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Our March 15, 2007 Newsletter
Edition
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IN THE NEWS:
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GREENSPAN WARNS OF
U.S. RECESSION - Associated Press - February 26, 2007
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Alan Greenspan, the former chairman of the U.S. Federal Reserve, warned
Monday that the American economy might slip into recession by the end
of the year. Speaking to a business conference in Hong Kong,
Greenspan said that the U.S. economy had been expanding since 2001 and
that there were signs that the current economic cycle was coming to an
end. When you get this far away from a recession, invariably
forces build up for the next recession, and indeed we are beginning to
see that sign, Greenspan said via a satellite link. He cited the
stabilization of profit margins as an early sign we are in the later
stages of a cycle. While, yes, it is possible we can get a
recession in the latter months of 2007, most forecasters are not making
that judgment, he said. Rather than predict when the next shock
would occur, Greenspan said, policy makers should create a global
environment in which economies are capable of absorbing unforeseen
events. He noted that the investor appetite for risk had led to
low risk premiums on financial assets, which could pose problems in the
future. We do not and cannot look into history without being very
concerned when you see the absence of awareness and concern about risk
that we see today, Greenspan said. Housing starts in the United
States are down quite sharply, which is implicitly creating a reduction
in the very high inventories of new unsold homes, he said.
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http://www.iht.com/articles/2007/02/26/business/gspan.php
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EDITORS NOTES:
So, Al is now claiming we have a recession coming, but funny how he
forgot to mention the recession that happened round about 2002-2003,
which was answered by running the printing presses under his
tutelage. Certainly there already has been much speculation as to
a return of the so-called stagflation of the seventies (higher interest
rates, inflation, stagnant economy, etc.). I guess we will have
to wait and see. Regardless, you may find the following recent
book of interest: BUBBLE MAN - Alan Greenspan and the Missing 7
Trillion Dollars - Published in 2006 By Peter Hartcher.
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But not be outdone by his former colleague, current Federal Reserve
Bank Chairman, Mr. Ben Bernanke, had the following to say to the US
House of Representatives (Congress) Committee on the Budget, on Feb.
28, 2007:
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Unfortunately, we are experiencing what seems likely to be the calm
before the storm. In fiscal 2006, federal spending for Social Security,
Medicare, and Medicaid together totaled about 40% of federal
expenditures, or 8½% of GDP. By 2030, the
federal budget
deficit will approach 9% of GDP - more than four times greater as a
share of GDP than the deficit in fiscal year 2006. The ratio of
federal debt held by the public to GDP would climb from 37% currently
to roughly 100% in 2030 and would continue to grow exponentially after
that. The only time in U.S. history that the debt-to-GDP ratio has been
in the neighborhood of 100% was during World War II. People at that
time understood the situation to be temporary and expected deficits and
the debt-to-GDP ratio to fall rapidly after the war, as in fact they
did. In contrast, under the scenario I have been discussing, the
debt-to-GDP ratio would rise far into the future at an accelerating
rate. Ultimately, this expansion of debt would spark a fiscal crisis,
which could be addressed only by very sharp spending cuts or tax
increases, or both. The prospect of growing fiscal
imbalances and their economic consequences also raises essential
questions of intergenerational fairness. As I have noted, because
of increasing life expectancy and the decline in fertility, the number
of retirees that each worker will have to support in the future either
directly or indirectly through taxes paid to support government
programs will rise significantly. To the extent that federal budgetary
policies inhibit capital formation and increase our net liabilities to
foreigners, future generations of Americans will bear a growing burden
of the debt and experience slower growth in per-capita incomes than
would otherwise have been the case.
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CENTRAL BANKS
CUTTING HOLDINGS OF U.S. DOLLAR
Bloomberg News - February 26, 2007
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Central banks around the world are continuing to diversify their
reserves by cutting their dollar holdings, according to a survey
sponsored by Royal Bank of Scotland Group. Italy, Russia, Sweden
and Switzerland have made major adjustments in foreign-exchange
holdings favoring the euro and the pound, according to the poll, which
was conducted by Central Banking Publications between September and
December 2006. China also plans to manage its reserves more
actively, the report said. Central banks are open to saying
they've been diversifying to improve returns and reduce exposure to any
single currency, said Sean Callow, senior currency strategist at
Westpac Banking in Singapore. There's no doubt that when they say
diversification they mean selling dollars. Diversification of
official reserves could make it more difficult for the United States to
finance its current account deficit, the broadest measure of trade in
goods and services, and cause yields on U.S. Treasury securities to
rise. The dollar accounted for 65.6 percent of global currency
reserves in the third quarter, according to the International Monetary
Fund. The U.S. current account deficit widened to a record $255.6
billion in the third quarter of last year, according to the Commerce
Department. When a country runs a deficit in the current account,
it relies on overseas investment to offset a shortfall in savings. Net
purchases of U.S. stocks, notes and bonds by investors from abroad fell
to $15.6 billion in December, the lowest level in almost five years,
according to the Treasury Department. Nineteen of the 47 central
banks surveyed had cut their share of dollars, with 10 saying that they
had increased holdings of the U.S. currency. Twenty-one
respondents said they had increased their reserves of euros, compared
with seven who said they had reduced their holdings of the currency.
