Fight or Flight

by Addison Wiggin – March 29, 2011

  • The Japanese earthquake could spare the United States from a "dubious distinction"… why it may not matter to you…
  • Capital goes where it’s treated best… 60 Minutes takes a moment to notice…
  • Video: Silicon Valley venture capitalists politely listen to a hippy-dippy pitch for bottled air…
  • More Fed folly, Ben Bernanke’s news conferences, a "stimulus" program from 7,500 feet up… and more…
  • Plus, a 20% discount on all books you read about in The 5, courtesy Laissez Faire Books

0:00 — How’s this for an unpredictable consequences of the disaster in Japan? The United States may not get to wear the mantle "world's highest corporate income tax" after all.


At the current pace, the U.S. will ascend to No. 1 next month, as Japan cuts its rate from 40% to 35%.

But last week, following the disaster, Japan's economics minister suggested the government might reconsider. He’s concerned the government will suffer a short-term revenue hit in the midst of rebuilding.

Japan is a fiscal basket case. The Nipponese government debt-to-GDP ratio is a whopping 225%. Compared to that to the American version… near 100%.

If we ran a business in Japan right now, we'd be looking forward to having lower taxes and higher operating capital. We probably wouldn't like it too much if the rug was pulled from under us at the last minute, earthquake or no.

0:20 — Having said that, we’re not running a business in Japan, are we? We’ve got the U.S. government to contend with. And the trend in place in this country is what we’re concerned with…

"We are dealing with a tax system that is a dinosaur," Cisco CEO John Chambers said of the U.S. system on 60 Minutes Sunday, helping to highlight our concern. We first noted the trend last year when David Farr, CEO of Emerson, said because of the uncertain business environment in the U.S. he was going to ship all of his new jobs overseas. The potential exodus is also a central theme of the documentary we’re filming right now.

Cisco has been expanding overseas in recent years, too… and keeping its average tax rate over the last three years to 20%.

"We do what makes sense to the shareholders," Chambers told Lesley Stahl. "We go where there are incentives in countries that say, ‘We want you here, we’re going to give you tax advantages, and we want you to add jobs here, etc.’

"We can no longer in America say, ‘This is how we do it; therefore. you must do it.’ [The U.S. has] gotta change, or we’re going to be left behind."

0:37 — "If you have a 35% rate in the United States and, for example, a 12.5% rate in Ireland, there’s a incentive to move your factory to Ireland," economist Martin Sullivan added. The 60 Minutes story pointed out 600 U.S. companies are in Ireland, employing 100,000 people.

"The U.S. Treasury, in effect, is subsidizing investment in Ireland," Sullivan said.

Cisco has eight subsidiaries in Ireland.

0:41 — Of course, there are shades of gray in all this. As high as U.S. corporate tax rates are, there are plenty of "loopholes" buried within the 71,684 pages of the tax code. That's how General Electric paid $0 in U.S. corporate income tax despite earning $5.2 billion in domestic revenue.

We might cheer GE's tax-reduction efforts if it weren't joined at the hip to Uncle Sam. GE secures boatloads of defense contracts. Its finance arm, GE Capital, got $139 billion in federal loan guarantees in during the Panic of 2008.

0:48 — There are other examples. Sen. Bernie Sanders, the self-described socialist, put out a list of 10 corporate giants that pay little or no income tax. With one exception, Carnival Cruise Lines, all 10 fall into three broad categories.

  • Government contractors (GE, Boeing)
  • Bailed-out banks (Bank of America, Citi, Goldman Sachs)
  • Energy firms that get assorted tax credits (Exxon Mobil, Chevron, ConocoPhillips, Valero).

So if you want to avoid corporate income taxes, the lesson is to either become an integral part of the government… or employ a massive lobbying force to secure favors for your industry.

That's a terrible lesson for the rest of us. For Cisco's John Chambers, the take-away is that he's better off casting his lot overseas. It's a shame, but we can hardly blame him. If capital goes where it's treated best, for many companies, the United States isn't currently the place.

0:55 — Thus, the crucial question of the age: Fight or Flight. Assuming you're not joined at the hip to Uncle Sam and get invited to regular lunches at the White House like GE's Jeff Immelt, what do you do?

Do you stay home and "fight"? Do you persist in your efforts to create wealth, despite the government's and the grifters' best efforts to destroy it?

