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The Awful Truth About Swiss Bank Accounts

There is an “awful truth” about Swiss bank accounts. Awful in that their reality pales in comparison with Hollywood’s and the mass media’s depiction of these financial instruments. CNBC’s Mark Koba wrote back on August 20:

Mention the words Swiss bank account and it can bring to mind corrupt politicians hiding vast sums of money, drug lords laundering ill gotten gains or filthy rich American citizens trying to avoid paying taxes. The reality, however, is quite different from the myths.

“Swiss banks must verify your identity and won’t accept your business if they think it is illegal, says Ken Wassell, CEO of Los Angeles, California-based Offshore Company, a firm that aids its customers in overseas financial services. “About five percent of applications a year are turned down because of possible fraud,” says Wassell.

It doesn’t stop there. James Nason, spokesman for the Swiss Bankers Association, adds that Swiss banks must not only verify your identity but also verify the source of the funds you are putting in the bank. “And besides that,” says Nason, “the beneficiary of the funds must also be positively identified.”

Screening process? Background checks? How boring. Lie to me, Tom Clancy. Lie to me, Ian Fleming. Nevertheless, there is some truth behind the myth of the Swiss bank account. Koba explained:

That’s not to say there isn’t secrecy in having a Swiss bank account. Any Swiss banker today who reveals your information without your consent risks prison time by law. And there is secrecy when it comes to issues like inheritance or divorce. It’s up to plaintiffs to prove someone has a bank account in Switzerland, if they want access to it through a lawsuit.

But, there is a limit to the extent of that secrecy. From the CNBC piece:

There are, of course, exceptions to the secrecy rule, especially concerning crimes such as gun running and drug trafficking. Swiss banks are forbidden by law to accept money which they know might be as a result of a crime.

And when it comes to names, the so-called secret numbered accounts in Swiss banks are not completely secret.

“Yes, banks can set up an account by number only,” says Nason, “but you will have to go through the same process to open the account as a named account—at greater expense. Your name will be known to several upper management types in the bank and there are records of ownership.”

Another common myth of Swiss bank accounts is that Americans use them for the purpose of tax evasion. Koba noted:

Any American Swiss bank account holder does not pay taxes to Switzerland. But if an American is looking to hide money from the IRS, a Swiss bank account won’t do much good. As of January 1, 2001, unless a foreign bank obtained a status of QI or “qualified intermediary,” the bank must report to the IRS all earnings received from the U.S. and the names of the beneficial owners. If the bank does have a QI, which keeps a bank’s secrecy if it follows strict regulations, U.S. citizens can only have money in the bank if they are willing to disclose their identity to the IRS.

Finally, there are misconceptions about the cost of opening up one of these accounts, as well as their true purpose. According to CNBC’s Koba:

If you still want to open an account, it’s not complicated but it does take some time, effort and of course, money. A search on the Internet for Swiss bank accounts suggests that you don’t need much money to open an account, but that is one of the myths about how the system works.

Nason says that while the deposit amount varies for each of the more than 400 banks in Switzerland, most of them are looking to invest the money for a depositor, and not just hold it to generate a minimal amount of interest.

“I get letters nearly once a month from Americans asking about Swiss banks,” says Nason. “I recently got one from a man in Virginia, asking for help in finding a bank to hold his retirement savings account for him and his wife. But that’s not what Swiss banks really do. They are into professional asset management. A six-figure sum is usually the starting point for opening an account.”

Wassel says it’s more like $250,000.

Source:

“Swiss Bank Accounts: Separating Fact From Fiction”
Mark Koba
CNBC, August 20, 2008

Poll: One-Third Of Adults Surveyed Think U.S. In Depression

It’s a recession when your neighbor loses his job; it’s a depression when you lose yours.

-Harry S. Truman, 33rd President of the United States

The “D” word is making a comeback. USA Today’s Mindy Fetterman wrote today:

In a sign that anxiety is growing, 33% of 1,011 adults surveyed over the weekend by USA TODAY and Gallup said the economy already is in a depression (though by economists’ measures it is not). Just 12% said that 10 months ago…

Seventy-three percent said U.S. financial troubles will get worse before they get better. They expect their taxes to go up, and many worry about affording retirement or maintaining their standard of living. Nearly half worry about their homes losing value; 20% are seriously looking at taking money out of the stock market…

Trust is shifting from stocks and real estate to federally insured bank CDs. And nearly 30% have postponed, or are thinking about postponing, a big purchase. Almost half of those with jobs are more worried than before that the Wall Street crisis will mean their pay or benefits will be cut.

