Extreme Tax Avoidance

Dave Gonigam – April 17, 2012

  • Record number of Americans turn to “extreme tax avoidance”: You might never take this step, but there’s something else worth considering…
  • Punishment for truth telling? The little rating agency that could, and the powerful forces trying to smack it down
  • President demonizes “oil speculators” anew: Time for a reality check, plus Chris Mayer on why the $90s might be oil’s new floor
  • A new move to make China’s currency a major player… Spain’s comeuppance for the Odyssey Marine travesty?… how high housing prices create a generation of the sex-starved… and more!

   “I’m amazed at how terrible I felt renouncing,” says Genette Eysselinck. “But it was the only way to get them off my back.”

“Them” in this case being the IRS. Ms. Eysselinck, born to a military family in Fort Bragg, N.C., has given up her U.S. citizenship at age 64. Married to a European civil servant, she found renunciation preferable to sharing every intimate detail of her husband’s finances with the IRS to comply with ever-more Byzantine U.S. tax law.

Ms Eysselinck, whose story turns up in a Reuters article here on Tax Day 2012, is one of a growing number of Americans taking this drastic leap. Here’s an updated edition of a chart we’ve shared with every new reader of Apogee Advisory since last summer. The numbers are small… but escalating dramatically.

How bad is the situation getting? “Many U.S. citizens living outside the U.S. are unable to even open regular bank accounts,” writes attorney Andrew Mitchel. “Foreign banks simply don’t want to deal with what they perceive as U.S. complicated and overreaching tax rules.”

Which is bad news even if you live stateside… and want to merely park some of your funds outside the United States, just in case.

One avenue remains open, however; Addison spells it out in the aforementioned special report. It’s accessible no matter your net worth, because there are no account minimums. If you’re not an Apogee reader, here’s where to become one.

   Stocks are roaring up today. The Dow has powered past 13,000. Whoops, make that 13,100. The Nasdaq and the small caps are up even more.

Goldman-Sachs, Coca-Cola and Johnson & Johnson turned better-than-expected earnings this morning, and a Spanish debt auction went reasonably well.

For the moment, that seems to count for more than the fact both housing starts and industrial production came in way below expectations.

Because you don’t need a healthy housing or manufacturing sector to have a healthy economy, of course. As long as the vampire squid can fudge its numbers to generate another earnings “beat,” buy!

   About that Spanish auction: Depending on who the buyers were, today’s “good” news could be making matters worse.

Spanish banks have stayed afloat by borrowing 227 billion euros in low-interest three-year loans from the European Central Bank. In turn, “the banks are propping up the Spanish government by parking these loan proceeds in the bond market,” says our Dan Amoss.

“But this is just temporary, and it makes the situation even more fragile by tying the fortunes of the government and the banks even closer together. Ultimately, the funds borrowed from the ECB must be used to satisfy deposits and bonds maturing later this year.”

Meanwhile, “the political will of countries like Germany to increase their funded financial commitments to the EFSF [the eurozone bailout fund] is fading. More pressure will fall on the ECB to resume its direct purchases of PIIGS debt.”

The investment takeaway? “Gold and other tangible stores of value have been rather dormant over the past six months,” says Dan. “Considering the explosive nature of this situation, this is puzzling. Perhaps most investors will wait to act until the gravity of this situation in Spain is staring them in the face.

“It’s only a matter of time before a broader group of central banks and institutional investors rushes to gold.”

   But not today. Gold is treading water this morning at $1,653. Silver’s back within sight of $32, though — currently $31.83.

   Nor is the greenback budging. The dollar index sits nearly unchanged at 79.5.

   A day after China took another step toward “internationalizing” the renminbi by loosening its dollar peg, one of the world’s major commodity exchanges is picking up the baton.

The London Metals Exchange denominates its contracts in dollars, yen, euros and pounds. Now it’s asking members to drop the pound and replace it with the renminbi.

Little wonder, considering China’s usage of the industrial metals traded on the LME, like copper and nickel. China is “the dominant force in the market,” says the Financial Times, “accounting for more than 40% of global demand for most metals and a rapidly increasing share of trading in LME futures.”

But what an insult to the mother country, no? Seventy years ago, the pound was still the world’s reserve currency; soon, it won’t even be a reference currency in the City of London.

Is anyone at the Federal Reserve or the Treasury taking notice? Nah…

   “There’s not a single rating by Egan-Jones that the SEC has ever said or even suggested was not of the highest quality or accuracy or integrity,” says lawyer Alan Futerfas, in a reminder of what can happen when you cross the wrong people.

Egan-Jones is a credit rating agency. Not a big one like S&P or Moody’s or Fitch. Nor does it follow the conventional rating-agency business model. “Its analysts,” Addison wrote in Apogee nearly two years ago, “are paid by the buyers of the securities it rates, not the issuers. What a novel idea!” The firm gained additional notoriety last summer when it downgraded U.S. Treasuries from AAA, preceding S&P by nearly three weeks.

The firm further downgraded Uncle Sam 12 days ago from AA+ to AA. And three days ago, it downgraded J.P. Morgan Chase from AA- to A+.

Perhaps not coincidentally, Egan-Jones finds itself the subject of a smear piece in today’s Wall Street Journal, which says the firm won SEC approval to rate bonds and other securities “despite having serious concerns about the firm’s internal procedures and staffing levels.”

Why, Egan-Jones has only five analysts and supervisors, according to the SEC. The big boys each have over 1,000. The horror! Never mind that Egan-Jones issues far fewer ratings. Indeed, it puts out 209 ratings per analyst, while S&P pumps out 885 ratings per analyst.