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http://www.iht.com/articles/2007/02/26/business/reserves.php
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EDITORS NOTES:
Many of our clients lately have been asking about the US Dollar and if
they should start moving into other currencies. When the central
banks of the world's major economies start dumping US Dollars, the
answer is obvious. Interestingly enough, the Dominican Republic
Central Bank announced previously that they would be moving into
British Pounds as one of its key foreign reserve currencies instead of
the USD. It would seem those Dominicans are not so dumb after
all, and neither are many other nations as well.
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MEDICARE PREMIUMS
MAY INCREASE RECORD AMOUNT NEXT YEAR
March 1, 2007
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Medicare Part B premiums are forecast to increase by $15.90 in 2008,
the largest single-year hike in the history of the program, according
to a new analysis by TREA Senior Citizens League. The 17 percent
increase would bring the premium to $109.40, up from $93.50 in 2007.
Medicare Part B pays for doctors' visits, tests, and outpatient
hospital care. The large Medicare premium increase could mean
that many will see no increase in their Social Security checks. The
Congressional Budget Office (CBO) estimates that seniors will receive
just a 1.5 percent Social Security Cost of Living Adjustment (COLA) in
2008. For the person with an average monthly Social Security benefit of
$1,044, that would result in a $15.70 monthly increase than the
increase in Medicare premiums. Almost all beneficiaries have their
Medicare Part B premiums automatically deducted from their Social
Security checks. The reason for the forecasted increase is the
growing deficit in the Medicare program. In 2006, Medicare's Trustees
announced that closing the deficit would require an 11 percent increase
in Part B premiums for 2007, but the Bush administration, which sets
the final rate for Medicare premiums, opted instead for a lower 5.6
percent increase.
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http://www.elderlawanswers.com/resources/
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STOCK SELLOFF IN
CHINA HITS WALL STREET HARD
By Associated Press - Feb 28, 2007
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WASHINGTON -- A plunge in Chinese stocks rippled across global markets
Tuesday, triggering a massive wave of selling in the United States that
sent the Dow Jones industrial average down 3.3 percent, or 416 points,
its biggest decline since March 2003. The news from Asia sparked
the initial sell-off, but a confluence of other events, including news
of rising real estate loan delinquencies, a surprisingly weak
manufacturing report and a bombing near Vice President Dick Cheney in
Afghanistan, made an already difficult day worse. For most of the
morning the Dow declined steadily until it had fallen 300 points. Then,
just before 3 p.m., it suddenly plummeted another 200 points before
recovering slightly because of a trading glitch that led to a backlog
of sell orders clearing at once. The Standard and Poor's 500-stock
index, a broad measure of stock prices, also lost more than 3 percent
by the close of the trading day, its biggest drop in three and a half
years. From currency markets to blue-chip companies to
international stock exchanges, no sector was left unscathed Tuesday.
The day was reminiscent of when the Internet bubble burst several years
ago -- traders and investors around the world stared at electronic
boards and televisions showing markets falling deeper into the
red. Todd Leone, head of trading at Cowen & Co., said he saw
nothing but sellers. My whole screen is red. Every group is down.
Adding to the market's woes, former Federal Reserve chairman Alan
Greenspan warned in a speech Monday that the U.S. economy might slip
into recession by year's end. I don't think a one-day (sell-off) is
going to do justice for what's been going on, said John O'Donoghue,
co-head of equity trading at Cowen. It wouldn't surprise me to
see a total 5 percent correction and even more from here. A major
long-term concern among analysts is whether the heady days of cheap
debt is coming to an end. The ability to borrow money at low rates and
with favorable terms has fueled much of the world economy in the past
few years, including the record-topping leveraged buyouts on Wall
Street, the global run-up in real estate prices and the surge of
investments in emerging markets overseas. Signs surfaced Tuesday
that the easy availability of debt may be ending.
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Moreover, investors fled emerging markets and took safe positions in
the currencies of Japan and other countries where borrowing costs are
among the lowest in the world. As emerging markets took it on the chin,
the yen climbed 2.3 percent yesterday, the most in nearly a year,
against the dollar. This occurred because investors sought to
protect their money in case of a sustained downturn. During a growing
global economy, these investors can take more risks and make higher
returns by borrowing money and pouring it into emerging economies, such
as China and India. To many investors, Tuesday's events were a
stark demonstration of how the global economy, not just that of the
United States, has vulnerable spots. That a sell-off in China could
have such serious reverberations around the world was noteworthy, said
Joseph Stiglitz, a Nobel Prize winner and former chief economist at the
World Bank. China has been the engine for global growth, Stiglitz
said. And a significant slowdown in China would have fundamental
implications for commodity prices around the world. Oil prices have
been sustained by high Chinese demand. Just think of what would happen
if a significant part of China that had a slowdown.