Displaced Great Depresssion kids
Bakersfield, California (1935)

Source:

“Poll on the economy: Americans gloomier, for now”
Mindy Fetterman
USA Today, September 29, 2008

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U.S. Economy Headed Towards Doom And Gloom?

This morning I came across two pieces which were notable in that they painted a gloomy picture for the U.S. economy going forward. Jonathan Burton of MarketWatch talked about TCW Group’s Jeffrey Gundlach’s economic outlook, and wrote:

An influential investment strategist has a dire forecast for U.S. stocks, credit markets and the continued independence of some of the nation’s top financial institutions.

Jeffrey Gundlach, chief investment officer at Los Angeles-based mutual-fund company TCW Group Inc., told clients on a conference call late Wednesday that the crisis in credit and housing may not abate for several years and is actually getting worse.

In the deteriorating climate he sees unfolding, Gundlach said, the Standard & Poor’s 500 Index could fall another 30%, giant Citigroup could become an “AIG-sized debacle,” Morgan Stanley would merge with a banking company, Wachovia won’t be able to stand alone, default rates on even prime mortgages could soar, and European banks’ woes are just beginning.

“This is no market for old men,” said Gundlach, who also manages TCW’s flagship Total Return Bond Fund . “This is no market for old-school thinking.”

Gundlach based his assessment on a belief that housing prices still face several more years of decline, a protracted slump, he said, not seen since the Great Depression. Moreover, Gundlach said it’s possible that home prices could be sluggish until 2022.

“If it’s like the Depression experience — and it sure is shaping up that way — it could take several years. Maybe we won’t see a bottom in home prices until 2014,” he said.

Burton talked about Gundlach’s credentials for making such statements. He wrote:

As a forecaster, Gundlach didn’t just climb aboard the gloom-and-doom wagon. He was early to spot the cracks that subprime loans were making in the financial system, and among the first to warn that an era of easy money would come to a bad end.

The MarketWatch reporter noted:

Expect loan default rates to rise, Gundlach said, not just in the subprime market, but among the top-drawer prime borrowers as well. The prime default rate could approach 10% from a current 2% before the carnage is over, he said…

Accordingly, financial institutions may suffer write-offs that could surpass $1 trillion before conditions improve, he said…

The breakdown will take a further toll on U.S. stocks, Gundlach added. The S&P 500 will tumble below 800, he said, about 35% below its 1156 close on Wednesday.

Said Gundlach: “None of us have ever seen this, and it’s no market for old men, but risk aversion is the order of the day.”

Someone else who sees massive problems ahead for the American economy is Harvard economic professor and former chief economist of the International Monetary Fund Kenneth Rogoff. He wrote on the Financial Times (UK) website last night:

Were the financial crisis to end today, the costs would be painful but manageable, roughly equivalent to the cost of another year in Iraq. Unfortunately, however, the financial crisis is far from over, and it is hard to imagine how the US government is going to succeed in creating a firewall against further contagion without spending five to 10 times more than it has already, that is, an amount closer to $1,000bn to $2,000bn.

In other words, $1 to $2 trillion. Rogoff continued:

True, the US Treasury and the Federal Reserve have done an admirable job over the past week in forcing the private sector to bear a share of the burden. By forcing the fourth largest investment bank, Lehman Brothers, into bankruptcy and Merrill Lynch into a distressed sale to Bank of America, they helped to facilitate a badly needed consolidation in the financial services sector. However, at this juncture, there is every possibility that the credit crisis will radiate out into corporate, consumer and municipal debt. Regardless of the Fed and Treasury’s most determined efforts, the political pressures for a much larger bail-out, and pressures from the continued volatility in financial markets, are going to be irresistible…

The Ivy League professor talked about the potential fallout from allocating so much money to deal with the escalating financial crisis. He wrote:

It may prove to be possible to fix the system for far less than $1,000bn- $2,000bn. The tough stance taken by regulators this past weekend with the investment banks Lehman and Merrill Lynch certainly helps.

Yet I fear that the American political system will ultimately drive the cost of saving the financial system well up into that higher territory.

