California’s “Dangerous Precedent”

March 20, 2013

  • Cyprus… or California? Inside Sacramento’s own desperate grab for cash
  • When “buy gold” TV commercials aren’t enough: What China’s doing now to put more gold in the hands of its citizens… and the stunning implications for your own metals stash
  • Is the China “miracle” stalling out? Checking the only economic number that matters to the new premier
  • A reader’s on-the-ground account from Cyprus… questioning whether Cypriots are really better off than Americans… an extraordinary gold coin value… and more!

  “How would you feel,” asks Brian Overstreet, “if you made a decision, which was made four years ago, [and] you absolutely knew was legally correct and four years later a governing body came in and said, Nno, it’s not correct, now you owe us a bunch more money. And we’re going to charge you interest on money you didn’t even know you owed’.”

Mr. Overstreet, and about 2,500 other Californians, are feeling a bit like Cypriots this morning.

In Cyprus, the crisis over the “stability levy” grinds on: “President Nicos Anastasiades,” the BBC reports, “is meeting party leaders to hammer out a Plan B after a one-off tax on savings failed to get the support of any MPs.” The banks are now closed through next Monday. Until the “holiday” is extended yet again.

“The theft of money from private bank accounts by bureaucratic dictate is not one to be condoned,” writes a reader from Cyprus. “It would set a very dangerous precedent.” Much more from him below…

  Meanwhile, California is setting a different kind of “dangerous precedent” with those 2,500 small-business owners — retroactive tax bills averaging $50,000 each.

“In December,” Fox News reports, “the state’s tax authority determined that a tax break claimed over the past few years by 2,500 entrepreneurs and stockholders of California-based small businesses is no longer valid and sent out notices of payment.”

Mr. Overstreet and his fellow investors sold their stake in a data-mining startup last year and reported the sale immediately to the state. “We paid the tax based on the law at the time.”

Then the law changed. “For 20 years,” explains Sacramento’s KCRA-TV, “California allowed investors to keep 50% of their gains after selling a startup company. But the Franchise Tax Board, or FTB, killed the program after a court ruled the tax was unconstitutional.

“But instead of making the tax proactive, the FTB is now demanding that some 2,500 businesses must pay five years worth of retroactive taxes, plus interest.” Overstreet’s bill is $250,000.

As in Cyprus, California lawmakers recognize the blatant injustice: A bill canceling the tax bills will likely sail through the legislature.

Whether the tax break will still be allowed in the future is an entirely different question. “As a going-forward problem,” says Overstreeet, “if entrepreneurs are no longer allowed this kind of incentive, there’s no longer any reason for us to intentionally grow our companies here in California.

“We are going to take our business to where it is the cheapest and most effective place to hire people.”

California — no surprise — came out near the bottom of our proprietary screen examining all 50 states in 2011 for their fiscal soundness. Who fared the best? We’ve been regularly updating our special report American Oases for readers of Apogee Advisory — identifying the five states best equipped to ride out any future crises. You can get a copy by following this link.

  The Dow has jumped back into record territory this morning, above 14,500. All the major U.S. indexes are up about two-thirds of a percent.

For the moment, nothing can shake traders’ confidence — not Cyprus, not a huge earnings miss from FedEx, not even the news that Oprah will deliver the commencement address at Harvard.

But the Fed? We’ll see: By the time you read this, the Federal Reserve’s Open Market Committee will have pronounced whatever it plans to pronounce about monetary policy, and Fed chairman Ben Bernanke will have spun it however he wants to spin it.

As usual, we’re watching Bernanke’s news conference so you don’t have to. We’ll pull out any noteworthy nuggets tomorrow.

100  After a pop above $1,610 in overnight trade, gold has settled back to $1,608.

Silver’s been a laggard this week, unable to move the needle above $29. At last check, the bid was $28.84.

  The Chinese government has taken another big step to encourage ordinary people to buy gold: It’s lifted the value-added tax (VAT) on Gold Pandas. The tax is 17%, so it’s a big deal.

“Given the demand for gold among China’s citizens,” writes Peter Anthony from World Coin News, “this is a very interesting development.

“The effects of this policy are likely to push demand for Gold Pandas even higher than it already is. It may also have the effect of creating a whole new group of collectors in China as buyers discover the charms of the coins that change design from year to year.”

Since at least 2010, we’ve chronicled the Chinese government’s efforts to get more gold in the hands of ordinary Chinese — even commercials on state-run China Central Television encouraging gold ownership. Addison and Chris Mayer have seen China’s bustling Cai Bai gold market up close and personal.

Then there’s the Chinese central bank’s gold stash — 1,054 metric tons as of April 2009. Officially, the figure hasn’t been updated. Unofficially, the Ministry of Industry expects gold reserves to grow to at least 8,000 metric tons.

“We could expect the Chinese,” says Byron King in a new presentation, “to add as much as 7,682 tons of gold in as little as two years — more than enough to launch them past Germany and America to become the largest gold-holding nation in the world!”

Byron’s new expose on “China’s Fort Knox” is ready for your review, complete with two eye-popping forecasts for the gold price — one for the next six-eight weeks, another for the coming two-five years. Hold onto your seat.

  “China’s newly inaugurated communist leadership is discovering that stimulus and infrastructure plans have limits,” suggests our macro strategist Dan Amoss.