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http://www.tdn.com/articles/2007/02/28/biz/news05.txt
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WALL STREET REBOUNDS
BUT SLIDE IN EUROPE CONTINUES
By Keith Bradsher and Martin Fackler - February 28, 2007
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Stock markets fell sharply across most of Asia on Wednesday and
continued declining in Europe in early trading, as investors worried
about weaknesses in the American economy. But share prices
rebounded in Shanghai and Shenzhen, the Mainland Chinese stock markets
that had been the first to tumble during Tuesday's global market rout,
falling nearly 9 percent then. Both mainland markets rose nearly
4 percent Wednesday as state-controlled media reported that the
government might allow greater foreign investment in Chinese stocks and
would not impose capital gains taxes on stocks soon. Stock
markets elsewhere fared much worse on Wednesday. Rajat Nag, the
managing director general of the Asian Development Bank, said in an
interview in Hong Kong Wednesday that the economic fundamentals of most
Asian economies were strong. But the region remains dependent on
exports, especially to the United States, and China is among the most
dependent of all, with international trade in goods equal to 65 percent
of its economic output last year, he said. We are still fairly
bullish on the Chinese economy's growth potential, Nag said, while
adding that its dependence on exports is vulnerability. China's
current difficulties are partly a case of getting what the government
wished for, only to regret it. The Chinese government has limited the
appreciation of the country's currency, the Yuan, to a very slow pace
by buying dollars on a massive scale as they enter the country,
accumulating more than $1 trillion in foreign exchange reserves.
To pay for the dollars, the Chinese central bank has been issuing
hundreds of billions of Yuan. The central bank has been able to
sop up some of the extra money supply by selling more government bonds
to Chinese banks and the public. The stocks of Asian exporters to
the United States, like Sony, suffered particularly heavy losses on
Wednesday following a report on Tuesday from the Commerce Department
that orders for cars, washing machines and other durable goods dropped
8 percent in January. There is a worry that U.S. consumption
could slow substantially, and that is a much bigger factor than China's
stock market, said Tao Dong, the chief Asia economist in the Hong Kong
offices of Credit Suisse.
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http://www.iht.com/articles/2007/02/28/news/stocks.php
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EDITORS NOTES:
It used to be said that when the US sneezes, the rest of the world
catches a cold. It would seem today that when China coughs, the
rest of the world catches pneumonia. How things have
changed. Which is to say, the US consumer makes up about 70
percent of the entire US economy, and 20 percent of the world
economy. Therefore, while 20 percent is a substantial number, it
is certainly not as high as 70 percent. The inference is that if
the US consumer stops buying (or stops getting free for the asking, new
shiny credit cards in the mail) to be sure, the world will feel it (and
the average US citizen will really, really, really feel the pain -
where is Bill Clinton when you need him?) But, will the rest of
the world really be as bad off as the US in such a case? That
depends, and not necessarily, is the answer. In terms of the
recent events in the Chinese Stock Markets, a ten percent correction
after a more than 100 percent run up in one year, is not so bad and to
be expected (not to mention the 4 percent rebound afterwards).
The fundamentals for China are still there, even though it is true that
the previous growth has been contingent upon all those happy American
consumers buying every-day low priced stuff at Walmart (made in China,
naturally). As noted economic guru Dr. Marc Faber has indicated
in the past (also known as Dr. Doom for his more, shall we say,
sanguine predictions), China can really grow its economy without the US
market, IF it has to. It may not grow at 10 percent per year, as it has
for the last decade, but it can probably still reach 4 percent, 6
percent or whatever positive growth. Which is to say, if 60
percent of Chinas growth is directly attributed to the US, and if that
60 percent goes away, we are still talking about a positive 4 percent
(10 minus 6 equals 4, just to be clear on the math). And aside
from all of the other markets China does already sell to, it is also in
the process of making inroads in many other markets (note the recent
bilateral trade agreements China has been signing around the world
recently, India as just one notable example). In addition, there
are an estimated 300 Million people inside of China just waiting to be
crowned middle class Chuppies (Chinese Upwardly Mobile Urban
Professionals). That is a segment of Chinas population, and just
a segment I remind you - that rivals the entire population of the
United States.
.
The United States on the other hand is an accident waiting to
happen. I know that there are many Americans out there who will
take offense to this comment. I also know that there are many US
politicians along with people in the US financial services industry who
continue to sing a happy tune, and praise the positive (the only
notable exception is Stephen S. Roach, the lead economist at Morgan
Stanley). However, this does not mean that the serious economic
problems and pitfalls will go away, or are simply negative
propaganda. In order to understand this, one must forget about
nationalistic pride for just one moment and take out your calculator
instead. In other words, let us look at things coldly, without
passions or emotions involved, in terms of hard numbers. To be
sure, we all know that stress and strains on the government welfare
state programs are an upcoming fact of life, due to demographics.