A large expansion in debt will impose enormous fiscal costs on the US, ultimately hitting growth through a combination of higher taxes and lower spending. It will certainly make it harder for the US to maintain its military dominance, which has been one of the linchpins of the dollar.

The shrinking financial system will also undermine another central foundation of the strength of the US economy. And it is hard to see how the central bank will be able to resist a period of allowing elevated levels of inflation, as this offers a convenient way for the US to deflate the mounting cost of its private and public debts.

It is a very good thing that the rest of the world retains such confidence in America’s ability to manage its problems, otherwise the financial crisis would be far worse.

Let us hope the US political and regulatory response continues to inspire this optimism. Otherwise, sharply rising interest rates and a rapidly declining dollar could put the US in a bind that many emerging markets are all too familiar with.

A new banana republic?

Sources:

“The worst is yet to come”
Jonathan Burton
MarketWatch, September 18, 2008

“America will need a $1,000bn bail-out”
Kenneth Rogoff
Financial Times (UK), September 17, 2008

Second Stimulus Package Taking Shape?

Had an idea this would be a hot topic after the carnage on Wall Street today. CNN Money’s Corey Boles and Michael R. Crittenden wrote this evening:

Sens. Carl Levin, D-Mich., and Sherrod Brown, D-Ohio, said that the federal government needs to step in and help people on Main Street, urging Republicans on Capitol Hill and the White House to work with the Democratic majority in Congress to finalize an economic assistance package.

“The uncertainty about the future of the market underpins the need for another economic stimulus package,” said Levin…

Levin and Brown were speaking on a media conference call Tuesday morning.

Meanwhile, Senate Majority Leader Harry Reid, D-Nev., called on Republican presidential candidate Sen. John McCain, R-Ariz., to work to pass a second stimulus package…

House Majority Leader Steny Hoyer, D-Md., said the news from Wall Street underscored the need for another stimulus package, and said he hoped to bring a recovery plan to the House floor soon.

Speaker of the House Nancy Pelosi, D-Calif., said she hoped the Bush administration would come to the table to talk with Democrats.

Brown said elements of a stimulus package needed to include an extension of unemployment insurance benefits, spending to repair the country’s infrastructure, an increase in grants to states to help them pay for rising Medicaid costs, and an extension of tax credits for companies investing in research and development, and renewable energy sources.

According to CNN Money’s Boles and Crittenden, another goal of a second stimulus package could be to rescue the battered U.S. housing market. They wrote:

Democratic aides in the Senate said that lawmakers could attempt to do more with part of a second stimulus bill to bolster the housing market, which is at the root of the problems affecting banks like Lehman Brothers and Merrill Lynch due to their exposures to the subprime mortgage market.

The aides said that discussions were beginning Monday as to what that assistance could be, and that details weren’t available yet.

Boles and Crittenden also noted there are some who would like to see any housing initiatives include a halt to foreclosures. From the CNN Money piece:

John Sweeney, president of the AFL-CIO, the largest group of U.S. labor unions, renewed his call for a government-imposed moratorium on home foreclosures to allow the problems in the housing market to settle down.

Source:

“3rd UPDATE:Market Woes Reinforce Need For Stimulus -US Dem Sens”
Corey Boles and Michael R. Crittenden
CNN Money, September 15, 2008

The Benefits Of Tax Havens

Earlier today, I received a press release from the Center for Freedom and Prosperity Foundation regarding their new mini-documentary on the global economic benefits derived from tax havens. From the press release:

The Center for Freedom and Prosperity Foundation today released a mini-documentary discussing the global economic benefits generated by low-tax jurisdictions. The CF&P Foundation’s new video, entitled “The Economic Case for Tax Havens,” makes a compelling and succinct case showing that these market-friendly regimes have led to better tax policy, faster economic growth, greater government accountability and higher living standards around the world. Narrated by Dan Mitchell of the Cato Institute, the video cites empirical and historical evidence to illustrate the many positive contributions of tax havens…

Andrew Quinlan, the president of the CF&P Foundation, remarked, “The video shows how we all benefit from tax havens. The evidence for the positive impact of low-tax jurisdictions is overwhelming and we’re excited to release this compelling video.”

“The Economic Case for Tax Havens”
YouTube Video Link

Please refer back to the press release for other ways of accessing the mini-documentary.

