A Closer Look at China, Where the Dividends Are, Credit Score Insanity and More!

by Addison Wiggin & Ian Mathias

  • Beijing on the brain: A revealing poll, gold-buying rumors, fevered activity at Treasury and the Pentagon
  • But is China really more capitalist than the U.S.?
  • An income investor’s dream… Where to turn for high yield when the usual suspects don’t deliver
  • Americans give priority to credit cards over mortgages… FICO chief wigs out in response
  • “A shot across the bow” — Doug Casey on the Texas IRS attack

 

  The markets are atwitter this morning over Greece. But chances are you already know that. It’s China we have on the brain.

And so does Joe Six-pack. ABC News and The Washington Post just polled 1,000 Americans and found…

· 41% say the 21st century will be the “Chinese Century”

· 40% say it will still be an “American Century”

· A slim majority says the U.S will play a smaller role in the world economy this century

· But a majority also says that will be either a good thing or, at worst, neutral.

We’re trying to be optimistic and take that last point as a sign that the protectionist monster among the masses is at bay.

In the meantime, there are other concerns…

  China has just postponed several military “exchanges” between Beijing and Washington — visits by high-level officials and such. It’s the first real, tangible retaliation for the U.S. sale of $6.4 billion of military gear to Taiwan.

  Rumor has it China will buy all 191.3 tons of gold the International Monetary Fund said last week it would put on the open market. So far, only Russian news agencies are reporting this; it’s yet to be confirmed by Western sources.

  We take note of these developments with a couple of looming deadlines in mind…

· Next month, the Pentagon issues its annual assessment of China’s military. It usually has alarmist language, and Beijing usually issues angry replies, but most of the time, it’s just theater. This time? We’ll see…

· April opens the official window in which the Treasury Department could label China a “currency manipulator.” We’re hearing buzz from Washington that the Obama administration is keen to boost jobs by boosting exports — which means a weaker dollar in general, and a weaker dollar versus the yuan in particular. We’ll watch this one closely.

  All of this weighs on our mind as we evaluate something we encountered on a private message board we belong to from someone who’s lived in China for 12 years. “What people fail to grasp,” this individual writes, “is this place is much more capitalist than the States now:

· No capital gains tax

· No property tax

· No local or state taxes

· A reasonable 35% tax rate for the highest earners

· Corporate tax rates of zero percent for 3 years and 15% per year after that.

“Also, most importantly, it’s not a casino economy like the States. China will sell 30% more vehicles this year than in the U.S. 93% of those vehicles will be purchased cash upfront.

“For a home loan, you need 30% down. As a private business, to get a loan you have to put up the assets of the company, i.e., plant and equipment. There are no leverage games here.

“It’s a one-party state, but at least it is focused on its own people. We have a two-party system that has sold us down the river. All the Asian Tiger economies needed a strong central government to launch themselves out of poverty. Not a good system for our culture, but it works for them.

“High-speed train systems going on line, 50 new airports in that last five years — you must see this place to believe it.”

We’ll be traveling to China in May. We hope to establish a business in Beijing. But what say you? Is China, for all its flaws, more capitalist than the United States now?

  “In the 1970s, the U.S. controlled a 70% share of the world’s financial markets,” writes our dividend hound Jim Nelson, who also sees wealth and power shifting away from the U.S. “According to Reuters, that number ‘could shrink to 30% by 2030.’

“Yet U.S. investors hold only about 5-10% of their investment wealth in foreign stocks and bonds. That’s a ridiculously low number, considering that soon, seven out of every 10 dollars will be made abroad.

“That’s not even the most enticing stat to switch to a broader international exposure…

“As income investors, it’s impossible to ignore the massive dividend yields foreign markets offer. The major indexes of many foreign markets are posting yields that are two, and even three, times larger than the S&P 500.

“Dividend payers in New Zealand’s NZW 50 are posting an average yield of 5.3%. Australia’s ASX 20 averages 4.8%. And even the FTSE 100 in the U.K. is sitting on a 4.5% dividend yield. You can compare those numbers with the S&P 500’s measly 2% dividend yield.”

And those are just the indexes. Jim has unearthed some terrific picks within those overseas markets that you can buy easily on major American exchanges. Including dividends, they’ve registered eye-popping gains in the last year, like 40% and 66%.

For access to all of Jim’s picks, check out Lifetime Income Report

  The Spartans are still gumming up the mainstream financial press today. Moody’s threatened to downgrade Greek sovereign debt this morning, on the heels of a similar warning from S&P yesterday. Yawn, stretch.

Markets reacted predictably. The Dow plunged 165 points in the first 20 minutes of trading. Gold is clinging to $1,090. The dollar index is back up to 81.

It didn’t help that the weekly report on first-time jobless claims showed another “unexpected” increase. Nor did this…

  Durable goods orders rose 3% last month, but that was almost entirely on the strength of orders for commercial aircraft.

Back out orders for transportation goods and the number actually fell 0.6%. Orders for business equipment — especially computers and electronics — looks lousy. If businesses aren’t investing in capital goods, how likely is it they’re going to hire people? Just asking.

  Nearly one in four homeowners with a mortgage is underwater, according to figures from First American CoreLogic. That’s an even more dismal assessment than the one from Zillow earlier this month that reckoned only one in five.

In California, the number is one in three. In Nevada, two in three. At that pace, much of the Silver State is destined to return to the desert from whence it came.