We also know, that the European Union nations and Japan will face the
exact same problem. However, the difference lies with the
economic condition of the average American consumer in comparison to
his European or Japanese counter-part. Which is to say, the
Unites States is addicted to debt, both in terms of government spending
and individual consumer spending as well. And unfortunately that
debt is largely externally financed (by foreigners, or foreign money,
rather than through domestic savings). While some US companies
have indicated record profits in recent years (and in some cases, other
US companies cling an inch away from bankruptcy), those numbers are
based on just two things, which are not sustainable. The first
thing to understand is the fact that US companies have outsourced just
about ALL their production or manufacture to lower wage foreign
countries. This has allowed them to produce the same goods at
lower cost, sold at retail inside the US for the same price as before
(sometimes even cheaper) but with a now higher profit margin.
However, that is a one off event. Meaning, after you move your
factory to Mexico or China, and cut your labor costs, then what is the
next hat trick? The only true way any company continues to grow
and make more money is when they SELL more stuff, and or create new
products (basically the same thing) each and every year going
forward. So, the question is - Are US companies really earning
profits directly from selling more stuff, or are they simply making
more money temporarily because they have cut production costs?
Next up is the American consumer buying that stuff. Where is he
or she getting the money to buy? Is the US based consumer buying
things will real or saved money, or is a vast majority of the buying
being done with borrowed money (credit card debt and home equity
loans)? I think you know the answer. So, what happens when
the spigot gets turned off and the borrowing or line of credit gets
shut down? To be sure, recent years of US financial prosperity
are nothing more than an illusion, or better said propped up with
borrowed money. We are already starting to see this daisy chain
of borrowing unravel, as the number of personal bankruptcies and home
foreclosures is on the rise (you should take note of recent comments
made by HSBC, Citicorp and JP Morgan in terms of reduced earnings for
2006 and where the trouble is). In addition, the US personal
savings rate has turned negative for the first time in almost 70 years
(the last time that happened was during the Great Depression
era). In short, the US consumer is becoming tapped out, is
spending all his or her money, is saving nothing on aggregate and is
now slowly being cutoff from credit (especially by foreign lenders who
see the clear risk involved). Note the comment from one of the
above news articles: Signs surfaced Tuesday that the easy
availability of debt may be ending.
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Next up is the US government and how they may or may not finance their
growing expenses and commitments as it pertains to social welfare
programs (Social Security, Medicare, Medicaid, and so on). There
are a number of problems already in existence (the trade deficit, the
amount of government debt as a percentage of GDP and the fact that a
good part of that debt is now foreign owned, etc.), yet even more
disturbing are the options going forward as a means to cover the
various increased costs or expenses on the horizon. One is to
increase taxes, two is to cut government expenses which means in turn
cut the social welfare benefits (reduce the pension check or reduce the
health insurance benefits), three is to simply continue borrowing more
money, and finally the fourth and usually most popular among the
politicians - get more loot by simply printing it. None of these
options are positive nor do they bode well for the next generation of
younger people coming up (or the economy is general). Ben
Bernanke basically laid all this out recently to the politicians, on
public record. The question is: what will the politicians
do? And regardless of what they do, how will that affect you and
your children's finances or economic well being going forward? To
be sure, there are other countries in the same boat, albeit they at
least are trying to do something about it. Sweden is just one
example. Sweden of course is a nation well known for very high
taxes along with very generous social welfare programs, yet even the
Swedes have made a systematic effort over recent years to reduce
government debt and otherwise put their financial house in order.
At least that makes one country on the list trying to prepare for the
coming storm.
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CHINA CONFRONTS
FINANCIAL DRAGON
By Stephen S. Roach - March 2, 2007
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Like nearly everything else in the world these days, it now appears
that global stock market corrections are made in China. The rout
Tuesday that began in China may have been an anomaly, or the start of
something big. But I have long felt that something has to give in
China. This may be the beginning of an important venting process.