Source:

“New Video Highlights Benefits of Tax Havens for Global Economy”
Press Release
Center for Freedom and Prosperity Foundation, September 10, 2008

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New York State Faces Worst Economic Hardship Since Great Depression

New York Governor David Paterson appeared on CNBC earlier today and warned that the state of New York is facing its worst economic hardship since the Great Depression. As a result of the crisis, New York state lawmakers were gathering for an emergency session. According to Governor Paterson:

• The state of New York is forecasting that Wall Street bonuses will be slashed 20% and capital gain losses will amount to 24% for the year.
• Governor Paterson’s “personal fear” is that investment bank and brokerage bonuses will be slashed by up to 40%, and capital gains reduced by the same amount.
• Wall Street supplies New York with one out of every five tax dollars.
• The state of New York could potentially lose $1.7 billion from slumping profits on Wall Street.

The New York governor told CNBC:

This is a combination of events. I wouldn’t compare it to the Great Depression, but I can’t cite a time since that period where we have had this amount of stress on our economy.

Paterson pointed out just how bad the financial situation is:

In June 2007, the sixteen banks that pay the most taxes on their corporate earnings remitted $173 million dollars to the New York state treasury. This June, those same sixteen banks paid $5 million. That’s a 97% decrease over last year. I don’t know if people really are getting how severe this problem is in New York and the ancillary effect it will have on the rest of the states, and even our federal economy.

You can view the 8 minute 33 second interview here.

Even Worse Than King Kong

Source:

“NY State’s Economic Emergency”
CNBC, August 20, 2008

Quote For The Week

Financial analyst Eric King talked about gold and silver on the Financial Sense Newshour this weekend, and warned listeners:

But I want people to listen carefully to what I’m about to say to them. Do not listen to statements made from this government. Ignore them. Ignore statements made by Paulson, who is retiring in November right after the election. They have been consistently wrong in all of their statements. They have lost control of the system, in my opinion, and the system is breaking right now. The United States banking system is insolvent, and they are trying to keep this hidden from people and try to get more suckers to put more money into these banks, but the suckers are not lining up anymore. A big tax bill is going to be laid on the American public, and as Greenspan stated in Belgium, the Federal Reserve, and even the Treasury, stands ready to create money without limit. We are about to go into that phase now where we are going to have very serious money printing, and the Fed knows it, Paulson knows it, the Treasury and Bernanke know it, and because of that they had to crush these metals ahead of that…

Windfall Profits Tax? Where’s The Windfall?

Driving back and forth between Chicago and Burlington, Wisconsin, last week, I listened to the news on the radio quite a bit. There was a lot of chatter about Exxon Mobil reporting its highest quarterly profit ever ($11.7 billion) on Thursday. Not surprisingly, politicians were quick to criticize the announcement. The New York Times’ Clifford Krauss wrote Friday:

Democrats in Congress were quick to criticize Exxon’s profit, hoping that the resentment felt by many drivers over high gasoline and diesel prices could help them in an election year.

“Inside the boardrooms at the major oil companies, it’s Christmas in July,” said Senator Charles E. Schumer, Democrat of New York.

Does anyone still pay attention to this guy? IndyMac. Lest we forget!

Anyway, one politician decided to take on the issue of oil company profits directly. On Friday, Senator Barack Obama (D-IL) announced a new proposal where oil companies enjoying record profits would face a “windfall profits” tax, where the cash would be passed on to consumers in the form of a rebate.

Hmm. A “windfall-profits” tax. I seem to recall that a windfall-profits tax was previously imposed on oil companies back in 1980, but was eliminated in 1988 after oil exploration and gasoline prices both fell. I’ve also heard that the tax raised only $79 billion, well below its proponents’ estimates. As a matter of fact, oil industry economists blamed the tax for contributing to a decline in exploration and drilling, helping set the stage for the energy crisis we currently face.

A reduction in oil exploration and drilling. Great. That’s exactly what our country needs right now. Which leads me to ask, which rocket scientist came up with this idea?

Earlier today, ABC News’ Jake Tapper asked the Obama campaign about the specifics behind the tax proposal. From their exchange:

TAPPER: What is a “windfall profit”?
OBAMA CAMPAIGN: Senator Obama believes that while oil companies and shareholders need incentives to run well managed businesses that invest in efficiency and innovation, a significant share of the record profits the big oil companies have been making have nothing to do with their management skill or investment decisions. Instead, it is the result of changes in the price of oil because of factors like supplies in the Middle East, demand in Asia, and disruptions and distortions in the oil market.

