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Our August 17, 2007 Newsletter
Edition
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IN
THE NEWS:
.
TAXMAN
TARGETS 100,000 MORE OFFSHORE DODGERS
By
Nicholas Neveling - Accountancy Age, August 3, 2007
.
The
taxman is preparing to launch enquiries into at least 100,000 taxpayers
who failed to disclose off-shore bank accounts to HM Revenue &
Customs under the off-shore disclosure amnesty, which closed on 22
June. The revelation of the new number dramatically increases the
number of people thought to be being targeted by the taxman. Until now,
best estimates had been that around 100,000 of the 400,000 account
holders identified probably had tax to pay. 60,000 made disclosures as
part of the disclosure scheme. Insiders at HMRC said officials
were sending out 3,500 enquiry letters a week to taxpayers who had not
come forward during the amnesty period.
.
http://www.financialdirector.co.uk/accountancyage/news/
.
.
NON-DOMS SURGE AFTER AMNESTY - Accountancy Age, July
9, 2007
.
The
number of people claiming non-domicile tax status has significantly
increased in the wake of the governments amnesty for offshore bank
accounts. Revenue & Customs has said that 112,000 taxpayers
claimed to be non-domiciled in the UK in 2004/05 to avoid paying income
and capital gains taxes. But tax experts have confirmed an
unprecedented surge in non-dom applications for this tax year that
could push the number over 200,000, The Observer reports. People
are telling the Revenue that they meant to sign non-dom forms and that
not filling them in was an oversight. The amnesty is pushing people
further offshore, one tax expert told the newspaper.
.
http://www.financialdirector.co.uk/accountancyage/news/
.
EDITORS NOTES:
For those of you who do not know what this is all about, in brief, the
UK government has basically decided to take a cue from their American
counterparts and make an effort to chase down citizens who have not
properly claimed or disclosed offshore bank accounts. They did
this by first declaring an amnesty for all voluntary comers, and now
the idea is to get nasty, as one might say (for those that have not
come forth voluntarily). Of course, with that said, it is also
interesting to note that British Citizens (as in the case of many other
countries) can legally declare themselves non-resident (or non
domiciled as the preferred term) for tax purposes. Which is to
say, if it is truly the case that you do not live in the UK (and meet
some other requirements, such as no longer owning real estate there,
etc.) then you are excused from local UK taxation. Sounds fair to
me, and such is the case in Canada plus many other European nations
also. So, this tax chase is really aimed at those people who
might have offshore bank accounts, but are really UK domiciled for tax
purposes. Now we get to the result of these actions:
Figures released by HMRC showed that during 2004/05 112,000 people had
applied for non-domiciled status. The number of applications
represents a 74% increase on 2002 figures and experts believe that by
the end of this year the number of applications could surge past
200,000. No kidding? As the tax chase intensifies, the
local citizenry head for the hills (the hills of Tuscany, the hills of
Costa Rica, and so on). What did they expect?
.
.
HOW
TO PAY FOR US ROAD AND BRIDGE REPAIR?
By
Ben Arnoldy - August 10, 2007
.
The
Minneapolis bridge collapse has put the nation's decaying roads and
bridges front and center, and politicians are suddenly in a fix-it
mood. In Congress, Rep. James Oberstar (D) of Minnesota proposed
Wednesday a national bridge plan that would create dedicated funding
for the fixing of the nation's 73,784 bridges rated structurally
deficient by the Department of Transportation. The cost of
improving the nation's roads and bridges to the levels needed is
estimated to be $155.5 billion, according to the American Association
of State Highway and Transportation Officials. And the backlog is
increasing: The $75 billion in annual spending by federal, state, and
local governments combined falls short of levels needed just to
maintain the status quo. Most of the available money comes from
gasoline taxes. The federal government hasn't raised the tax
since 1993, while the cost of construction materials has jumped
dramatically in recent years due to Chinese demand for materials like
concrete and steel. The federal highway trust fund is expected to run
dry by 2009.
.
http://www.csmonitor.com/2007/0810/p03s01-usec.html
.
EDITORS NOTES:
Ah yes, the old raise the price of gasoline with higher gasoline taxes
routine - an old and favorite tune, and naturally the Chinese are to
blame in the process. Regardless, it is interesting to note that
about 25 percent of the nation's bridges in America (which translates
into 73,784 bridges) are rated structurally deficient according to the
US Department of Transportation, although it should also be noted that
an independent watch dog group says that actually 147,913 of the
nation's bridges are in this shape structurally. Also of interest
is the fact that 500 bridges nationally have the same design as the one
that collapsed Aug. 1 in Minneapolis. But, saying that public
infrastructure is in less that wonderful condition is bad enough.
The real problem is that the US Department of Transportations Trust
Fund (which supposedly has the money to fix these kinds of things) will
be bankrupt, or completely out of money in 2008, and start running into
deficit in 2009. Lets hear what a conservative politician from
Texas has to say about all this:
.
.
HUTCHISON:
STAY OFF ROAD TO HIGHER GAS TAX
By
Michael A. Lindenberger - The Dallas Morning News
.
Democratic
calls for raising the federal gas tax to pay for national bridge
repairs are wrongheaded, U.S. Sen. Kay Bailey Hutchison said Thursday
at a transportation forum in Irving. We cannot adopt every bridge
in America, said Ms. Hutchison, R-Texas. We have to be very, very
careful that the federal government not become the genesis of the
funding for all of the nation's bridges and for all of its
highways. Transportation officials in Austin and Washington have
warned that the gas tax revenues supporting the Federal Highway Trust
Fund will have a $4 billion deficit by 2009 unless new sources of
revenue are found.
.
http://www.dallasnews.com/sharedcontent/dws/news/localnews/transportation/
.
EDITORS NOTES:
First off, allow me to say that I consider myself to be a
Libertarian. This means that Libertarians in general are probably
some of the most conservative thinkers on the planet when it comes to
government spending and so on (or better said, lack of government
spending and ergo lower taxes as a result). However, I also
believe that among all the philosophical arguments that so-called
Liberals and Conservatives have about the role of government, one
general area of common ground is the idea that government probably
should be involved with infrastructure, at least to some extent (of
course debatable as to the possible taxes and mechanics involved), as
its one core area of responsibilities (the government should be useful
for something - no?).
