would always be readily available instead abruptly evaporated. Jump forward to today and perceptions have it that the Fed and global central bankers are waiting to ensure that confidence is maintained and liquidity remains always bountiful. We are apparently so much more enlightened today, especially with our sophisticated risk monitoring and mitigating systems. We have derivatives!
I have my somewhat different take on why credit-induced booms are destined for bust. Bubbles are sustained only by increasing quantities of credit creation – a rather simplistic proposition encompassing highly complex processes. Inevitably, the dilemma evolves (sometime late in the cycle) to the point where the quantity of requisite additional credit turns enormous – and the rapid financial expansion accelerates to breakneck speed. At the same time, the risk profile of the marginal (late-cycle) new loan deteriorates, while the major financial intermediaries (right along with the vast majority of market participants) are caught reaching too aggressively for perceived easy profits. Too much credit is financing speculative endeavors, highly inflated assets values, and enterprises that, at best, are economic only as long as boom-time conditions exist.
Underlying credit risk eventually succumbs to parabolic growth tendencies – as we have witnessed this past year. Yet one critical upshot of this dynamic is the associated (credit-induced) surge in overall system liquidity, especially in wild securities markets inflation. Naturally, this “monetary disorder” unfolds some number of years into the prosperous boom – after an entrenched inflationary bias has taken firm hold in the securities markets and the economy generally. Irving Fisher was making a fortune at the top. He was intoxicated by his inflating wealth and was as emboldened as the naysayers were fully discredited. Almost by cruel design, the credit bubble’s “terminal phase” is guaranteed to entrap those willing to subscribe to New Eras.
The unappreciated predicament of 1929 and today is risk intermediation. Dr. Bernanke refers to the study of the Great Depression as the “Holy Grail of economics”. He blames the “bubble poppers” and the Fed’s subsequent failure to create enough money. Conventional thinking has it that had the Fed only created $5 billion and filled the hole in bank capital, the devastating downturn could have been avoided. But the issue at the time was not, as conventional monetary economist believe today, the few billions necessary to recapitalize the banking system – but the ongoing tens of billions that would be required to sustain unsustainable credit bubble-induced inflated asset prices, inflated corporate profits, inflated earnings, and myriad worsening economic maladjustments.Link here (scroll down).
BEST FREE ANONYMOUS WEB SURFING SERVICES
There are lots of reasons folks have for wanting to surf anonymously, ranging from simple paranoia to possibly being murdered by a malevolent foreign government. Whatever the reasons, commercial services that offer anonymity are doing real well. However one of the best services, JAP, is totally free. In fact JAP is perhaps a little too good. That is why the German Police insisted in 2004 that a backdoor be put into the product to allow interception of child pornographers. This was done but subsequently removed as a result of court action by JAP.
An alternative to JAP is a system called Tor. It not only allows anonymous browsing but anonymous P2P, email, IM, and IRC chat as well. Given the U.S. Navy origin of Tor, the suspicion arises that this system may indeed have a permanent backdoor. However the source code is now publicly available so that suspicion can perhaps be set aside. More worrying was a raid by German police in September 2006 involving the seizing of some Tor servers in that country. Again, pedophiles were the supposed target, but who really knows.
Whatever, both JAP and Tor offer a level of secrecy that is better than many commercial systems though not watertight. However expect your surfing to slow down as you will be relayed through a chain of servers particularly with Tor which has been ground to a near standstill by BitTorrent users seeking to hide from the RIAA.
A recent development is the release of the XeroBank Browser, previously called TorPark, a special version of the Firefox browser that has been configured to work with the free Tor anonymizing service and run directly from a USB flash drive. You just plug in your USB stick to any PC with a USB port and Firefox V2 is automatically launched, set up for secure and private surfing. The most obvious application is internet cafes, public terminals or indeed any PC including your own where you do not want to leave any trace of your private surfing activities. Moreover, TorPark creates a secure encrypted connection between the PC you are using and the first Tor server. This allows you to safely transmit information without fear of interception. This makes it ideal for surfing on open Wi-Fi networks.Link here.