Therefore, a well designed mechanism can impose a fee on a small share of these windfall profits without affecting incentives for oil companies and without affecting the price of oil. Indeed, as the Congressional Research Service recently concluded: “[T]o the extent that a surtax on the corporate income of crude oil producers on their upstream operations could approximate such a [pure corporate profits] tax, this would not raise crude oil prices and would not increase petroleum imports in the short run. While the current corporate income tax is not a pure corporate profits tax, a surtax for oil companies would arguably be an administratively simple and economically effective way to capture estimated oil windfalls in the short run.” [Emphasis added, “The Crude Oil Windfall Profits Tax of the 1980s: Implications for Current Energy Policy,” Congressional Research Service, 3/9/06, p. 32.]
TAPPER: Should such a tax only be applied to oil/gas industries?
OBAMA CAMPAIGN: Yes.

Okay. Enough of this foolishness.

…a significant share of the record profits the big oil companies have been making have nothing to do with their management skill or investment decisions. Instead, it is the result of changes in the price of oil because of factors like supplies in the Middle East, demand in Asia, and disruptions and distortions in the oil market.

Geez, is that the best they can come up with? In which parallel universe is any business or industry NOT affected by external factors such as supply-and-demand fluctuations, disruptions, and distortions? As such, is it fair to impose additional taxes on a business or industry just because these factors (which had “nothing to do with their management skill or investment decisions”) played out the way they did?

Yet, the most disturbing aspect of this ill-contrived proposal is the fact that profit margins in the oil and gas industry aren’t exactly at windfall levels. The evidence? From the July 27 issue of Parade Magazine (based on U.S. Department of Energy data):

Although Exxon Mobil netted $40 billion in 2007, the average profit margin for oil companies is just 7.6%, compared with 9.2% for most manufacturers.

Adding to growing speculation that the proposal is purely for political pandering, the Wall Street Journal wrote yesterday:

Maybe they have in mind profit margins as a percentage of sales. Yet by that standard Exxon’s profits don’t seem so large. Exxon’s profit margin stood at 10% for 2007, which is hardly out of line with the oil and gas industry average of 8.3%, or the 8.9% for U.S. manufacturing (excluding the sputtering auto makers).

If that’s what constitutes windfall profits, most of corporate America would qualify. Take aerospace or machinery — both 8.2% in 2007. Chemicals had an average margin of 12.7%. Computers: 13.7%. Electronics and appliances: 14.5%. Pharmaceuticals (18.4%) and beverages and tobacco (19.1%) round out the Census Bureau’s industry rankings. The latter two double the returns of Big Oil, though of course government has already became a tacit shareholder in Big Tobacco through the various legal settlements that guarantee a revenue stream for years to come…

The Journal summed it up best when it stated:

…a windfall is nothing more than a profit earned by a business that some politician dislikes. And a tax on that profit is merely a form of politically motivated expropriation.

It’s what politicians do in Venezuela, not in a free country.

Sources:

“Exxon’s Second-Quarter Earnings Set a Record”
Clifford Krauss
New York Times, August 1, 2008

“Obama’s Proposed ‘Windfall Profits Tax’”
Jake Tapper
ABC News, August 5, 2008

“With Gas at $4 a Gallon… Who Is Getting Your Money?”
Parade Magazine, July 27, 2008

“What Is a ‘Windfall’ Profit?”
Review & Outlook
Wall Street Journal, August 4, 2008

Second Stimulus Package Update

Seems like there’s been a lot of interest lately in a second stimulus package to get the U.S. economy back on its feet. On July 15, I talked about how House Speaker Nancy Pelosi met with several economists and announced afterwards that:

We will be proceeding with another stimulus package.

On July 22, Reuters reported:

The U.S. Congress is discussing a second economic stimulus bill that could include nearly $15 billion in infrastructure spending, a senior member of the House of Representatives told Reuters on Tuesday.

Rep. James Oberstar, a Minnesota Democrat who chairs the Transportation and Infrastructure Committee, said a stimulus package could include “accelerating” pay-outs of $9.5 billion from the federal trust fund dedicated to road construction and maintenance…

The money would go to funding more than 2,600 projects, he said. States would receive full federal funding and then have a few years to pay back any matching funds.