.
And
yet, here we have a conservative politician from Texas stating (and I
quote): We have to be very, very careful that the federal
government not become the genesis of the funding for all of the
nation's bridges and for all of its highways. Say what? If
the government is not going to build and maintain a nations
infrastructure - then who will? What is this seemingly new solution we
are hearing about, and what does all this mean in the long haul for the
average citizen?
.
Well,
for starters, I am of the opinion that they are broke. Not just
plain old, the check has not arrived yet kind of broke, but really,
really hard up out of money broke. Why do I say this? If
you look at the shenanigans pulled off by US corporations in the
developing or third world, what we see is that same thing now taking
place in the US. Meaning, the privatization of public works
projects and public infrastructure (you should read: Confessions of an
Economic Hit Man By John Perkins to get an idea). And so, the
result is, we are now seeing public works projects such as the
so-called NAFTA super-highway (I know, I know, the politicians at the DOT say it is all an urban legend)
being funded by a Spanish construction company (with some public tax
payer money thrown in for good measure), and operated thereafter as a
toll road (rather than seemingly a 100 percent government funded and
operated venture, although the actual status is still unclear).
.
Why
do you think any company, foreign or not, is interested in paying for
the construction of a highway or bridge? Because they are nice
guys? No, the answer is because they will make their money back
in droves by operating the thing as a toll crossing. Now then,
where do all those profits or toll revenues go? Back into the
local state or federal government coffers as income for other local
uses once the initial investment is paid back (such as school text
books as one happy thought), or does it flow outside of the country as
income to the foreign company that built the thing? Keep all this
in mind, because this will be (my prediction) the next new major trend,
namely, privatization of bridges, highways, and other things (prisons,
for example, which is one of the fastest growing for profit businesses
in America at the moment). In other words, keep an eye out as
they start to pawn the furniture to raise money. Which to say,
someone that is, shall we say, broke, usually begins the mad dash for
cash by taking the television set down to the pawn shop, and then the
other things start to follow, like the stereo, the furniture and so
on. Ask yourself, what is it that governments have to sell or
pawn if they are going broke? If they are not going broke, then
why do it? Is the government planning on cutting taxes and
getting out of the government business? Some interesting
questions to ponder.
.
If
you are bored on a Saturday night, get a copy of a older film from the
1970's called Americathon with John Ritter as the American President
living under financial difficulties (not a great movie by a long-short,
probably not even a good B-Movie, but pretty close to being a sort of
black comedy and a dire prediction of things to come as the government
had sold off everything to raise cash, as the premise behind the film,
and now needs to hold a telethon to raise some scratch).
Ironically the film was made during the last stagflation-inflation
environment of the Carter years complete with sky high gasoline prices
and the jogging suit craze, and take note of the insinuated economic
and political status of Vietnam (and substitute the American Indian
Tribes for China, and you will get the humor or irony of it).
.
Getting
back on topic, on the one hand, they probably have no choice but to
sell off everything (remember, I said they were broke). On the
other hand, if a foreign company is the owner of such things (and it
does make you wonder a bit about why foreign and not local companies
are doing this, unless the only entities with any money are the foreign
ones these days) then in that case, even more wealth is being filtered
out of the country in terms of expatriated profits. And all of
this goes in line with my previous comments that the US is looking more
and more like a so-called third world nation economically. Which
is to say, looking at the previous corporate playbook for the
developing world, a country is viewed as nothing more than a cash cow
to milk for what it is worth (without any interest in local
reinvestment). Again, this is all just an observation or
hypothesis, so do not be offended and you have the right to believe it
or not. Also, this is not any sort commentary that would suggest
that socialism is the answer, or to suggest any sort of tirade against
corporations (corporations are not to blame really, if it is the
politicians that are in fact allowing certain things to take
place). However, I do think it important to speculate what the
outcome might be economically and socially. P.S. If the
politicians try to spin this as a way to keep taxes down, don't believe
it. Taxes will stay right where they are, and to be more truthful
or accurate, most likely, the taxes will be going up (just remember you
heard it here first).
.
.
INGERSOLL-RAND TO SELL BOBCAT DIVISION
- July 30, 2007
.
Ingersoll-Rand
(IR) said on Sunday it had agreed to sell the Bobcat division and two
other units to South Korea's Doosan Infracore for $4.9 billion, marking
the biggest-ever foreign acquisition by a South Korean firm. The
diversified manufacturer received a much-higher-than-expected price for
its Bobcat machinery division. The Bobcat division and its
utility equipment and attachment units generated $2.6 billion in sales
last year, accounting for about 23% of Ingersoll-Rand's total 2006
revenue. The sale price was about 20% higher than expected,
analysts said. Deutsche Bank analyst Nigel Coe had estimated a $4
billion price, given the decline in Bobcat earnings over the past four
quarters.
.
http://www.usatoday.com/money/industries/manufacturing/
.
EDITORS NOTES:
What is noteworthy here is not the sale itself, but rather whom exactly
is buying whom. Our speculation is that Asian Central Banks, and
perhaps companies as well, are holding vast amounts of US Dollars that
they now want to get rid of (and probably the sooner, the
better). Since US government debt is really not that attractive
in terms of current interest rates, the paper money is in effect being
swapped for other kinds of assets (note China's attempt not too long
ago to buy Unocal). However, selling a company for double annual
sales is really not out of line when valuating a sale. Businesses
are often sold for roughly two to three time average annual revenues,
so nothing strange and some might even call the sale cheap, although
the Bobcat division has reportedly seen a drop in sales over the past
year (one question is why the drop in sales?). What is more interesting
is why would a company like Ingersoll-Rand give up a division
generating 23 percent of its income? Interestingly enough,
Ingersoll-Rand is nominally based in Bermuda - in other words,
one of those US companies that domiciled themselves offshore for tax
savings. Also, the acquisition will make Doosan Infracore the
world's seventh-largest manufacturer of construction equipment by sales
(I wonder if the new owners manual for Bobcat equipment will be in
Korean?).