The basic story about China is that despite its remarkable successes on
the economic development front, the nation has a seriously unbalanced
economy. The main problem is a runaway investment boom. By Morgan
Stanley estimates, fixed-asset investment - spending on housing,
commercial buildings, factories, infrastructure and other property -
exceeded 45 percent of China's gross domestic product in 2005. This is
a record for China and, in fact, a record for any major economy in the
world. By comparison, Japan's investment percentage in the 1960s - the
period of maximum rebuilding from the destruction of World War II -
never exceeded 34 percent of GDP. China's annual growth in
fixed-asset investment has averaged 26 percent over the last four
years. Should investment continue to run at this pace, it could lead to
a Japanese-style deflation. That's the last thing China wants or
needs. The Chinese government recognizes the perils of such a
possibility. For nearly three years, it has conducted an on-and-off
campaign aimed at cooling its overheated investment sector. Following
relatively limited actions first implemented in the spring of 2004,
Chinese authorities have upped the ante in the last eight months. The
People's Bank of China has raised a key short-term interest rate twice,
totaling slightly more than half a percentage point, and beginning in
mid-2006, the central bank boosted bank reserve requirements five
times, going from 7.5 percent to 10 percent, the latest such action
taking effect last Sunday. The results have been mixed. Fixed
investment growth has finally begun to slow, decelerating from near 30
percent at the start of 2006 to about 14 percent at the end of the
year. Unfortunately, bank lending accelerated. That means China's
central bank has been unable to get traction in reining in bank credit
expansion at the same time that the central planners are finally
gaining traction in orchestrating an investment slowdown. This
has resulted in an excess of bank-funded liquidity that is undoubtedly
spilling over into the financial system. As a doubling of the Shanghai
A-share index over the last six months suggests, a bubble in the
Chinese stock market appears to have been a major outcome of this
development. In China, stability is everything. The leadership
believes that it can't afford to lose control of either its real
economy or its financial markets. Pure market-based systems can rely on
interest rates, currencies, fiscal policies and other macro
stabilization instruments to contain the excesses. With an undeveloped
financial system and the still dominant influence of state ownership, a
blended Chinese economy is much harder to control.
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http://www.newsday.com/news/opinion/
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A NECESSARY
CORRRECTION IN A RISING TREND: Relentless Optimism Reigns Among
Investors. By Larry Elliott and Jonathan Watts in Beijing - March
1, 2007
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It may have been the biggest fall since 9/11 but few people seem very
worried by it. Dominic Rossi, head of global equities at
Threadneedle Investment Services, summed up the City's insouciant mood
after the biggest tremor in global markets since 9/11: Nothing has
happened over the past 48 hours that affects our view of the world and
the positive outlook for equity markets. The falls in stock markets
were not a reaction to any economic event, he insisted. China was
steaming ahead, in spite of Tuesday's drop of almost 9% in the Shanghai
stock market. In short, the macroeconomic backdrop remains
favourable, he said. Growth is robust and a lack of inflationary
pressures prevents the need for substantial monetary tightening. With
Wall Street recouping some of Tuesday's 415-point loss in early trading
yesterday, the markets were last night reassuring themselves that
February 2007 was more October 1987 than October 1929. A minor
correction in an upward trend; nothing more. Ben Bernanke, chairman of
the US Federal Reserve, helped calm markets by telling Congress that
the bank still predicted moderate growth.
.
Not everybody sees it that way. For many years, Stephen Roach, head of
global economics at Morgan Stanley, was the bear's bear, who could
always find the cloud to any silver lining. Last April, he recanted and
said he was now more optimistic about the outlook. On Tuesday, just
before Wall Street nose-dived, he had second thoughts. After four
fat years, convictions are deep that nothing can derail a Teflon-like
global economy. Investors, policymakers and politicians have now
succumbed to a dangerous complacency. That's the time to worry the
most, he said. Central banks have been issuing warnings for some
time that markets are not fully priced for risk, and to ram home the
point that strong global growth and soaring asset prices pose a threat
to low inflation they have been pushing up interest rates as
well. But until this week, the warnings have been blithely
ignored by the markets. Now the hunt is on to explain the sudden
spasm. Is it overheating in China, a looming US recession or just the
fact that investors have made too many dumb plays in too many
out-of-the-way locations?
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http://business.guardian.co.uk/story/
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EDITORS NOTES:
So where do you invest, or otherwise stash your money? A valid
question on the minds of many investors I would think. Certainly
if you are someone that believes an economic slowdown in the US is
imminent, then consider investing in and or holding currencies from
countries that will be less effected. And speaking of this
idea, if you take a look back into economic history, while it was true
that markets around the world felt some pain from the so-called Great
Depression, the two worst off countries were the US and Germany.
Therefore, if you lived in say Egypt, Panama, Argentina, Thailand, and
even the UK or Canada, things were not great, but they were not as bad
as the US or Germany either. This reverts back to our comments
that even if the domestic economy in the US becomes extremely negative,
it does not necessarily mean other countries will be as bad off.
Of course what other countries is the question. The answer is
countries whose economy is primarily export driven (and not
manufactured goods sold primarily in the US), countries with plenty of
raw commodities (whose primary exports are raw commodities as opposed
to manufactured consumer goods), countries whereby local consumers
primarily operate on a cash basis (and not credit cards or borrowed
money), and in turn where local banks do not give the money away
(whereby borrowers actually have to qualify for loans, with substantial
down payments, etc.). There is a long laundry list of countries
that meet this criteria, but in general, many of them tend to be
emerging markets or what are also called developing nations. Such
places are starting to develop a middle class, albeit with the same
lending practices and consumer mentality that existed before (paying
cash). In addition, that is where you still are going to see some
positive economic growth, even with an economic slowdown in the
so-called wealthy industrialized nations. So, in summary, the
name of the game going forward may be diversify investments away from
the high tax welfare states with a plethora of problems looming on the
horizon, and also seek out investments that in the least will maintain
purchasing power (such as gold, commodities, and other
currencies).