Richard Cowan, John Crawley, and Lisa Lambert noted:

Congressional aides have discussed infrastructure elements to the plan, but have not provided cost estimates or other details. The timing of any second stimulus bill remains up in the air.

The Senate Appropriations Committee on Tuesday postponed consideration of its version of a second stimulus plan until September, said Robert Byrd, the panel’s chairman and a West Virginia Democrat.

President George W. Bush has indicated he wants to see how effective the first stimulus package is before looking at another one.

The idea of a second stimulus package hasn’t been lost on U.S. presidential candidate Barack Obama. According to the Star Tribune of Minneapolis-St. Paul yesterday:

Back from a nine-day overseas trip, Sen. Barack Obama made a point of turning to domestic concerns, calling a meeting Monday to solicit advice on reviving the economy and lifting wages.

Obama’s 2 1/2-hour economic forum, which was closed to the media, included some of the top economic policymakers of recent Democratic and Republican administrations. Among them were Robert Rubin and Paul O’Neill, Treasury secretaries in the administrations of Presidents Bill Clinton and George W. Bush. Billionaire investor Warren Buffett took part by phone.

Obama said the economy needs short- and long-term fixes, including another “stimulus” from Congress…

The group agreed with Obama’s call for a second stimulus plan, although there was some debate about the size.

Obama wants to inject another $50 billion into the economy. Laura Tyson, who headed Clinton’s Council of Economic Advisers, said, “There were people in the room who felt it should be more.”

Sources:

“Infrastructure could spur new stimulus: Rep”
Richard Cowan, John Crawley, and Lisa Lambert
Reuters, July 22, 2008

“Obama gains support from economic team for a second economic stimulus plan”
Star Tribune, July 29, 2008

How Will McCain, Obama Deal With A Record Budget Deficit?

Last week, I talked about the U.S. national debt. $53 trillion of debt (factoring in long-term liabilities), or $455,000 per American household.

This week, it’s the U.S. budget deficit, which the White House predicts will reach close to half a trillion dollars in 2009. The Associated Press’ Andrew Taylor wrote earlier today:

The government’s budget deficit will surge past a half-trillion dollars next year, according to gloomy new estimates, a record flood of red ink that promises to force the winner of the presidential race to dramatically alter his economic agenda.

The deficit will hit $482 billion in the 2009 budget year that will be inherited by Democrat Barack Obama or Republican John McCain, the White House estimated Monday. That figure is sure to rise after adding the tens of billions of dollars in additional Iraq war funding it doesn’t include, and the total could be higher yet if the economy fails to recover as the administration predicts.

The result: the biggest deficit ever in terms of dollars, though several were higher in the 1980s and early 1990s as a percentage of the overall economy.

Both presidential candidates have proposed new initiatives as part of their campaign platforms. The question is, how will this latest deficit forecast affect their agendas? Taylor noted:

Neither campaign is backing off campaign promises — McCain to cut taxes and Obama to expand health and education programs — in light of the bleaker new figures.

“We can’t afford not to invest in some major initiatives such as health and energy and middle-class tax cuts,” said Obama economic adviser Jason Furman. “And we also can’t afford not to pay for those initiatives.”

Some would disagree with Furman. MarketWatch’s Robert Schroeder wrote today:

Stan Collender, a managing director for Qorvis Communications who formerly worked on both the Senate and House Budget Committees, is skeptical that the next president will have an easy time getting much accomplished as long as the deficit remains high.

“Based on what we now know for sure about next year’s budget, none of the presidential candidates’ promises should be taken seriously,” said Collender. “Unless they, the country, and those lending us money are willing to tolerate much higher nominal deficits and a larger debt than has so far been imaginable, the next president’s options will be severely limited,” Collender wrote Tuesday.

Sources:

“US deficit zooming to half-trillion as Bush leaves”
Andrew Taylor
Associated Press, July 29, 2008

“Deficit projections complicate candidates’ plans”
Robert Schroeder
MarketWatch, July 29, 2008

Crash Prophet Gary Shilling Predicts Nosedive In Consumer Spending

Back on June 13, 2007, I wrote a post entitled “Crash Prophets” and spoke of economist/investment advisor Gary Shilling. Dr. Shilling, who was twice ranked as “Wall Street’s top economist” by polls conducted by Institutional Investor magazine, said last summer that the United States was fast approaching a financial storm. From that post:

He notes, “An unusual confluence of five forces in recent years created a virtual world of financial speculation that departed spectacularly from the real economic world, the ‘grand disconnect’ we’ve called it.” The five forces… are:

1. Global liquidity.
2. Investors’ misguided belief in “20% annual returns each and every year.”
3. Risk desensitization due to recent low volatility and the belief the Fed will “bail them out.”
4. Rampant, aggressive speculation.
5. American consumer spending, highlighted by instant gratification and the inability to save.