.
.
FOOD
PRICES THREAT TO INFLATION CEILING
By
Bill Jamieson - July 30, 2007
.
BRITAIN'S
economy is facing a double hit in the coming months, with soaring food
prices threatening to push inflation to the top end of its target range
and the effects of the global credit crunch smashing growth in the UK's
booming financial sector. Fresh falls are expected in markets
today. And in an assessment of the impact of the credit-market
downturn on UK growth, forecasting group Oxford Economics warns in a
report to be published tomorrow that the impact on Britain's financial
sector could be greater than that on its US counterpart, with a
potential halving of growth.
.
http://business.scotsman.com/
.
EDITORS NOTES:
Looking at what is going on in the US, Mr. Niall Ferguson writes in the
July 30 edition of the Los Angeles Times: The International
Monetary Fund recorded a 23% rise in world food prices during the last
18 months. Of course, we're
not supposed to notice that prices are going up. In the U.S.,
the monetary authorities insist that we should focus on the core
consumer price index, which excludes the cost of food and fuel, and has
the annual U.S. inflation rate at just 2.2%. But food inflation is
roughly double that. When I wanted a Philly cheese steak last
week, I had to pay through the nose. That's because cheese inflation is
4%, steak inflation is 6% and bread inflation is 10%. Steak is now 53%
dearer than it was 10 years ago.
.
http://www.latimes.com/news/opinion/
.
In
other economic news, here is a list of US companies reporting drops
from estimated earnings (as reported August 1, 2007): Avon
Products - estimated earnings off 38 percent, Best Buy - estimated
earnings off 23 percent, Winnebago Industries - off 28 percent, Del
Monte Foods - off 18 percent, IDEXX Laboratories - off 19
percent, Stanley Furniture Co. - off 13 percent, Tree house Foods - off
22 percent, Conseco - off 70 percent, New Frontier Media - off 41
percent, Genesco - off 61 percent, United Retail Group - off 85
percent, Dillards - off 27 percent, Gap Stores - off 8 percent, K &
F Industries - off 24 percent.
.
http://www.rttnews.com/
.
We
have attempted to give a general cross section of the market, leaving
out the obvious banking and housing related companies which we know are
in, shall we say, difficulties - as a polite way to put it. One
surprise is New Frontier Media (adult entertainment, otherwise known as
porno). If sex no longer sells, then I do not know what
does. Also, we left off companies such as Caterpillar, which we
talked about in a previous newsletter (we discussed how the company
management predicted a severe drop in US earnings for 2007, but hoped
to make up the loss from foreign sales). Indeed, along these
lines, Mr. Bob Chapman, the author of the July 28th Train Wreck of The
Week Newsletter from The International Forecaster site says quite
clearly: If it weren't for foreign earnings a slew of US
transnational conglomerates would have had lower earnings. They were
GE, UPS, IBM, Caterpillar and FedEx. Dupont and Pepsi can thank foreign
sales as well.
.
http://www.theinternationalforecaster.com/
.
A
very good recent news article to read is: The Greatest Economic Boom Ever, By
Rik Kirkland of Fortune Magazine
who says: A lot could go wrong. And it may not feel like a day at
the beach to most Americans. But for your average globetrotting Fortune
500 CEO, right now is about as good as it gets. Also from the
article: More than half of GDP growth is coming from emerging
countries. It is something we have never seen before. (Editor):
Keep this comment in mind, as it is a very important long-term economic
dynamic as to where the growth will be in the future. Which is to
highlight what we said previously - Just because the US may slide into
an economic funk, this does not mean things are necessarily bleak
elsewhere (and why elsewhere is where you may want to be, or at least
your money as the next best thing). Don't you think it a bit more
than mere coincidence that some notable wealthy people and corporate
CEO's have been moving themselves abroad lately, and or have been
buying up real estate elsewhere?
.
http://money.cnn.com/magazines/fortune/fortune_archive/2007/07/23/
.
.
FORECLOSURE
TREND RISING AS HOPES FALL
By
Lori Weisberg and Emmet Pierce - August 5, 2007
.
San
Diego County's highflying housing boom is over, but real estate agents
specializing in foreclosure sales say business hasn't been this good
since the deep recession of the mid-1990s. As thousands of
mortgage-default properties hit the market, prospective home buyers and
investors are looking to cash in on other people's misfortunes.
Caught in the turmoil of the sub-prime mortgage meltdown, lenders are
scrambling to dispose of their rising inventories of foreclosed homes,
sometimes enlisting the help of auction companies, a factor not seen in
the local market for years. Although foreclosures still make up a
small fraction of the local market, the rising trend is disturbing.
Each abandoned home represents the financial hardships faced by a
dispossessed household and, for neighbors, new concerns about vandalism
and falling property values. In the first half of 2007, the county had
a record 2,896 foreclosures, compared with 445 during the first half of
2006 - - - a 551 percent increase.
.
http://www.signonsandiego.com/news/metro/20070805-9999-1n5reo.html
.
.
AMERICAN
HOME MORTGAGE LAYS OFF 7,000
By
Lynn Adler, Reuters - August 3, 2007
.
In
some respects it was a normal summer Friday in this Long Island hamlet
roughly 50 miles east of Wall Street. The weather was hot, a bit
steamy. The weekend approached, and employees of American Home Mortgage
Investment (AHM) awaited their paychecks. What was different was
that the checks would be their last. One day earlier the mortgage
lender said it would fire nearly 7,000 employees, an exclamation mark
to one of the biggest and fastest corporate collapses in the U.S.
housing downturn. Friday would be the last day. In a statement
Thursday night, American Home confirmed it would cease most operations.
It will slash its nationwide employee base to about 750 workers from
the 7,409 it reported at the end of last year.
.
http://www.usatoday.com/money/economy/housing/2007-08-03-american-home-layoffs_N.htm
.