THE DECLINE OF WESTERN INCOMES
Recent negative earnings surprises by Pfizer and Caterpillar may indicate a new reality: The income premium for being a Westerner and having access to the centuries of Western intellectual property and business acumen may be sharply diminishing. We can all rejoice as poor and middle income countries are brought up to Western levels of affluence, but our rejoicing will presumably be sharply diminished if we come to realize that much of their gains may be at the expense of our children’s living standards.
The vision of the world of 2050 or 2100, in which the great majority of Third World peoples enjoy more or less Western living standards, has always been a but fuzzy. 30 years ago, if you had asked people to imagine the world of 2050, all but the most manically environmentalist would have envisaged Third World residents enjoying living standards comparable to those of current Westerners, while the affluent West had reached living standards that could currently be dreamed of only by an affluent few.
The more thoughtful would have recognized that there was simply not enough space for the squirearchical dream of robot servants for all, together with country houses and rolling parklands. However the 18th century customers of Capability Brown did not enjoy modern plumbing, found travel impossibly time-consuming and uncomfortable, and had a nasty tendency to die in childbirth at 30 or of flying gout at 50. 2100’s median Western real income of $250,000 or so would have to be spent differently, but the income itself seemed pretty assured, given the continuance of technological development.
That is no longer the case. Elite opinion remains wedded to globalization as the best of possible economic policies, and believes with fanatical devotion that David Ricardo’s Doctrine of Comparative Advantage will ensure that there will be no significant class of people, even in rich countries, who lose out because of it. However it is becoming increasingly obvious to the populace as a whole that globalization produces substantial numbers of losers, particularly among the less well educated inhabitants of Western countries. No amount of cheaper consumer goods will assuage your pain if you have been forced to exchange a $25 an hour factory job for a $8 an hour service job.
I have discussed previously the effect of outsourcing and international migration on living standards at the bottom of the scale. Here I want to examine the extent that the advantages which have traditionally kept Western countries affluent – in particular those of financial capital, intellectual capital and a near-monopoly on innovation – are all losing their power to differentiate living standards.Link here.
TAX-FREE IN THE RUST BELT
Looking for a retirement tax haven? Alternatives to Florida and Nevada beckon.
When John Jazdcyk retired in 2004 from his management job at a Green Bay, Wisconsin Procter & Gamble plant, he and his wife, Susan, debated whether to move full-time to their vacation home on Lake Mullet in Cheboygan, Michigan. Then they learned that Michigan exempts $81,840 a year in private retirement income per couple, in addition to Social Security, from its 3.9% state income tax. Wisconsin, by contrast, taxes private retirement payments, as it does salary and other income, at 5.6%. “Whenever taxes can be avoided, I feel better,” says new Michigan resident Jazdcyk.
The accepted wisdom is that tax-averse retirees should move to Florida or Nevada, which have no state income or estate taxes. But what if you do not worship the sun or relish a long-distance move? In recent years other states, too, have been lavishing tax goodies on retirees, including affluent ones. With a little research you might discover your own retirement tax haven is close to home.
Most states do not tax Social Security benefits. Three states with broad income taxes (Illinois, Mississippi and Pennsylvania) exempt all private and public pension payouts, including withdrawals from IRAs, from their taxes. More than a dozen other states exempt some annual dollar amount of seniors’ income – from private pensions, IRAs and sometimes other nonwage sources. With all these special breaks the best tax locale for a retiree is not necessarily the same as for a working stiff, particularly when high real estate levies in some income-tax-free states are considered, says Thomas Wetzel, president of Retirementliving.com, which tracks taxes by state. In addition to Florida and Nevada, seven states – Alaska, New Hampshire, South Dakota, Tennessee, Texas, Washington and Wyoming – have no broad income tax.
New Hampshire has no sales tax either, which would seem to make it an ideal New England retirement retreat. Except New Hampshire taxes investment income, as does Tennessee, which can be significant if your financial assets are mostly in nonretirement accounts. Worse, New Hampshire’s real estate taxes are among the highest in the nation, at a median 1.6% of home value, double that of Massachusetts.