.
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READERS WRITE IN:
.
John - As a long time reader - subscriber, have enjoyed your
information and columns. I sent you a question a few yrs ago, but
never got an answer, nor saw it printed in your columns. I will
be retiring soon from a combination of 30 yrs of military - government
civil service as soon as 6 months, or at the latest in 3 1/2 yrs.
Is there any hope/suggestions for the many government workers who will
be retiring, and can't just renounce their citizenship to enjoy the
benefits of retiring in another country, as our pensions, etc are all
tied into the U.S. government??
.
EDITORS REPLY:
Well, believe it or not, we have quite a few clients who are retired
military and I have found that such people are very open to and keen on
the idea of retiring to another country. Perhaps it is because
they have traveled and lived in other countries so much, and do
understand that living abroad is less expensive and not the negative
experience often thought to be by the average American that has never
ventured beyond the Florida Keys. In any event, I would not
encourage you to renounce your citizenship, especially if you are
beholden to Uncle Samuel for your government pension. Of course,
becoming a legal resident in another country is a very different matter
than obtaining another citizenship (or renouncing your existing
citizenship) and in no way jeopardizes your current US citizenship. But
this issue aside, certainly I think you have the same problem as any
other retiree, which is, how to live as best you can on what you have -
and also how to protect your purchasing power should the nice people at
the Federal Reserve decide to go hog wild with the printing
presses. In this regard, certainly having the capacity to hold
savings accounts in other currencies is one part of that
strategy. And yet another, the idea of simply living in a
jurisdiction whereby your monthly pension takes you further in terms of
lifestyle costs, property taxes (or hopefully lack thereof) and so
on. However, this may mean consider retiring outside the
US. If fact, considering such things as real estate taxes (some
retirees are now leaving Florida to get away from the US$10,000 per
year in annual property taxes being assessed for nothing more than a
condo), I would say living outside of the US has probably almost become
a necessity.
.
.
ANOTHER READER
WRITES:
.
Hello I want to start by saying thank you for writing the Dominican
Republic report. It is very informative. It is nice to have a
current reference. Also I look forward to the newsletters. My
husband and I have dreamed of moving out of the US for many years but
various factors kept us from doing so. Now we are ready to make
this dream happen, and we have decided the DR is our number one
choice. Since first discovering the possibility of the DR a year
ago I spend any free time I have looking at whatever I can find about
the DR. This includes searching any web site I can find selling and or
renting in all of the Dominican Republic. We have plans of
working a few months out of the year in the US (we are definitely
interested in enlisting your services for our move your knowledge of
finance and how to protect the $ we earn from high taxes is invaluable)
and living off of our earnings the rest of the year in the DR. I know
you covered living expenses in your report and I know there are two
different markets one for tourist and another for locals. This is why I
have tried to keep my search in Spanish only. Thought I would have
better luck finding the real bargains needless to say there aren't many
that are advertising on the web. What I have found seems to be so
much more expensive than stated in your report. I use the dr1 a lot and
they have a link to super-casa.com there are tons of properties but not
to many less than 3 million RD this seems like a lot considering what
an average Dominican earns. Am I wrong? I also keep an eye on the
listings in the Listin Diario again there seems to be a lot of high
prices. Has things changed that much from last year or is it a matter
of just being there pounding the pavement to find the bargains?
Even the rentals 800, 900, 1000 a month is this what the locals are
paying. I know the location makes a difference, and I am
definitely not familiar with them I only know of the few you have
mentioned and I know the best from the dr1 such as Bella vista
.piantini and naco to name a few. So could you please give me you
very informed opinion on what would be necessary to live a normal
middle class life with one child in the DR. I only want a life
equivalent to what I have in phoenix Arizona as a working class family.
We are not sure were in the country we wanted to be but we would love
to be able to walk to the beach. I can only say we don't want to be
isolated. I am sorry this is so long I just wanted you to know where I
was coming from. Only someone there living in it can give me a true
idea and I need to know what my earning goals need to be. The last
thing I want to do is be in a new place and run out of $. We will rent
until we find the perfect place to buy. Thank you for taking your
valuable time and I look forward to your reply.
.