.
IMPACT
OF MORTGAGE CRISIS SPREADS
By
Gregory Zuckerman, James R. Hagerty and David Gauthier-Villars
August
10, 2007
.
Fallout
from the intensifying credit crisis stretched from a French bank to the
largest home-mortgage lender in the U.S., triggering unusual
central-bank interventions and driving the Dow Jones Industrial Average
to its second-worst drop this year. The troubles demonstrated
both the global reach of the crisis and its impact on a widening circle
of markets and companies. The first jolt came from French bank BNP
Paribas, which said early in the day that it was freezing three
investment funds once worth a combined $2.17 billion because of losses
related to U.S. housing loans. That prompted the U.S. and European
central banks to inject cash into money markets to keep interest rates
down. The market for the assets has just disappeared, said
Alain Papiasse, head of BNP Paribas's asset-management-services
division. Since the start of this week, there are no prices for
instruments that carry, directly or indirectly, some types of U.S.
assets.
.
http://online.wsj.com/
.
EDITORS NOTES:
As we move through the fallout of these interest-only, no-money down,
no income verification home mortgages, we find out that the Blanche Dubois Syndrome goes deeper
than perhaps some may have thought. Meaning, the US has indeed
been living on the kindness of strangers in more ways than one.
Highly touted in the past has been the fact that a sizeable portion of
the US Government debt is owned by foreigners (either directly via
foreign governments, foreign central banks and or other private
investors who now may want out - - - - note our reporting previously
that China dumped almost 6 Trillion Dollars worth of US Treasuries in
May). However, it does not end there. Seems that some
European banks have previously bought up these junk bond CDO
thing-a-ma-jigs too (Collateralized
Debt Obligations, which were comprised of the packaged sub-prime
mortgage pools dressed up by Wall Street as legitimate and credit
worthy investments). So, as a result, we now find out that the
French bank BNP Paribas is FREEZING redemptions from three of its
investment funds presumably because these investment funds are chock
full of these things (in short, this means you cannot get your money
out if you happen to be one of the unlucky investors). In
addition, IKB Deutsche Industriebank AG was recently subject to an
emergency financial bailout organized by the German Banking Authorities
directly as a result of its so-called diversification into these
newfangled doped up investments (a friend of mine on Wall Street has
called these CDO things a sort of traditional Ginnie-Mae On Crack - - -
- too bad the Germans and the French did not know the difference
between a Ginnie-Mae and a Crackie-Mae). Of course, at the
moment, the Europeans cannot give them away even though they would very
much like to (note the comment by Alain Papiasse, head of BNP Paribas's
asset-management-services division, who says that the market for these things has disappeared).
In fact, this same gentleman alludes to the idea that the Europeans do
not want to touch any financial instrument that has US affiliated
exposure at the moment - - - - what a surprise.
.
Getting
back to the US home front, Countrywide Financial Corp., of Calabasas,
California, one of the largest mortgage companies in the US, currently
has about US$120 Billion Dollars worth of these junk mortgages on its
books and the rate of current delinquencies and foreclosures are now
over 20 percent as of June 30, 2007 - which is up from 14 percent just
one year ago. Regarding regular or prime home-equity loans (read
the non junk portion of mortgages), the delinquency rate was 3.7%, up
from 1.5% a year before. The company also transferred $1 Billion
of nonprime mortgages from its held for sale category to held for
investment in the first half, which they had to mark down as
well. In other words, just like the European Banks, they can't
sell the crap either (even though they too would just love to dump it
off their books also, if they can find a buyer, that is).
.
As
a result of all this nonsense, the European Central Bank is trying to
stave off a credit meltdown and is in effect instituting the old
Greenspan PUT by providing more than $130 billion to the European
financial credit markets (and the U.S. Federal Reserve also added $32
billion in reserves to the U.S. banking system). Funny how there
is never any money for this or that (bridge repair comes to mind) but
then all of a sudden it appears like magical pixie dust when
desired. In any event, the end result of that will be further
devaluation pressure on the US Dollar (the extra and NEW liquidity or
money has to come from somewhere, and running the printing press is the
only answer that comes to mind - - - but let's think positive - - -
Tinker Bell taught us to think happy thoughts if you want to
fly). With economics though, there is no free lunch - you solve
one problem and create another. Sort of like starve a cold or
feed a fever.
.
Of
course, in the case of Europe, many pundits have noted that the
European banking system as a whole is really not in that bad shape, and
it was only a few, shall we say, rogue bankers (I could use the word
stupid instead of rogue, but lets be nice) that bought these CDO things
with investor funds. However, whenever the Central Bank is
handing out candy, everyone lines up regardless if they truly need it
or not. Regardless, let's keep an eye on this one and see where
it goes, but my bets remain with the emerging third world cash based
economies. Note the key word cash, as opposed to credit (and note
this current rope-a-dope in the financial markets is indeed a credit
crisis). Which is to say, it is only a so-called crisis if you
are broke and want to borrow money, if you have cash - then who
cares? Sometimes, even with economics, what is old becomes new
again (saving your money and buying something for cash as one of those
outdated old fangled ideas your grand-parents talked about).
.
In
short or in summary, watch out for the coming, we are the world, speech
from US politicians and other pundits who will basically pose the
argument that if foreigners do not continue lending that the US economy
will head south and take the rest of the world economy with it.
After all, misery loves company, but the argument has more holes than a
package of Swiss Cheese. Indeed we already know that China has
the low wage manufacturing market covered and has tons of cash, India
has the software market and now has very impression cash reserves too,
and Brazil is looking pretty good as well not to mention a few other
countries (note that we reported in the past that the central bank of
Argentina was buying up gold, when gold what a lot cheaper than what it
is today). So, the bottom line is, the possibly scenario going
forward is, the developing markets or so-called Third World (which are
economies with CASH - read no credit crisis as part of that comment,
and ARE growing) will simply by-pass the US market and do business
directly with each other (we are starting to see this already).