Plan now for later.
Even if you are years away from hanging it up, it makes sense to consider taxes in your retirement planning now. “If your taxes are a lot lower, your retirement funds are going to go further,” reasons Don R. Weigandt, 60, a managing director at JPMorgan Private Bank in Los Angeles, who is considering following the well-worn trail to Nevada himself when he retires.
Stock options and deferred compensation require special handling since, if you move, your old state might pursue you for taxes on these – particularly if that old state is New York or California. Do you hold your employer’s stock in a workplace retirement account? It may be better to cash out the stock portion than to roll it into an IRA, since gains in employer stock are taxed at the lower federal capital gains rate, which now tops out at 15%. By contrast, withdrawals from a regular IRA are taxed as ordinary income, at a federal rate as high as 35%.
The Jazdcyks sold big blocks of P&G stock to take advantage of this provision and made sure to do so before leaving Green Bay. Why? Wisconsin exempts 60% of capital gains from tax, reducing the effective Wisconsin tax on gains to 2.6%, versus the 3.9% they now pay on long-term gains in Michigan.
Better-off seniors generally pay federal taxes on 85% of their Social Security benefits. But only 15 states still tax any of these benefits, and some of those are dropping or cutting their taxes. The greediest states? Seven that follow the feds in taxing up to 85% of Social Security benefits. Among the offenders are Minnesota, with a top state rate of 7.85%, and Rhode Island, at 9.9%.
You can now accumulate large amounts in a pretax retirement account while working in a high-tax state and then move to a state that does not tax pension withdrawals without worrying about tax collectors from your old state coming after you. In 1996 Congress ordered states to stop pursuing most former residents for taxes on pensions. This stops California from going after a former resident who is living in Nevada when he taps an IRA or draws a pension from Procter & Gamble. The 1996 law protected employees. Last year Congress extended it to cover former partners (e.g., lawyers and accountants), too. This does not keep your old state from taxing deferred compensation paid out to you in a lump sum. It does, however, protect deferred compensation received in equal installments over 10 years or more. If you retire to a state that provides a limited annual exemption for private pensions, try smoothing out your income to take maximum advantage of it.
Many states give old folks higher standard deductions or personal exemptions – for example, an extra $4,200 per couple exemption in Arizona and Michigan. Plus, a handful give seniors large breaks for income from virtually any investment. Georgians 62 and older may exclude from taxable income $60,000 per couple (rising to $70,000 per couple in 2008) of interest, dividends, capital gains, rents, pensions and annuities. Substantial deductions are also available to folks who contribute to 529 college savings plans, as many grandparents do. You can check on your own state at savingforcollege.com. (Deposits in these plans are not deductible on federal returns.)
40 states exempt a certain amount of the value of a resident’s primary home from real estate tax, and many of them provide an even larger exemption to old folks. So, too, do some local governments. While exemptions have been growing, they have not generally kept pace with fast-rising assessments, causing heartburn for real-estate-rich seniors. 23 states and D.C. impose their own estate or inheritance taxes on money left to anyone other than a spouse (see map). While the federal estate tax does not, generally, hit estates of $2 million or less, most of the state levies kick in at lower levels. Ohio, for example, exempts just $338,000 from its estate tax. New Jersey, Rhode Island and Wisconsin exempt $675,000. Nine other jurisdictions exempt $1 million. Pennsylvania imposes its quirky inheritance tax on every dollar not left to a spouse, with the rate dependent on who gets the money.
One problem in deciding where to move based on estate tax – particularly for youngish retirees – is that this politically charged tax is in flux in many states, just as it is in the federal tax law. Virginia’s estate tax expired in July. Wisconsin’s expires at the end of this year. Kansas’s tax is slated to disappear at the end of 2009. Michigan eliminated its estate tax in 1993 in part to stem the outflow of retirees. Now, to patch a budget deficit, Michigan’s Democratic governor has suggested reincarnating its death tax. If she does it threatens new resident John Jazdcyk. He just might move again.Link here.