And what will trigger the meltdown? According to Farrell, Shilling still sees the subprime debacle as the catalyst.

A year later, and the “crash prophet” is providing his latest financial storm forecast. Yesterday, the president of A. Gary Shilling & Co was the subject of a Newsmax.com piece. According to the Internet news site:

The U.S. is already in a recession that’s unfolding in four stages — and it’s going to get a lot worse, investment advisor Gary Shilling says.

“We’re between the second and third stages right now,” Shilling told a Bloomberg interviewer.

“The first phase was the collapse in housing market, led by subprime slide last year; the second phase was Wall Street, where there was a tremendous amount of over-leverage and investment in assets of questionable if not unknown value and highly illiquid.”

Shilling believes the third phase — a big nosedive in consumer spending — is about to unfold.

Yesterday, Bloomberg reported that prices paid by U.S. consumers jumped in June by the most since 2005 on spiraling costs for fuel and food. The cost of living soared 1.1% after a 0.6% gain the prior month, the Labor Department said. Fed Chairman Ben Bernanke, testifying before Congress Wednesday as part of his semi-annual report on the U.S. economy, warned that consumer spending is “likely to be restrained over coming quarters,” and businesses are “likely to be cautious with their spending in the second half of the year.”

Dr. Shilling told Newsmax:

Once people work through their tax rebates, they’ve run out of borrowing power. Their home equity has disappeared. They’ve been relying on that and on income growth that isn’t happening. With high energy bills and maxed out credit cards, I think consumers are about to go off the cliff….

I look for the biggest decline in consumer spending since the 1930s.

Next up? Phase four, where recession spreads throughout the world.

Oh joy…

Sources:

“Gary Schilling: U.S. In Recession Now”
Newsmax.com, July 16, 2008

“U.S. Consumer Prices Climb by the Most Since 2005 (Update1)”
Shobhana Chandra
Bloomberg, July 16, 2008

Merrill Lynch Economist Warns Of Multiple U.S. Recessions

According to the Financial Post (Canada) from July 9, David Rosenberg, the chief North American economist at Merrill Lynch, is warning of the possibility of not one U.S. economic recession, but a series of them. The Post’s Jacqueline Thorpe wrote:

Rosenberg has consistently held one of the more pessimistic views on Wall Street, arguing the housing slump and credit crunch will exact a heavy toll on U.S. consumer spending. He believes the data will eventually show the recession started in January.

But he adds it’s not the peak-to-trough decline in real GDP that’s important but the duration. Trouble is, the duration could be Japanese-like (about a decade).

Just like Japan, he says a series of rolling recessions is possible for the next three to five years, making it extremely difficult to time the market. Japanese equities got trashed through the process. At the 1998 post-bubble lows, Japanese bank, construction, real estate and transport stocks were all down 80%, retail stocks were down 50%. The only place to hide was bonds, notes the bond bull.

Rosenberg told the Canadian publication:

We are nervous that we have ended up following in Japan’s footsteps due to the inept fiscal response to the problem. A temporary tax rebate from Uncle Sam to buy iPods tackles a real estate deflation and credit crunch as effectively as the LDP’s (Liberal Democratic Party) “solution” in the early 1990s to build bridges and pave river beds that nobody needed.

The Vapours, “Turning Japanese” (1980)
YouTube Video Link

Source:

“Rosenberg on strike, fed up trying to pinpoint U.S. recession”
Jacqueline Thorpe
Financial Post (Canada), July 9, 2008

House Speaker Pelosi Announces Second Stimulus Package

Looks like another stimulus check may soon be on its way to American households. According to Reuters today, House Speaker Nancy Pelosi met with several economists Tuesday and announced afterwards:

We will be proceeding with another stimulus package.