Again, will a US basis economic crisis have an effect on world
trade? Of course it will, as the US consumer accounts for 20
percent of the world's GDP, but the US economy itself is more
precarious in that the US consumer accounts for 70 percent of domestic
GDP inside the US. The synopsis is then, world trade will feel
some back draft, but not to the extent what could occur domestically
inside the US. And as such, note that foreigners will not
tolerate a continuing decline in the value of the US Dollar nor will
they be so inclined to loan money to a risky borrower. I call all
of this, the revenge of the Third World (be careful what you sow, as
the economic blowback may not be enjoyable - once again, read John
Perkin's book). In addition, as the domestic government tax
revenues continue to shrink, watch out for aggressive tax collection
policies as well, as if the foreign lenders turn off the spigot (and as
the ability to borrow money to make up the shortfall perhaps becomes
more difficult), things will become dicey indeed. Again, I am not
trying to be a bad guy, belligerent, anti-US, or whatever else - but
rather simply to say, it is what it is (and consider what that may mean
going forward for you own personal lifestyle and investments).
.
.
IMPORTED
INFLATION? TRY MADE IN THE U.S.A.
By
Caroline Baum, 07/29/07
.
For
years globalization was touted as undisputed good news in terms of the
low prices it delivered to consumers. It was unqualified bad news only
if you happened to be the fellow who made the goods now being produced
in China. Now the tide has turned. After more than a decade of
exporting deflation, China has gone over to the dark side, according to
U.S. government statistics. The price of Chinese imports to the U.S.
has risen in the last few months, triggering predictable reactions
based on faulty assumptions. Specifically the question is, can
one country import inflation from another? In the case of China and the
U.S., it depends on whether one is flying from east to west or west to
east. China pegs its currency to the U.S. dollar. In other words,
it has adopted U.S. monetary policy as its own. If the U.S. inflates,
China inflates, not the other way around. If China had an
independent monetary policy and its currency wasn't linked, rising
prices would be offset by a falling currency and the U.S. wouldn't see
any effect, says Jim Glassman, senior U.S. economist at JPMorgan Chase
& Co. The broader issue is whether a sovereign nation with an
independent central bank can import inflation or deflation from
overseas. The answer is, it depends on what the monetary
authority in the importing country does.
.
http://www.app.com/
.
EDITORS NOTES:
The author of the above article is wrong about one thing: China had
stopped pegging its currency, the Yuan, to the US Dollar in mid 2005 -
or in the least, we can say they relaxed the stringent link they had
imposed previously. As a result, the Chinese currency has
appreciated by about 6 to 9 percent to date versus the USD (from what
it was two years ago, all depending upon which statistics you wish to
use), but of course the criticism is still that the Yuan remains
undervalued by another 20 percent or so (and why the comments by the
indefatigable current US Treasury Secretary that the Chinese should
allow the currency to appreciate even further). Regardless, Ms.
Baum is certainly correct in her analysis that China is indeed
increasing prices, and perhaps now exporting inflation to the US (as
opposed to exporting deflation previously) - going over to the Dark
Side as she puts it (where is Luke Skywalker when you need him,
probably at an Ashwam in India having tea). To confirm this (not
Luke having tea, but the rather the inflation data), the Commerce
Department recently said U.S. IMPORT PRICES
rose for a fifth consecutive month in July, increasing 1.5 percent
(thanks guys, for telling us something we already knew).
.
.
HOW
THE CHINA EFFECT NIPPED BACK INFLATION
By
Ethel Hazelhurst - July 30, 2007
.
Falling
prices, still floating miraculously on a sea of inflationary impulses,
appear in three categories of goods listed in Statistics South Africa's
inflation report for last month. Furniture prices fell 0.7
percent in the month and 1.8 percent in the 12 months to June. Clothing
prices fell 0.5 percent in the month and 7 percent over 12 months and
footwear prices were down 0.1 percent and 10.4 percent. The
reason: these goods are either imported from China or India or some
other low-cost Asian country; or they have to compete with cheap
imports. Without the benefit of cheap imports, South Africa's
inflation rate would be higher than it is - at 7 percent in June.
And interest rates would probably be higher too. And without the
intervention of the department of trade and industry's deputy
director-general, Iqbal Sharma, the disinflationary effect of cheap
Chinese imports would have been even greater. Sharma slapped a
two-year import quota on certain Chinese imports of clothing and
textiles as from January. It's a pity he had to dilute the China
effect, because there is evidence it's on its way out. Market forces
are doing what shortsighted intervention can't achieve. The UK
newspaper, The Telegraph, reported recently that industrial wages on
China's eastern seaboard have jumped 50 percent over two years, while
salaries in Bangalore have risen so much that software companies are
outsourcing back to Europe. Economists are now starting to tell
us that the era of importing disinflation from China is over.
.
http://www.busrep.co.za/
.
EDITORS NOTES:
Here we have a concrete example of the economy in South Africa (which
certainly applies to the US as well) whereby inflation is kept somewhat
artificially lower due to stable or decreasing consumer prices for
products imported from China. Those very same products,
manufactured locally with local wage rates surely would otherwise be
priced higher with the LOCAL inflation rate factored in one way or
another. We made this argument time and time again concerning the
US economy, and surely those products or services that could be not
manufactured or done elsewhere (medical care, education, etc.) have
gone through the roof in terms of costs for the average consumer.
Every American consumer not strung out on Prozac surely is aware of
this. Again, the cheap imports from China (and elsewhere) in fact
hid the true local inflation rate from the domestic consumer as those
everyday falling prices at Mega-Mart would seem to indicate. Now
however: Economists are now starting to tell us that the era of
importing disinflation from China is over. Indeed, the Chinese
are not so dumb. Even with a 50 percent wage increase there, what
are we talking about in terms of labor costs? Average Chinese
manufacturing wages are said to be about 25 Cents an hour, Mexican
wages $2 Dollars an hour and US wages, $17 Dollars an hour. The
Chinese could increase wages 400 percent, and it would still be half of
the hourly wages in Mexico (and light years away from US domestic
hourly wages). So, the point is, no American company is going to
move all those factories back again to the so-called homeland because
wages went up by 100 percent in China (or whatever it comes out
to). And so, the final point for the American consumer is, labor
cost increases and perhaps compensation for a devaluing dollar will be
reflected in higher US consumer products once again as we move forward
into this brave new world. And of course all this going on with
HIGHER food prices and pressures to push down domestic US wage rates at
the same time. I wonder if they will start to replace the yellow
smiley face with a red faced frown on the price signs at the mega-mart
store as the numbers on the sign start flipping back up in the other
direction?