SPEED KILLS (YOUR WALLET)
The Sneaky War on American Motorists
It was a beautiful afternoon in early autumn, and for an instant I mistook the brightly colored lights flashing in my rearview mirror for streaks of sunlight filtering through gently turning leaves. But only for an instant. Just past a curve on a steady downgrade a sign announced the end of the 55 mile-per-hour state speed limit and the beginning of the town 40. I hit the brakes but it was too late. That is the purpose of a speed trap. 62 in a 40, the policeman said.
Speeding tickets have always been a pain in the butt. You pay about $150, and if your insurance company chooses to be mean it uses the three fresh points on your license to justify a rate hike. In a recent legal transformation that has quietly gathered steam across the U.S., however, getting caught speeding has become far more traumatic.
A year before the incident related above, a state trooper had plucked me out of a cluster of vehicles on the Long Island Expressway, dinging me for 72 in a 55 (heavy volume had slowed traffic from its typical average of 80). That earned me a $185 fine plus six points – a point hike up from the long-standing three. A few months later the Department of Motor Vehicles sent me a letter notifying me that I owed an additional $300 – bringing the total fine to $485 – for a “driver responsibility assessment”. The 2004 law establishing the additional fees was passed in greater secrecy than the USA Patriot Act. Even this devourer of three newspapers a day had not heard of it.
My second ticket brought another letter billing me a second $300 driver responsibility assessment. But if I had plead guilty, New York would suspend my license for hitting the 12-point limit. I hired an attorney. I spent eight months and more than $2000 fighting the ticket in municipal court. My lawyers kept filing motions to delay my trial date until my cop would be away on vacation. Finally, the judge asked my attorneys what it would take to get my case off her docket. A deal was cut. I paid $850 in fines, plus the state assessment, and performed 25 hours of community service. I was allowed to pick between sorting trash at the recycling center and filing at the zoning board. You can guess which one I chose.
Final tally for two speeding tickets? $3,935. No wonder so many people drive around with suspended licenses! They cannot afford the fines.
Michigan charges $1,000 over the fine amount for driving 20 mph over the legal limit. New Jersey raises $130 million a year through supplemental state fines. Texas cashes in to the tune of $300 million. Other states, including Florida, are considering similar laws. The War on Speederists has reached its fastest boil in Virginia, where the extra fines can run over $2,500. Exceeding the posted speed limit by 20 mph, for example, earns motorists a $200 fine plus a $1,050 “civil remedial fee”. State legislators who sponsored Virginia’s stiff new penalties say they are out to make the roads safer, but admit that their main objective is funding highway repairs.
It is not just budget-mad Americans. Even the land of Mad Max and the Tasmanian Devil is getting tough on speeders. “Many people seem to believe that driving five, 10 or even 15 kilometers per hour over the limit is acceptable,” says Jim Cox, Infrastructure Minister for the Australian province of Tasmania. “For a pedestrian hit by a car, an additional [3 mph] can literally mean the difference between life and death.” Fines for speeding will be raised by 300%. OK, so speed kills. But when zealots like Cox say things like “research shows that even a one km/hour reduction in speed can result in a 3% reduction in crashes” you have got to wonder whether he has been smoking too much eucalyptus.
Virginia courts are bracing for an onslaught of angry drivers forced to fight their tickets. “For someone who is living near the poverty line, or even making $30,000,” said Fairfax attorney Todd G. Petit, draconian fees of over $1,000 have “a significant impact” that could lead to them losing their license and job. “It’s basically the Lawyer Full Employment Act,” chortled another happy member of the bar.
My friends have learned from my experience. Since every violation brings you a single ticket away from license revocation, challenging them in court is the smart way to go. Though the correlation between speeding and highway fatality rates is well established, fining speeders more than drugged drivers is disproportionate to the social impact of the offense. On the other hand, there is no denying the deterrent effect. I pay a lot more attention to speed limit signs.Link here.