EDITORS REPLY:
Well, as I have said many times before, there are some very nice
upscale ocean front real estate projects going up in various parts of
the country (Punta Cana, as just one example) BUT they are marketed
primarily to foreigners and are NOT indicative of the local market in
terms of cost. Which is to say, you can certainly find a very,
very nice 2,000 square foot home in a middle class residential area for
about US$150,000 to US$170,000 or you can find an upscale apartment in
the same financial range also. With that said, there are of
course also many higher priced and more luxurious properties on the
market as well. There are also some new more economical but
decent apartments for about US$85,000 on the market too, and certainly
acceptable places to consider. It all depends upon what you want,
where you want to live and so on. However, keep in mind that if
you are paying the equivalent of US$200,000 or US$300,000 for a home in
Santo Domingo, Santiago or some other areas, I can guarantee you your
home in the US priced in the same range will be a shack in
comparison. Which is to say, you will get more for your money in
the Dominican Republic, but again, if you stay away from these mega
priced projects. And by the way, I am not knocking such places -
if you have the money and you really like it then by all means consider
it. But do not think these are the only American or European
standard homes on the market, and do not think you need to spend these
sums either. Regarding rental costs, I can only assume you are
talking about USD equivalents, but again, you can find very nice
apartments to rent in middle class or upper middle class areas of Santo
Domingo or Santiago for about 16,000 to 20,000 Pesos (about US$500 to
US$600). Are there dopey people that over pay? Of course
there are. Are rentals and properties priced much higher in a
beachfront or tourist areas? Of course that is the case
everywhere. The bottom line is, learn some Spanish and check out
the local classifieds in the local newspapers. Learning Spanish
can save you money.
.
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ANOTHER READER
WRITES:
.
Hello John, I am a US citizen living in Maryland. I am purchasing
some undeveloped land in Costa Rica with my Uncle, a US Citizen who
resides there, which we plan to subdivide and resell. I am
looking into the tax responsibility that I would face as an American
buying and then selling parcels in CR. I read an article that you
wrote roughly 2 years ago in the Escape Artist entitled Buying Real
Estate In Another Country: The Last Great Non-Reportable
Investment Idea? In which you wrote, REAL ESTATE ownership is not
reported, is not required to be reported, and is a non-taxable asset
for Americans or Europeans in terms of any worldwide taxation reporting
initiatives. Is that still the case? Does Senator Carl
Levin's Stop Tax Haven Abuse Act affect this? I look forward to
your thoughts.
.
EDITORS REPLY:
My thoughts are as follows. First off, the venerable Mr. Levin
believes that US$100 Billion is lost each year in US government tax
revenue due to various offshore holdings and so on (supposedly owned or
controlled by US citizens, but not declared and not taxed accordingly)
- But the truth of the matter is THEY
DO NOT KNOW. They
have no idea, and that is one part of the frustration. So,
instead they make up a number. However, let us put this into
perspective (the US$100 Billion that Carl is talking about). In
2006, the US Federal Government operating budget deficit was $248
billion, the difference between $2.654 trillion in spending and $2.407
trillion in revenue. In other words, let us assume there was all
this tax avoidance going on and it added up to US$100 Billion each year
- The politicians in Washington still continue to spend almost US$250
Billion more per year than are taken in from tax receipts. So
where is the other US$150 going to come from? In 2004, the
government budget deficit was $521 billion, so I guess they are making
progress - but so far, they have not paid that down either. In
fact, the US Government has now borrowed almost 9 Trillion Dollars
- which comes out to about US$30,000
for every man, woman and baby
still in diapers at the moment (based on the new census count of
slightly over 300 Million people). Where is that money going to
come from? Is Carl Levin planning on winning that money at
Thursday night Bingo, or does he have something else in
mind??
.
Regardless, this new bill is meant to put the US Treasury into the mix
as a sort of enforcement agent, and I will tell you what I think is
coming down the line as a direct result of that (let us see how good I
am at predictions). But before I do so, let me also say that the
European Union is highly perturbed because the US is one of the best
Tax Havens in the world for non-US citizens. Mr. Levin has
complained about banking secrecy in other countries and or simply lack
of cooperation regarding tax matters from other countries (presumably
whereby information about what accounts or holdings US citizens have in
other countries cannot be gleaned or found out), but ironically it is
the US that has refused to cooperate with other countries as it
pertains to foreign citizens who are banking or hold other assets
inside the US specifically in regards to taxation matters. So,
this is the hypocrisy at work.
.
To answer your direct question, yes indeed the bill adds on the term
real estate and other assets or holdings as well, although it would
seem to be more directly pegged at so-called tax shelter arrangements,
such as offshore trusts and the like. But that does not so much
concern me really as does the larger picture. Which is to say, in
my opinion, THEY ARE BROKE or they are going broke, and they know
it. When trying to collect money, or otherwise work ones way out
of the financial hole, the politically speaking low hanging fruit is
the expatriate and so-called tax dodger. I mean, lets face it,
most people will say it is a good idea to get all those tax dodging
scoundrels - no? However, the joke is that many very wealthy
people have gotten themselves and or their money out years ago (if they
wanted to). It is NOT the mega-wealthy that are now leaving, but
rather the middle-class. You know who they are - they are the
group of people that really do pay all the bills, or better stated, pay
most of the taxes anyway (and why all of a sudden Tax Havens are a
problem, even though they have been around for decades and decades -
BECAUSE the people that actually pay the taxes are starting to use
them). The other immediate thing politicians can do without
raising too much suspicion or complaint from the general masses is to
run the printing presses (and devalue the currency as a result).
That they have already been doing for some time now, and why the
world's central banks are dumping US Dollars. And it is not as if
the average consumer has not noticed. We commented towards to the
end of last year that FOOD prices would jump in the US during the first
quarter of 2007, and so they have (see recent news links below).