.
.
OIL,
GOLD, GRAIN PRICES TO STAY STRONG
By
Sam Nelson - July 31, 2007
.
Crude
oil, gold and grain prices will keep rising as demand for commodities
plays catch up with a robust global economy, analysts said on
Tuesday. Global demand for oil is expected to rise by 50 percent
in the next 25 years, in China the demand is at record highs and will
continue to rise, Phil Flynn, energy analyst for Alaron Trading
Corporation, told an annual Commodities Outlook form. Flynn said
crude oil prices, which have soared almost $8 per barrel from $70 in
early July basis New York crude futures to nearly $78 on Thursday,
would peak at $85 by end of 2007. I think crude was undervalued
based on the rest of the world markets, he said, adding that continued
growth of world economies should add about $10 per barrel per year to
the price of crude oil and that the market should reach roughly $100
per barrel at the end of 2009. Flynn also said gasoline prices
were currently undervalued and would rise to match crude oil prices by
the end of 2007.
.
http://www.reuters.com/
.
EDITORS NOTES:
No market moves in a direct straight line, it goes up, it comes back
down a bit, it goes up again - - - but the long-term trend for oil
prices (and gasoline) is up, up, up - which is bad, bad, bad news for
consumers. Which is why we are big fans of alternative energy,
and along those lines, why the government in Brazil must be laughing
their rear ends off right about now. In fact, any country that
has already embarked upon weaning itself off of foreign oil, and oil in
general, will be in good shape going forward. Speaking of which,
what the heck is going on in India right now with solar power?
Let's take a look.
.
.
INDIA ANGLES TO BE SOLAR-INDUSTRY HUB
- By
K.C. Krishnadas
.
India
does not yet have a semiconductor-manufacturing plant in operation, and
opinion is still divided whether the country needs one. But given the
frequent power outages throughout the country, the story is quite
different for indigenous solar-cell manufacturing. The Indian
government announced incentives for manufacturing solar cells and
panels earlier this year, and it has targeted meeting 10 percent of the
country's power needs through renewable energy by 2012. That has
spurred a flurry of announcements by companies looking to join the
nascent solar industry here. EDA industry veteran Prabhu Goel's
Signet Solar has announced the most ambitious plans thus far - an
investment of $2 billion over 10 years to set up three plants in India.
Signet operates a plant in Germany and expects to leverage that
experience to ramp production here.
.
Tata
BP Solar, a joint venture between the Tata Group of India and BP Solar
of the United Kingdom, operates one of the oldest solar-energy
equipment manufacturing plants in India, near Bengaluru. The plant is
being expanded now, at an additional investment of $100 million.
Homegrown storage-hardware manufacturer Moser Baer has announced it is
building $250 million plant to make solar energy products in northern
India using technology from Applied Materials Inc. The global
photovoltaics market is on a high-growth curve, and sales are expected
to grow by six times, to $40 billion, by 2010. We believe our expertise
in related production technologies will help us get a leadership
position in the global PV industry, said Ravi Khanna, CEO of Moser Baer
Photo Voltaic Ltd. (MBPVL). U.S.-based Cypress Semiconductor,
meanwhile, is reportedly considering a $50 million facility to make
solar cells and wafers near the southern Indian city of Hyderabad,
likely through SunPower Corp., in which it holds a majority stake.
.
SunTechnics
Energy, a subsidiary of Germany's SunTechnics Gmbh, has a manufacturing
plant in Bengaluru and plans to expand it. The upsurge in demand
in India, by nearly 25 percent annually, is prompting several players
to put in huge investments. Companies make these investments largely
for export reasons, to cater to global needs, which are far greater
than local needs, said Rajesh Bhat, director and country manager for
SunTechnics Energy Systems Pvt. Ltd.
.
http://www.eetimes.com/news/
.
EDITORS NOTES:
Looking to invest in a growth industry? I do not think you need a
doctorate degree to figure that one out. Did you know there is a
backlog of anywhere from 3 to 6 months in some cases, if you want to
buy solar panels? Mostly it is the Germans buying the stuff up
like no tomorrow, but as petroleum prices continue to soar, and as many
utility companies start raising rates to compensate (for the portion of
their electricity generated from petroleum fired plants) the demand for
home solar power can only increase in the years ahead. And with
that said, where do we see the new factories and infrastructure to
bring the new capacity of global solar panel production on-line?
India, of course. Where did you expect - Ohio?
.
Many
economists predict that China will overtake America between 2030 and
2040, while India will overtake the US by roughly 2050, as measured in
dollar terms. Measured by purchasing-power parity, India is already on
the verge of overtaking Japan to become the third largest economy in
the world. India now trains a million engineering graduates a
year (against 100,000 each in America and Europe) and stands third in
technical and scientific capacity - behind the US and Japan, but well
ahead of China. Today India's IT sector alone annually earns the
vast sum of almost $25 billion, mostly in export earnings. With an
average growth rate over the last decade of 6 per cent and current
growth of 9 per cent, it is little wonder that average incomes are
doubling every 15 years - and the Indian government has loads of cash
in terms of foreign reserves (no credit crisis there). And now
they will be making solar panels. The Hindu Deity Vishnu must be
smiling.
.
.
INDIAN
AIRLINE MAKES ITS CASE A PREMIER-CLASS CONTENDER
By
Joe Sharkey - July 31, 2007
.