Or do you "flee" and take your capital where it's… well, treated better? That's the core question we'll pose this coming July — just four months from now — at the 12th annual Agora Financial Investment Symposium in Vancouver.

We'll be joined by familiar cantankerousness from Doug Casey… who's chosen the "fleeing" option by living in 12 countries during his adult life… and new ideas from Gary Shapiro, author of the book The Comeback, who’ll be arguing that innovation will restore the American Dream. We’ve invited crowd favorites Marcio Mello, Juan Enriquez and Barry Ritholtz to come back too. Along with the whole list of "usual suspects." (You’ll even be invited to view and comment on the film in progress…)

Check out the current list of speakers… and we're adding new ones every day… right here. If you'd like to sign up, discounted registration is still available. Or call Barb Perriello at (800) 926-6575 and tell her Addison wants you to be there… you.

1:16 — For the third time in a week, a gauge of consumer confidence has turned in a spectacularly gloomy number. Today it's the Conference Board's turn; its index for March took the biggest one-month hit in a year.

As with the Bloomberg and Reuters/University of Michigan surveys last week, consumer mood is being dragged down by higher food and fuel prices. The Conference Board's chief economist, really sticking her neck out, says this "will likely impact spending decisions."

1:23 — Here's another data point that's turned in its worst one-month performance in a year: the Case-Shiller home price index. The 20-city gauge fell 3.1% between January and February.

"The housing market recession is not yet over," in another neck-extending statement, this one from the head of the committee at S&P that crunches the numbers. As you can see, the 20-city number is at a critical juncture… because it's its late 2008 lows.

Prices have fallen in 18 of the 20 cities over the last 12 months. They're essentially flat in San Diego, and up 3.6% in the Belly of the Beast — Washington, D.C.

1:00 — Stock traders have sloughed off the day's data, and the major indexes are up slightly as we write.

1:04 — "This week will see a lot of data releases that will cause anxiety and uncertainty in price direction," writes our currency trading expert Abe Cofnas.

"On Friday, we’ll have the Bureau of Labor Statistics' monthly nonfarm payroll numbers, a market-moving U.S. economic indicator. And Thursday will see the Tankan report, a massive quarterly survey of 10,000 Japanese manufacturing firms. Yen traders be on alert for any surprises there.

"We’ll also have speeches from several U.S. central bankers that have the potential to cause ripples as traders listen closely for any references to inflation risks and the end of quantitative easing, or QE2.

"In fact, I saw a fairly new phrase emerging from Internet market chatter —‘normalization.' That reference is to end of QE2. It’s important because the end of easing provides fuel for the ‘hawks' supporting tighter rates. It’s also dollar positive. This new wrinkle in the sentiment wars will be interesting.

"Of course, the situations in Japan and Libya remain forces on market sentiment, as well. All this presents a rich context for shaping binary option opportunities."

Yesterday, Abe's readers laid on two currency trades, playing a market covered by no other North American trading advisory. As with all trades in this market, the results will be known by Friday. Some of them play out even sooner.

Readers have already collected gains of 369%, 545% and even 1,339%. Let Abe walk you through how it works right here.

1:46 — Precious metals are down fractionally from where they were 24 hours ago. Spot gold is fetching $1,419 and silver has dropped a couple of pennies below $37.

1:50 — Crude oil has added a few cents, pushing back above $104.

2:17 — Has the venture capital scene really come to this?

The setting: the Venture Capital Fundraising Club of Silicon Valley, a reality show in which you get to make a five-minute presentation to at least two judges — real venture capitalists, or CEOs of VC companies or startup lawyers.

Rachel Sequoia was the "Audience Choice" winner in February. This child of the earth proposed she be given $500,000 for a venture called "Share the Air." What Perrier and Fiji did for bottled water, Sequoia would do for air — capture it in exotic places, bottle it up and sell it to "plants, animals and people."

But Rachel is far more, like, eloquent in her visions than we could ever be…

Duude, were these VCs, like, "getting punked"… or I don’t know… something else? Either way, this is potentially the most annoying video ever.

2:48 — "Do the Feds really not see," writes a reader, preaching to the choir after yesterday's issue, "that the ‘significant strength and momentum' in the economy is the same smoke and mirrors as the ‘stock prices rose and… interest rates fell,' not because things are getting better, but because the Feds are distorting reality?