Reviewing this report, a Reuters columnist points out something we wish had occurred to us earlier — the Census Bureau’s “homeownership rate” has become a mockery. Officially, the number is still 67%. But if you exclude everyone who owes more on his home than the home is worth, the number is actually 43%. So much for the “ownership society,” huh?

  Speaking of home ownership, FICO, the outfit that computes your vaunted “credit score,” has just noticed that consumers with high scores are more likely to default on their mortgages than their credit cards.

Last year, the firm says, folks with FICO scores of 760 or higher defaulted on real estate loans at three times the pace they defaulted on plastic.

This shouldn’t be any surprise to FICO. We noticed a few days ago that the number of consumers current on their cards but delinquent on their mortgages exploded by 50% in the year after Lehman went belly up. FICO has access to this data in real time.

But it appears flabbergasted by this development, marveling in the first paragraph of a press release that “most credit cards are unsecured credit and mortgages are secured by real estate.”

Earth to FICO: If you’re in an underwater home, why wouldn’t you commit strategic default and use the difference between a mortgage payment and rent on a similar home to pay down those cards? You might not even have to move if your mortgage lender doesn’t want to follow through on foreclosure and book the loss!

Still, FICO’s CEO told Bloomberg TV he’s stunned the phenomenon isn’t limited to subprime: “Now we’re starting to see at the high end of the marketplace people with good FICO scores having serious delinquency problems.”

There’s a hint of panic in the man’s words, as if he senses his entire business model is going down the toilet. Good riddance. Millions of mortgages were issued in the last decade on the basis of nothing more than the “score” issued by this company, which reveals exactly nothing about a borrower’s income, or how his debt load compares to his income. FICO wasn’t the cause of the housing bubble, just a trifling enabler.

“I think we’re on the ragged edge, and this Austin thing is a clear warning shot across the bow,” says Doug Casey, reflecting on last week’s aerial suicide attack on a federal building in Texas housing IRS offices.

“When individuals start taking actions like this, it can change things. An army of one can sting, but what happens when you have 100,000 armies of one? Or a couple million? Just think of what would have happened back before World War II in Germany if each one of the millions of Jews and Gypsies and others the Nazis rounded up had fought back. The death camps were made possible by people who, although they had the capacity to act like wolves, acted like sheep.

“I’m not saying things will go that way in the U.S. But I do think there’s increasing resentment on the part of the average citizen against those who work for ‘The Man.’”

Doug never fails to provoke when he appears each year at the Agora Financial Investment Symposium. We can’t guarantee he’ll flout the B.C. authorities by lighting a cigarette — indoors, on stage — as he did in 2008, but we’re sure he’ll give you plenty to think about — and act on. Besides, if you’ve watched the Olympics and thought that skyline in Vancouver looks pretty nice, you should experience it in person this July. For the 8 millionth time, here’s where to register. Do it.

  “The reader asserting, ‘Without an initial increase in borrowing/money supply, there can be no fiscal growth’ apparently has forgotten that it is possible to begin with savings, rather than debt. And even those who need to borrow can do so from others who have saved, rather than from an increase in the fiat money supply.”

  “Why do you, and most every other analyst, talk about the government needing to raise taxes when what is really needed is to raise revenue? It makes absolutely no sense considering that lowering the tax rates causes revenues to rise! There must be a break-even point in this formula, but so far, we have not lowered taxes to where we have reached it.

“Or contrarily, it needs to cut spending the way I do when my income is lowered by unemployment. I know, expecting Congress to cut spending is like expecting politicians to tell the truth. But you should not be encouraging raising taxes when that is not the answer to the problem.”

The 5: Oy. You must be new to the class. We’ve written extensively on the Laffer Curve, which is, as you describe, the optimum level of taxation for maximizing revenue to the government.

Even Arthur Laffer himself believes the level of taxation to maximize revenue is higher than where we are currently… because the nitwits in Washington can’t figure out how to control spending. We published a complete interview with Laffer, including his thoughts on deficit spending during the Bush years, in our book I.O.U.S.A.. Further, as we described in the “Foreword” to Gold: The Once and Future Money by Nathan Lewis, we don’t believe the Laffer Curve can work under a fiat currency regime. It requires the fiscal restraint of a balanced budget and the gold standard. Fat chance at that…

The whole idea is daft and conjured up by politicians who think the sun won’t rise without their approval. Why would you want to maximize revenue to the government anyway? It’s not like it knows how to spend it well. At this current juncture, we don’t advocate sending any money to Washington.

(Not that it really matters what we think. Members of Congress believe they have the right and infinite capacity to borrow whatever they want from our kids’ and grandkids’ future. In fact, they routinely pass the idea into law.)

Side note: We need your help. Seven years ago, we acquired a boutique research firm on Wall Street, because we thought we needed eyes and ears on the scene in New York. Heh. Stupid idea that was, eh? We closed that office in New York, but we haven’t given up on the idea of providing investment research for individual investors that will not only cover the nexus between money and politics, between Wall Street and Washington, but would crush even the finest research published by the Wall Street houses, such as they are.

We’re starting that service with three “beta” issues. We’d like to test the idea and get your feedback, so we’re offering the initial issues free of charge. If you’re interested in providing feedback, please get the details here.

Regards,

Addison Wiggin

The 5 Min. Forecast

 

P.S. We’re also giving away six months of our most exclusive and expensive service.

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rspertzel

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