BETTER
than Singapore, better than Cathay and at least as good as
Emirates. That was how Naresh Goyal stated his goal that the
Indian carrier Jet Airways be rated among the top premier-class service
in the world in a few years. Most Americans have never heard of
Jet Airways, the airline he founded in India 14 years ago as a domestic
carrier and began building into an international player. That will
change. Starting Sunday, Jet Airways introduces its first service
in the United States, a daily flight between Newark and Mumbai, India
(with a stopover at the airlines new hub in Brussels).
.
Jet
Airways, which is profitable, now flies between 40 cities in India and
has expanded to routes between India and London, Sri Lanka, Nepal and
Southeast Asia. The airline plans to add service late this year to San
Francisco and later to Toronto, Johannesburg and the Persian Gulf, all
big premium-class markets. Mr. Goyal says Jet Airways new
long-haul first-class service will top that, with sliding double doors,
an 83-inch lie-flat bed, storage closets, a 23-inch flat-screen video
monitor, and a work table that can also seat two for an intimate
dinner. The money is there, he insists. In India, there are
about 30 million people who would be called rich - rich and another 350
million middle class, Mr. Goyal said. The economy is growing. Many Indians
have the money, and they want quality service when they fly
internationally - standards not lower than Singapore and Cathay.
.
http://travel.nytimes.com/2007/07/31/business/
.
.
INDIA
EXECS MOST OPTIMISTIC ON ECONOMY, INFLATION
The
Economic Times - July 29, 2007
.
Indian
executives are the most optimistic in the world in terms of
expectations for growth in economy, their industries as well as
improvement in inflation levels in their countries, a new Mckinsey
study shows. EXCEPT NORTH AMERICA,
a majority of executives across the world expect economic conditions to
improve in the next six months with Indians coming on the top with as
much as 81 per cent expressing a positive outlook, shows a survey
conducted by international management consulting firm McKinsey.
The robust economic growth projections come despite a GROWING THREAT FROM INFLATION ACROSS THE
WORLD, the study noted. In India, the latest government data
showed inflation rising to 4.41 per cent in week ended July 14 after
being unchanged for two straight weeks. While fuel prices were
steady during the latest reported period in India, the McKinsey study
found that nearly two-third of the executives worldwide saw oil and gas
costs as the biggest driver of the inflation.
.
http://economictimes.indiatimes.com/
.
.
THE
CRASH THAT COULD COME
By
Robert Kuttner - July 30, 2007
.
HISTORICALLY,
October has been the month for big financial busts. But this year,
October could come early. Investors and ordinary citizens have
good reason to worry about a perfect economic storm: a deepening loss
of confidence in the dollar leading to higher interest rates; the
higher rates bringing a crashing end to a hedge-fund, private equity,
and merger binge that has depended heavily on cheap borrowed money; the
boom in bait-and-switch mortgages ending in a morning-after of rising
defaults and sinking housing values; inflationary pressures in food,
oil, and other commodities leading to still higher interest rates --
all unsettling stock and credit markets and putting a new squeeze on
consumers borrowed to the hilt.
.
The
historical parallels aren't comforting. In the years 1971-73, the
United States devalued the dollar and went off the gold standard. Oil
exporting countries, compensating for a weaker dollar and angry at US
support for Israel, hiked the price of oil. This set in motion a
decade-long period of stagflation -- high inflation, tight money,
sluggish growth, shaky banks. If anything, the United States is
more vulnerable today. In that era, America enjoyed a net inflow of
earnings from global investments, ran a trade surplus, and lent far
more than it borrowed. As tourists of the 1960s appreciated, visiting
Europe on a pittance of $5 a day (in 2007, $5 buys coffee), the dollar
was way overvalued relative to Europe's play-money currencies and
overdue for a correction.
.
But
today, our trade deficit is more than 6 percent of gross domestic
product, and we borrow heavily to finance both private capital needs
and government debt. Until lately, optimists insisted that cheap
foreign debt-financing would continue indefinitely and prop up the
dollar, because it was in China's interest to keep underwriting
American purchases of its ever-expanding exports. But, swollen
with dollars, China is behaving more like an activist investor. The
Chinese government's investment arm has begun buying not just debt but
real assets, including 9.9 percent of the private equity fund
Blackstone and a big chunk of Barclays bank. We can't count on China --
or anyone else -- funding America's burgeoning foreign debt at bargain
rates indefinitely.
.
If
the dollar slide turns into a crash, the Federal Reserve would face the
unhappy choice of either hiking interest rates to raise foreign
confidence in the dollar (thus deepening domestic recession) or letting
the dollar sink further and increasing imported inflation. With 3
billion new consumers in Asia putting pressure on oil supplies, oil
exporting nations warn that a declining dollar means further price
hikes. Food experts, pointing to everything from global warming to
diversion of farmland for ethanol production, project rising food
prices. Increasing inflation could lead central banks to tighten money
generally.
.
And
the prospect of higher credit costs has Wall Street increasingly edgy.
The Wall Street Journal recently tallied 21 credit deals ranging from
$150 million to $20 billion since mid-June that had to be scrapped or
delayed because nervous investors balked at the proposed financial
terms. The unsold homes backlog is at its highest level in 15
years, according to the Financial Times. It reports a 57 percent drop
in the stock price of building companies in the past two years. Busted
private equity deals and predictions of a deeper housing slump sent the
Dow down 520 in two days. But every economic depression since the
early 19th century has been the result of excesses in the financial
sector undermining the real economy. 1929 was also a banner year for
new technologies and nifty consumer products.
.
When
historians sort out what could well be the recession of 2007-08, they
will wonder why regulators did not act before the speculative binge in
hedge funds, private equity, derivatives, and sub-prime mortgages
pushed the larger economy into a general downward spiral. As always,
the details will be complex, but the basic reason is pretty simple --
too many well-connected insiders were making too much easy money.
.
http://www.boston.com/news/globe/editorial_opinion/oped/articles/2007/07/30/
.
EDITORS NOTES:
I know, I know - another one of those sour and negative chicken little
- bad news bear kind of news items, but for what it's worth, the man
makes some valid points (that cheeky fellow that wrote in from the last
newsletter would not be pleased, I am thinking). In any event,
here is what Mr. Mort Zuckerman has to say (owner and editor of US News
& World Report).