.
In addition, the next phase is going to be increased taxation and not
necessarily the political hot potato of direct income taxes.
Thousands of middle class Americans will be hit with higher income tax
rates BECAUSE of the AMT, which is not indexed to inflation. Of
course there is speculation that the politicians, in conjunction with
their get the tax dodgers initiative, will do something about this AMT
problem, which will basically impose a higher income tax rate
automatically upon thousands and thousands of middle class
taxpayers. Personally I think you have a better chance of seeing
pigs fly as the politicians can always blame that on predecessors (the
AMT problem and not the flying pigs - which is why I think the AMT will
be left as is- they need the money, don't-cha know). But
something else has been happening on the state and local municipal
level - higher real estate taxes. In part, this is due to cuts
backs in US Federal Government funding to the states for a variety of
things, including education. Ergo, you now have senior citizens
living in Florida getting hit with a US$10,000 real estate tax bill for
their retirement condo, not mention everyone else, everywhere else, who
will be paying higher property taxes this year (which we reported on in
a previous newsletter). In addition, you have heard talk about a
national US sales tax supposedly to be put in place instead of an
income tax or in exchange for a reduced federal income tax rate
system. Forget it. I believe that if a national sales tax
is implemented, the income tax will stay right where it is.
.
Now then, what does all this other nonsense have to do with your
question about the Tax Haven Abuse Act? Well, it gets the US
Treasury involved (and the banking regulators) as an enforcement
mechanism. So, it opens the door for currency controls by
default. Why do I say this? Well, a Mr. Russ Fox of Clayton
Financial has said: Americans might have even more difficulties in
getting funds from the U.S. to the offshore (gambling industry).
Let us substitute the term gambling industry with say, the term,
jurisdiction. They currently have a list of 34 nations on this
list (already directly mentioned in the bill). Incredibly enough,
aside from all the usual suspected names, is Costa Rica. Tiny,
idyllic, friendly Costa Rica - a nation that has no standing army, by
the way and has not had one for years. So, are we to believe now
that the definition of a rogue state is one that simply decides not to
be a friendly collaborator regarding taxation matters? It would
seem so. Therefore, how far of a stretch is it really to propose
or imagine restrictions whereby you cannot wire money abroad any
longer? Obviously there may be issues like this already with
so-called terrorist states and so forth, but why not expand the
list? Why not simply say, you cannot wire money anywhere?
So, my main concern is not real estate and not Costa Rica, but rather
restrictions of the ability of private citizens to freely move funds
abroad in the future. Sound like a conspiracy theory?
Perhaps, but then again, someone once told me, if you think things are
bad now - just wait five more years (that was more than ten years
ago). The problem is, I shudder to think what the next five years
will bring. The same person also told me - forget tax havens and
offshore companies - get your money out, get yourself out, and renounce
your citizenship. That may not be such poor advice either, but
you have to be domiciled somewhere. You have to be a resident of
some place and if you have a business - the business may possibly have
to be domiciled somewhere as well. Of course, why not become a
citizen of, or set your company up, in a country that is not broke, and
one that will not tax you to death? An interesting question to
ponder.
.
.
SOME NEWS ARTICLES
OF INTEREST (US Economy):
March 14, 2007
.
SHOCK JUMP IN US
PRODUCER PRICES
.
US producer prices have jumped by more than analysts forecast in
February. The driving force behind the increase was a surge in the cost
of food, energy and toys, the Department said.
.
http://news.bbc.co.uk/2/hi/business/6454243.stm
.
.
RECORD US TRADE
DEFICIT IN 2006
.
The US current account deficit jumped by 8.2% to a record $856.6bn
(£444bn) in 2006, official figures show. The deficit
for 2006
meant the US was borrowing more than $2bn daily to finance its trade
gap.
.
http://news.bbc.co.uk/2/hi/business/6450565.stm
.
THE END OF THE
AMERICA DREAM ?
.
The US economy has been generating strong economic growth over the past
few years as it has come out of recession. After growing at more
than 3% a year in 2004 and 2005, the pace picked up to a blistering
5.6% annual rate in the first quarter of this year - although the pace
has since then slipped back to 2.9%. So far, though, little of
that growth has translated into the hands of the average worker,
according to new research from the Economic Policy Institute (EPI). For
real household incomes, the median point - the level at which half of
households earn more and half less - has actually fallen over the past
five years. Productivity - the measure of the output of the economy per
worker employed - grew even more strongly, by 16.6%. But over the
same period, the median family's income slid by 2.9%, in contrast to
the 11.3% gain registered in the second half of the 1990s. The
wages of households of African or Hispanic origin fell even
faster. And new entrants to the labour market fared particularly
badly. Average hourly real wages for both college and high school
graduates actually fell between 2000 and 2005, and fewer of the jobs
they found carried benefits such as health care or company pensions.
.
http://news.bbc.co.uk/2/hi/business/5303590.stm
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