Reuters’ Andrew Taylor wrote:

Pelosi said that recently issued tax rebate payments of $600 to individuals and $1,200 for married couples have helped the economy but that more is necessary to offset the drag of higher gasoline prices and other costs…

The Democratic effort is still in its formative stages, but most of the proposals mentioned by Democrats were rejected by Bush during negotiations that produced the earlier stimulus measure. A new package probably won’t be acted on before Congress returns in September from its annual summer vacation.

According to Taylor, this second stimulus package could consist of additional tax rebates, heating and air conditioning subsidies for the poor, infrastructure projects, higher food stamp payments, and aid to the states.

Speaking of seconds, back on April 29 I talked about humor columnist Dave Barry, who published the following in the Miami Herald on April 13 in response to the first stimulus package:

…this year, filing taxpayers will receive an Economic Stimulus Payment. This is a very exciting new program that I will explain using the Q and A format:

Q. What is an Economic Stimulus Payment?
A. It is money that the federal government will send to taxpayers.
Q. Where will the government get this money?
A. From taxpayers.
Q. So the government is giving me back my own money?
A. Only a smidgen.
Q. What is the purpose of this payment?
A. The plan is that you will use the money to purchase a high-definition TV set, thus stimulating the economy.
Q. But isn’t that stimulating the economy of China?
A. Shut up.

Source:

“Democrats plan second economic stimulus bill”
Andrew Taylor
Associated Press, July 15, 2008

The Great American Lock-In

Back on June 17, I added the following comment to my post “Are Rich Americans Leaving The Country?”:

U.S. Gameplan- Block the exit doors on rich Americans trying to leave (hit ‘em in the wallets), then hammer them with higher taxes down the road.

On the personal finance website MainStreet.com yesterday, Terry Savage, who I’m familiar with through the Chicago Sun-Times but who is also a nationally-known expert on personal finance and a regular television commentator on CNN, CNBC, PBS, and NBC, talked about how Congress has just passed a law which effectively blockades Americans with a lot of assets from expatriating and relinquishing their American citizenship. Savage wrote:

A lot of people probably can’t understand why someone would voluntarily give up American citizenship — but if someone wanted to do that, they’d now incur financial penalties for it.

Congress just passed a new law that will stop your capital — or at least a good portion of it — at the border, should you decide not to be a U.S. citizen anymore. Is it, perhaps, in preparation for the possibility that Americans might rebel at the debt and taxes incurred by their government by leaving for lower-tax locales?

Welcome to the Great American Lock-In.

And how did Congress slip this past the “filthy rich” of America? Savage says:

You probably didn’t notice this little provision inserted into the Heroes Act of 2008, passed by Congress on June 17. The headlines in the press release about the law were about the increased benefits for veterans and families of deceased military.

But Richard Kohan of Price WaterhouseCoopers drew my attention to one section of the act, which states that anyone voluntarily giving up his or her citizenship will be taxed on all of his assets as if he or she had sold them — paying capital gains on assets that have increased in value, even though they have not been sold.

Uncle Sam’s message to the rich? You’ve achieved the American Dream, now I’m going to take away the fruits of your labor if you try to leave.

Savage adds:

That’s right. While everyone in the media is focused on keeping aliens out of America, Congress has voted to lock its citizens - or at least a good portion of their assets — into America! Maybe they’re thinking that patriotism won’t be enough to keep the smart money from recognizing the coming increases in the tax burden.

So part one of the gameplan is now in place. How about those higher taxes? U.S. presidential hopeful Senator Barack Obama appeared on FOX’s “Your World with Neil Cavuto” on June 26. He told Alexis Glick of the FOX Business Network:

I will say — and I have always tried to be honest with this — 95 percent of Americans will see a tax cut under my tax plan. It is true that those like myself, who are in the top 5 percent, we’re going to see a tax increase. I’m going to roll the Bush tax cuts back to the levels they were in the 1990s. And just remember that rich people were doing pretty good back then, too.

Should Obama win the White House, it appears wealthy Americans are going to get hit in the pocketbooks whether they choose to stay or leave.

Sources:

“There’s A Law That Takes Away Money If You Leave U.S. Citizenship?”
Terry Savage
MainStreet.com, June 30, 2008

Barack Obama Interview
Alexis Glick
FOXNews, June 26, 2008.

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Offshore Banking Alert
The 10 things you really need to know before opening an offshore bank account. Free Report.