.
.
THE GOLDEN AGE IS ENDING- By Mortimer B.
Zuckerman - July 29, 2007
.
We
have been enjoying a golden age. In the latter part of the 1990s and
the first part of the 21st century, every indicator of economic health
that should be up has been up: employment, income growth, stock market
profitability. And everything that should be down has been down:
inflation, interest rates, and unemployment. Inflation in the United
States was contained by a fortuitous combination of a glut in global
productive capacity, foreign competition, technological innovation, and
the soaring dollar, which made imports cheaper. Everything that China
exported went down in price (and everything that China imported went up
in price). So we had more productivity here, more jobs, more growth,
and pay rises without inflation.
.
Today,
many of these benign forces are still in play but to a much lesser
extent. The dollar is no longer soaring but slumping, as the world
engine for growth moves from the United States to the East. To get a
sense of how critical Asia has become, consider that our economy is
expected to expand by $526 billion this year. The Chinese economy,
which is a fraction the size of the U.S. economy, is expected to grow
by $420 billion. That divergence will persist as China, as well as
India, grows at a 10 percent annual rate.
.
A
collateral result of tighter money and higher interest rates is that
the currency exchange rates of these booming countries have
appreciated. The dollar has plunged roughly 4 percent just in the past
few months and on a trade-rated basis compared with a basket of major
currencies is now down some 30 percent from its 2002 peak. IMPORT PRICES HAVE
RISEN, which now ADDS
rather than abates INFLATIONARY
PRESSURES here. Wage costs in foreign countries have given
another twist to the spiral, not dramatic yet but noticeable: In the
past several months we have been paying about 2 percent more for
consumer imports, excluding autos, the fastest such advance in more
than a decade. This time last year, these prices were falling.
There is NO PROSPECT of these GLOBAL INFLATIONARY pressures easing. EMERGING NATIONS ARE
ENJOYING rising aspirations, HIGHER
LIVING STANDARDS, and rising incomes. Demands for food, consumer
goods, automobiles, and trucks are increasing, and so are the demands
for improved education and labor training. The result is increases in
costs that are rising more rapidly than technology can reduce them.
.
http://www.usnews.com/usnews/opinion/articles/070729/6edit.htm
.
EDITORS NOTES:
Mort tells us that: emerging nations are enjoying rising aspirations,
higher living standards and rising incomes. I could not have said
it better myself. Pretty smart fellow that Mort Zuckerman.
.
.
READERS
WRITE IN:
.
We
are going to the Dominican Republic from January to March. Have been
thinking of purchasing a condo in Cabarete or Sousa. Is a mortgage
possible?
.
EDITORS REPLY:
Well, this a question we do get via telephone and email occasionally,
and I have to be quite frank in my reply. Which is to say, what I
am going to tell you may not be appealing, but it happens to be the
truth (and why such CASH based
economies will be resilient to the current credit crisis problems we
are now seeing).
.
First
off, all of our clients pay cash for their real estate purchases.
Why? For starters, all of our clients want to get OUT of and not
into debt. Second, the Dominican Republic has never been an
attractive place to borrow money, historically speaking (invest or
deposit money, YES, borrow money, NO), and the banks in the country are
certainly very strict when it comes to lending money. Interest
rates in Pesos for car loans, home mortgages and the like are at a low
right now (ranging between 10 and 16 percent, which is quite low if you
can believe it). But, in terms of a mortgage, expect the bank to
ask for at least a 20 percent or more down payment (new construction
payments are often set up in such a way that you end up putting at
least 40 percent down once you get to the point of closing and paying
cash for the rest when the project is completed, or taking a bank loan
if need be for the remaining sixty percent balance). Also, expect
no longer than a 20 year adjustable rate loan structure on average. And
if that is not bad enough, the bank might ask for a local co-signer
that has assets (not Jose, the friendly tax driver you met at the
airport the last time you visited, but someone with real assets to grab
to cover the loan if you skip out of town) plus they will probably send
you to take a physical exam to apply for life insurance as well (a life
policy with the bank as beneficiary, enough to cover the loan amount).
.
And
now for the good news. Because of such very strict lending
practices, the loan and mortgage portfolios of Dominican banks, on
average, are much, much sounder and in better health than their US
banking counterparts. Because much of the foreign purchases are
done for cash, and because a home to a Dominican that does borrow is
sacrosanct (and they want no debt on their homes if they can help it,
or want to pay it off as quickly as possible), chances are you will not
see the same kinds of problems going forward in the Dominican Republic
housing market that you see happening in the US. In addition, my
very blunt and direct advise is use the opportunity to change the way
you manage your personal affairs, if you are planning to relocate to
another country. If someone is having trouble making it now in
the US, and are drowning in debt with a 5 percent ARM, believe me when
I say, you do not want to have one at 15 percent in the DR. So,
the idea and goal should be to get off the borrow all you can lifecycle
and try to live debt free, and take advantage of the lower housing
costs (and other costs, such as education) if possible. And with
that said, if you do not have enough cash under your belt to pay cash
in a market like the Dominican Republic, you may be setting yourself up
for trouble, and are probably better off staying right where you are in
the US. Everything takes at least some amount of money, even when
Escaping From America (to coin Roger Gallo's phrase).
.
Now
with that said, if you are someone that plans on living as debt free as
possible (with the idea to possibly live off of your investment
income), then in that case a country such as the Dominican Republic
will be attractive for you (with your investments spread out
internationally and prudently of course). And when you factor in
various cost of living or cost of lifestyle calculations, you will
probably find out that you can live better on less. This is the
reason many, many people from North America and Europe are relocating,
not to mention lower taxes as well (remember that real estate valued at
less than US$150,000 or RD$5 Million is tax-free in terms of annual
real estate taxes, and for the value over 150K you will pay about 1
percent on the overage value - - - - compare that to the real estate
taxes in many other places in North America for the equivalent of a
small broken down shack).
.
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