That says to us Egan-Jones does a more thorough job. All hail Egan-Jones! Really, we’re supposed to take the “concerns” of the SEC seriously? When its supervisors are surfing porn on their work computers and blowing off whistle-blower warnings about Bernie Madoff’s frauds?


   Uh-oh… Here we go again. “We need to work extra hard to protect consumers,” said the president this morning in a White House speech.

With West Texas Intermediate up to $104.42 this morning, the evil “oil speculators” are in the cross hairs again. Thus is the president asking Congress to beef up the surveillance and enforcement staff at the Commodity Futures Trading Commission. Traders would also have to put up more margin under the proposal.

This is as good a day as any for a refresher on why the national average gasoline price is pushing $4 a gallon… again. While everyone from the president to Bill O’Reilly harps about “Big Oil” and “the speculators,” the reality is rather different. Click the play button below for a nifty primer from our friends at Daily Resource Hunter. It takes only six minutes of your time…

   “Oil averaging somewhere in the $90s is a reasonable, if conservative, assumption,” says Chris Mayer, examining the issue from a different angle — the cost of production.

“If an industry can produce a commodity at a healthy profit,” says Chris, “then the incentive is to produce more. And eventually, the industry succeeds in doing so, which lowers the price of the commodity, thereby shrinking that profit gap. Or costs rise as the industry takes on more-marginal projects and the big profit gap shrinks.”

“Likewise, if the price of a commodity is such that many in the industry can’t make money, then the incentive is for the higher cost production to disappear.”

“From an investment point of view, you’d prefer to invest in low-cost commodity producers in which the price of the commodity produced is low relative to break-even. There aren’t too many of those around these days. But oil is one that probably doesn’t have much downside.”

The IMF reports that Saudi Arabia needs an oil price of $80 per barrel to balance its budget. Only a few years ago, that price was $40. Other big producers are in the same boat: Russia’s break-even was $110 last year, and will probably rise this year. “Many exporters,” says the Erste Group research firm, “need a price level of at least $80-90.” Otherwise, they lose money.”

That’s how Chris arrives at a “reasonable if conservative” assumption of oil in the $90s. “Based on that assumption, you can buy relatively low-cost producers of oil in the U.S. and Canada that should generate good profits in the years ahead.”

For the scoop on one of Chris’ favorite energy speculations of the moment, give this a look.

   Elsewhere in the energy sector, shares of the Spanish oil company Repsol tumbled 6% today when the Argentine government moved to nationalize one of Repsol’s major assets.

Repsol owns a majority stake in the Argentine oil firm YPF. Argentine President Cristina Kirchner has asked her nation’s parliament to seize 51% of YPF.

Spain’s government has leapt to Repsol’s defense. “This is a terrible decision,” said Spanish Foreign Minister Jose Manuel Garcia-Margallo.

Longtime readers will instantly recognize the irony… in light of Spain’s agitation to grasp the stash of coins recovered from a shipwreck by Odyssey Marine. In February, a U.S. appeals court sided with the Spanish government and ordered Odyssey to hand them over. “What is important,” said Garcia-Margallo at the time, “is that is a court has recognized Spain’s rights as owners of this wreck.”

Gee, karma’s a female dog, ain’t it?

   From Hong Kong comes word of an unexpected downside to living in a place with high housing costs: Young people aren’t getting any.

“Hong Kong is too crowded and lacks the privacy people need to have sex,” says professor Emil Ng, associate director at the Family Institute of the University of Hong Kong.

That’s because many Hong Kong residents live with their parents in cramped apartments well into their 20s or even 30s; they simply can’t afford to marry and move out earlier. The result is one of the world’s lowest birth rates, according to the World Bank: 1.04 births per woman.

“Hong Kong is always near the bottom of the list in terms of sexual frequency in those Durex annual surveys,” adds Ng, referring to a condom-maker’s survey of how often people around the world make love. “It may not be a very scientific research, but it still says a lot about Hong Kong.”

A poor environment for procreation

Meanwhile, sexologist Petula Ho from the University of Hong Kong (as Dave Barry would say, we swear we’re not making this up) points out women greatly outnumber men in Hong Kong. There’s less than one man for every 1.2 women between the ages of 20 and 39.

“Straight women in Hong Kong are in poverty in terms of sex,” Ho says.

Wait a minute… Don’t men significantly outnumber women on the Chinese mainland? Why, yes they do: “China’s deeply skewed sex ratio,” the Pulitzer Center reported last year, “is expected to lead to a population of lifelong bachelors roughly the size of Texas by 2020.”

Sounds like a match made in heaven…


Dave Gonigam
The 5 Min. Forecast

P.S. Bruce Robertson, director of our annual Symposium in Vancouver, has lined up Fusion IQ proprietor and Big Picture blogger Barry Ritholtz for a return appearance.

Recently, Mr. Ritholtz’s personal email account had the world’s best out-of-office reply…

“This week, I will be spending time on the Left Coast, meeting with clients, and generally being a New York nuisance. I expect to return from LaLa Land after my Botox treatment.

“If you are located in Europe, and require an extension of credit, please contact Angela Merkel.

“In case of dire economic emergency, contact appropriate party below:

Ben Bernanke    202.452.3000
Tim Geithner    202.622.2000
People’s Bank of China”

That’s the kind of humor Symposium attendees have come to expect from Mr. Ritholtz, along with investment insights he doesn’t share on his blog. Early-bird registration for Vancouver is available now.


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