RELIGION AND THE ARTS IN AMERICA
At this moment in America, religion and politics are at a flash point. Conservative Christians deplore the left-wing bias of the mainstream media and the saturation of popular culture by sex and violence and are promoting strategies such as faith-based home-schooling to protect children from the chaotic moral relativism of a secular society. Liberals in turn condemn the meddling by Christian fundamentalists in politics, notably in regard to abortion and gay civil rights or the Mideast, where biblical assumptions, it is claimed, have shaped U.S. policy. There is vicious mutual recrimination, with believers caricatured as paranoid, apocalyptic crusaders who view America’s global mission as divinely inspired, while liberals are portrayed as narcissistic hedonists and godless elitists, relics of the unpatriotic, permissive 1960s.
A primary arena for the conservative-liberal wars has been the arts. While leading conservative voices defend the traditional Anglo-American literary canon, which has been under challenge and in flux for 40 years, American conservatives on the whole, outside of the New Criterion magazine, have shown little interest in the arts, except to promulgate a theory of art as moral improvement that was discarded with the Victorian era at the birth of modernism. Liberals, on the other hand, have been too content with the high visibility of the arts in metropolitan centers, which comprise only a fraction of America. Furthermore, liberals have been complacent about the viability of secular humanism as a sustaining creed for the young.
Liberals have also done little to reverse the scandalous decline in urban public education or to protest the crazed system of our grotesquely overpriced, cafeteria-style higher education, which for 30 years was infested by sterile and now fading poststructuralism and postmodernism. The state of the humanities in the U.S. can be measured by present achievement. Would anyone seriously argue that the fine arts or even popular culture is enjoying a period of high originality and creativity? American genius currently resides in technology and design. The younger generation, with its mastery of video games and its facility for ever-evolving gadgetry, has massively shifted to the Web for information and entertainment.
I would argue that the route to a renaissance of the American fine arts lies through religion. Let me make my premises clear. I am a professed atheist and a pro-choice libertarian Democrat. But based on my college experiences in the 1960s, when interest in Hinduism and Buddhism was intense, I have been calling for nearly two decades for massive educational reform that would put the study of comparative religion at the center of the university curriculum. Though I shared the exasperation of my generation with the moralism and prudery of organized religion, I view each world religion, including Judeo-Christianity and Islam, as a complex symbol system, a metaphysical lens through which we can see the vastness and sublimity of the universe.
Knowledge of the Bible, one of the West’s foundational texts, is dangerously waning among aspiring young artists and writers. When a society becomes all-consumed in the provincial minutiae of partisan politics (as has happened in the U.S. over the past 20 years), all perspective is lost. Great art can be made out of love for religion as well as rebellion against it. But a totally secularized society with contempt for religion sinks into materialism and self-absorption and gradually goes slack, without leaving an artistic legacy.
For the fine arts to revive, they must recover their spiritual center. Profaning the iconography of other people’s faiths is boring and adolescent. The New Age movement, to which I belong, was a distillation of the 1960s’ multicultural attraction to world religions, but it has failed thus far to produce important work in the visual arts. The search for spiritual meaning has been registering in popular culture instead through science fiction, as in George Lucas’s six-film Star Wars saga, with its evocative master myth of the “Force”. But technology for its own sake is never enough. It will always require supplementation through cultivation in the arts.
To fully appreciate world art, one must learn how to respond to religious expression in all its forms. Art began as religion in prehistory. It does not require belief to be moved by a sacred shrine, icon, or scripture. Hence art lovers, even when as citizens they stoutly defend democratic institutions against religious intrusion, should always speak with respect of religion. Conservatives, on the other hand, need to expand their parched and narrow view of culture. Every vibrant civilization welcomes and nurtures the arts.
Progressives must start recognizing the spiritual poverty of contemporary secular humanism and reexamine the way that liberalism too often now automatically defines human aspiration and human happiness in reductively economic terms. If conservatives are serious about educational standards, they must support the teaching of art history in primary school – which means conservatives have to get over their phobia about the nude, which has been a symbol of Western art and Western individualism and freedom since the Greeks invented democracy. Without compromise, we are heading for a soulless future. But when set against the vast historical panorama, religion and art – whether in marriage or divorce – can reinvigorate American culture.Link here.
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