"And what do they think is gonna happen once they start to tighten? I can’t believe these guys are such morons. Prime examples of government employees…"

The 5: We had this very discussion yesterday while writing The 5. We try to take them at face value. They appear to have the hubris to believe they can pull a lever here, push a button there and control the entire global economy. As investors, we assemble evidence to the contrary and place our bets accordingly.

3:42 — "Mr. Ben four times a year," adds another reader, commenting on the Fed’s announcement they’ll be giving quarterly press conferences. "Now we can get the expected answer in quadruple form.

"So when would Mr. Bernanke say anything that would be true? He would only answer and present what people want to hear.

"QE to infinity! With all the mortgages on the books, good or bad, as those are rolled over, they will continue to convert the incoming cash to Treasury purchases? It’s sleight of hand. The crappy assets will be turned over through refinance, short sales and foreclosures to finance the U.S. government.

"We paid for them once, and then we will pay for them again. Am I wrong? Am I seeing this clearly? Probably not, because it is behind the curtain…"

The 5: Bernanke's first news conference comes at the end of next month. We're not sure how useful they will be in pulling back the curtain, but we are very confident they’ll be confusing and entertaining at the same time. Stay tuned.

4:08 — "I’ll provide the link," a reader extends a generous offer to a fellow reader, "to the appropriate chapter of Economics in One Lesson to show what a shortsighted and counterproductive position his is."

Ah, yes… the reader yesterday suggested that "Large and ongoing U.S. military expenditures are actually an indirect form of societal welfare," and as a result, bringing the troops home from their assorted overseas obligations would bring about massive unemployment.

"But given the absurdity of supporting military expenditures," our reader cautions, "and destruction as ‘productive welfare,’ he should really read the entire book."

4:33 — "The reader who wrote about all the displaced people we would have if we stopped aggression overseas," another agrees, "have no fear! There are plenty of jobs here. I submit for your consideration:

A Florida Fish and Wildlife officer using a twin-engine Vulcanair to spot a crack smoker in the woods from 7,500 feet.

"One might marvel at the technology, or one might marvel at the endless resources our government can employ to spy upon us. How much freakin’ money did we spend to go find that one loser off in the freakin’ jungle? "

"Aren't there enough drug kingpins selling drugs to kindergarteners that we have to search out the wilderness?

"No, to answer your unasked question, I have never even smoked pot. But I still don’t give a damn if you use it. But yes, I do partake of adult beverages.

"Really enjoy The 5. I like to think I’d get along with your readers famously."

The 5: Why not try it out… about a thousand readers will be assembled again this year at our Symposium in Vancouver from July 26-29, 2011. Our theme, to get you interested, is Fight or Flight: Capital at Risk! We’ll be hosting speakers and attendees from 29 countries and all seven continents. We, too, believe you’ll get along with the group famously… Vancouver is a sight to behold each year.

(If you want to know how we have attendees from Antarctica, you’ll just have to call Barb Perriello at (800) 926-6575… and book your early-bird discounted seat, today.)

5:00 — "I’m a fairly new subscriber with you. And I want to say how much I appreciate your 5 Min. Forecast. Though I am not really into finance, and therefore don’t understand some of it, there is enough to help keep a novice interested. Thanks."

The 5: Welcome. Thank you… for giving us a try. We hope you continue to like what you see.


Addison Wiggin

The 5 Min. Forecast

P.S. Hmnn… Time magazine's website today presents a slideshow of photographs from the 1923 hyperinflation in Weimar Germany…

The demise of the dollar is going mainstream.

If you want to stay ahead of what your friends will be talking about at your next backyard barbecue, the book When Money Dies will help you dazzle them with factoids.

The book is a gripping account of what it felt like for ordinary citizens when the German government tried to print their way out of war debt incurred by World War I. Written by the British journalist Adam Fergusson and published in 1975, it became an underground classic in the last decade, with used copies going on Amazon for hundreds of dollars.

Now it's back in print, and we're making it as easy as possible for you to get a copy… In fact, we'll even give you access to Chris Mayer's monthly letter Capital & Crisis for a 30-day trial. All we ask is that you cover shipping for the book. The full scoop on this offer is here.

P.P.S. All books you read about here in The 5 are available at Laissez Faire Books for a 20% loyal-reader discount.


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