The every-10-years change of power was completed last week: Xi Jinping is the new president, Li Keqiang the new premier.

Li was introduced to 5 readers in late 2010 when his name turned up in one of the State Department cables posted online by WikiLeaks. He had dinner with the U.S. ambassador one night and dismissed China’s sky-high GDP figures as “for reference only.”

If he really wants a pulse on the Chinese economy, Li said he follows only three indicators…

The analysts at World Economics have since mashed up these three indicators into the “Li Keqiang Index.” Going into 2013, it appeared to be running out of gas…

“China has been running stimulus programs for years on end,” Dan Amoss continues. “It’s dotted with half-empty high-rise buildings, airports and train stations. ‘Let’s put millions to work on these projects and then figure out what to do,’ was the idea.

“These modern-day pyramids are not self-funding; as such, they will require permanent subsidies from an overstretched banking system.

“The laws of economics say construction spending has declining marginal returns. Even in the state-run Chinese economy, the laws of economics cannot be repealed.” In today’s 5 PRO, Dan follows up on a stock he recommended avoiding on Feb. 13 — one heavily dependent on Chinese construction.

  Copper prices sit near eight-month lows at $3.44 a pound… not that it matters to the perps in our latest copper caper.

Part of the roof has disappeared from the Palisades Community Church in Washington, D.C. — along with the downspout and some gutters.

It’s a “big irritant,” church volunteer Lee Wilson tells The Washington Post. “They don’t comprehend the replacement cost.” Well, no, they don’t, any more than the thieves who were stealing lead from the roofs of Anglican churches in the U.K. a while back…

  “I just thought I would shed light on why there were hardly any protests in Cyprus,” writes a reader from nearby Greece.

“It is a tiny population of around 1.1 million where everybody knows everybody, as it were. Basically, Cypriots were all calling their representatives and telling them that if you vote for this, we are going to… [we’re redacting this last part in deference to the Presbyterian standard].

“Hope this helps solve your puzzle.”

The 5: Makes sense. Doing some back-of-the-envelope math, it appears each member of the Cypriot parliament represents about 20,000 people — even less than the 30,000 or so the Founders envisioned for the U.S. House of Representatives. (Today, it’s about 700,000.)

  “Your reader yesterday missed one thing,” writes a reader about the suggestion that a 7% bank levy in Cyprus looks good compared with near-zero interest rates in America.

“This is not an either/or option,” counters today’s reader. “Inflation is in place in both North America and Europe. That will remain true. So the question becomes should a one-time theft of 7% of savings be acceptable if inflation will continue to eat into the remaining 93% of your reserves?”

  “Is it just me,” a third writes, “but even the normally ‘sane’ talking heads on TV are saying this couldn’t happen here. Hasn’t it already happened?

“We spend more than we bring in with taxes, run huge deficits, so we print more money, which we can do as the world’s reserve currency, the Fed buys our bonds, and then we raise everyone’s taxes to just keep going. And this is a solution? Your other subscriber had it right, maybe the Cypriots got a good deal. Also, is it a good idea to annoy the Russian mafia — don’t they also have drones?”

  “I would like to take issue,” writes a reader from Cyprus, “with your loose and belittling terminology — it is not a farce! A fiasco, perhaps. But to us here in Cyprus, it is neither — it is serious.

“Bank accounts are frozen, the Germans are showing no understanding of what the impact is of their highhandedness and your readers don’t understand what is going on — from the comment about the theft of 7% from individuals’ bank accounts being the same as paying 0% interest — only in his simple arithmetic mind could this be suggested.

“The theft of money from private bank accounts by bureaucratic dictate is not one to be condoned… it would set a very dangerous precedent… and you should thank the people of Cyprus for taking this courageous step. They now face some dire uncertainties.

“The issue is not that the banks were stupid in their lending to developers and greedy for the better returns formerly offered by Greek banks (which were lost and is why the Cyprus banks are now in trouble. The real issue is that Germany is the only country that benefits from a strong euro — while the weaker countries are all being destroyed by it. And the Germans now dominate the EU.

“The decision to make an example of tiny Cyprus is German power politics — nothing more. Merkel is up for re-election, and we all know what that means… The Russian ‘dirty money’ in Cyprus is being used to bolster her chances — by taking this righteous stand against the

Russian oligarchs — or mafia, if you prefer — she is showing her strength. But she is forgetting that the Russians have the means to buy Cyprus, or should I say, the Cypriots’ gas futures (Gaszprom to the rescue) — and who knows what accommodation Cyprus may choose in order to retain its dignity and to spit in the German eye.

“Personally, I would have been well served had they voted in favor of the amended bailout — exempting depositor accounts below 20,000 euros and applying the ‘theft’ to the rest.

“But I am glad they chose to say ‘OXI!’… ‘NO!’ It may cost me in the end — but I’m glad Cyprus will have shown its spirit in upholding the trust we all must have in our banking accounts.”

The 5: Thanks for the ground-truth perspective… and Godspeed.

Best regards,

Dave Gonigam
The 5 Min. Forecast

P.S. While we have Chinese Gold Pandas on the brain… our friends at First Federal have an unprecedented offer going — Gold Pandas priced “for the actual price of their gold weight alone,” says Nick Bruyer.

Limit two per household, Nick says. And the offer is available for only a few more hours. Take advantage here.

rspertzel

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