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Off the Cuff: Battling Mixed Messages

Thursday, March 22, 2012, 9:59 AM

In this week's Off the Cuff with Mish & Chris podcast, Mish and Chris referee:

  • Bernanke vs. Gold

    • How accurate is the Fed Chairman's criticism of the gold standard?
  • Perception vs. Reality
    • Why does the economy feel so bad when the stock market feels so good?
  • You vs. the Herd

    • Why now is the time for having the courage of your convictions.

There are a lot of mixed messages swirling around of late. Sound money advocates champion precious metals, while our Fed Chairman derides the gold standard as an anachronistic failed experiment. A steady drumbeat of discouraging data shows that the global economy still faces serious risk, but the stock market suggests times could hardly be better. It's times like these when a steady hand on the tiller can make all the difference.

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Important Consequences of Expatriation

Thursday, March 22, 2012, 9:32 AM

Important Consequences of Expatriation

by Mark Nestmann, contributing editor
Thursday, March 22, 2012

Part I: A Primer for Those Considering Expatriation

In Part I of this article, we describe a plan that any U.S. citizen can use to legally and permanently end their future obligation to pay U.S. tax on their worldwide income or estate.

If you have not yet read Part I, available free to all readers, please click here to read it first.

Part II: Important Consequences of Expatriation

In this second part, we explain:

  • The nuts and bolts of expatriation, including the legal process of expatriation
  • The tax consequences of expatriation
  • The immigration consequences of expatriation
  • The pros and cons of U.S. investments once you expatriate
  • The tax consequences should you choose to spend more than a few months each year in the United States after expatriation
Expatriation: The Basics

Once you've obtained a second passport and qualified for residence in another country, you can begin the legal process of expatriation.

To do so, you must make an appointment with a U.S. consulate. You generally cannot expatriate within the territorial boundaries of the United States. The consular officer will explain the consequences of expatriation and have you sign some forms.

Two or more appointments may be necessary to complete the process. At the end of whatever sequence of visits applies at the consulate you choose, you'll then hand in your U.S. passport. Anywhere from several weeks to several months later, you'll receive an official document called a "Certificate of Loss of Nationality" (CLN). With the receipt of this document, you will have officially relinquished your U.S. nationality.


Off the Cuff: US Treasuries - The Coughing Canary

Thursday, March 15, 2012, 1:28 PM

In this week's Off the Cuff with Mish & Chris podcast, Mish and Chris investigate:

  • Risk "On"

    • Painful days for those holding precious metals, bonds or the yen
  • US Treasurys
    • Are we seeing a game change of historic proportion?
  • Not all numbers are trustworthy

    • The recently-released bank stress test results insult our intelligence

From now on, you're going to hear a lot more about the US Treasury market. Rates are beginning to creep up, which for a global economy hooked on free debt is like sunrise to a vampire. The Treasury market is monstrous, and when it rolls over, it will take nearly every asset class down with it. Suffice it to say, we're watching it very closely.

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Get Ready for Oil Price Volatility to Kill the 'Recovery'

Tuesday, March 13, 2012, 12:52 PM

Get Ready for Oil Price Volatility to Kill the 'Recovery'

by Gregor Macdonald, contributing editor
Tuesday, March 13, 2012

Executive Summary

  • The market is losing faith in the transportation sectors ability to deal with $100+ oil
  • Why greater volatility in the price of oil is a safe bet in 2012
  • Why oil has a hard price floor and soft price ceiling
  • How greater oil price volatility will (negatively) impact the global economy

Part I: Understanding the New Price of Oil

If you have not yet read Part I, available free to all readers, please click here to read it first.

Part II: Get Ready for Oil Price Volatility to Kill the 'Recovery'

To the extent that the US economy has been redefined as the health of its corporations, rather than the health of its people, it makes sense that many may hold the view that oil prices have an “unclear” effect on the economy.

To be sure, if your corporation is sited in the US and your labor force is manufacturing goods in Asia -- which runs on coal -- then at least for a while, a shield from rising oil prices can be sustained. However, the 2 mbd taken offline from US consumption and the 1.0 mbd taken offline in Europe over the past seven years have removed about as much discretionary demand as possible. From this juncture, the next layer of demand to be removed will directly impact the industrial economy, especially through its transport and logistics systems.

As we came out of the September 2011 lows in global stock markets and oil once again regained the $90 level, I began to watch the Dow Jones Transportation Index (TRAN) for signs of recovery or recession. As many of you understand, I have been a long-time advocate of rail transport for its outsized advantages compared to trucking and automobile transport, owing to its incredible energy efficiency. And the railroads have indeed thrived in the first stage of Peak Oil, taking share away from trucking.

However, despite strength in the TRAN, largely owing to the representation of railroads, there is still a large portion of the global economy running on airlines, trucking, logistics, and delivery services. Companies like FedEx and UPS use a lot of oil and cannot escape their reliance on it in their mission to connect the world globally through door-to-door services. Equally, it is not just consumer-related demand that drives the global delivery companies. World industry uses FedEx and UPS to ship critical parts throughout the global supply chain.

Here is a chart of the components of the Dow Jones Transportation Index (TRAN).


As you can see, while railroads compose 29% of the TRAN, airlines, delivery services, trucking, and other truck and transport services compose 44% of the index.

Now, as I said, I have been waiting to see how durable the recovery in the TRAN would be once we started hitting the wall of higher oil prices. Using the iShare ETF which represents the TRAN, symbol IYT (NYSE), I have noticed the following turn in the chart:

Some of you may be familiar with Dow Theory, which holds that the Transportation Index (TRAN) needs to continually confirm new highs in the broader Jones Industrial Average (INDU) to maintain the prospect for even higher stock prices on the back of a healthy economy. I don’t wish to invoke that particular theory here, as that would over-complicate my analysis and force a digression into the flaws of using the broader Dow Jones Industrial Average (INDU) as a tell on the economy.

Instead, I want to keep it simple: Reflationary policy can keep economies from collapsing, push up the prices of stocks, and ensure that some moderate consumption flows into demand for goods.

But reflationary policy cannot rescue the most energy-sensitive sectors of the economy. As Bernanke himself said: “The Fed cannot create more oil.” Accordingly, what I find in the above chart of the TRAN is that investors are losing confidence that global logistics can keep expanding, now that WTIC oil has been pressing up against $110 and Brent is trading near $125.


Greek CDS Triggered

Friday, March 9, 2012, 5:25 PM

The ISDA ruled today (Friday) that a default has occurred on Greek debt and that roughly $75 billion of Greek CDS paper with a putative net value of $3.8 billion has been triggered and will now pay out. I’m a bit surprised by this, given how hard they’ve worked to avoid exactly this ruling.

The fact that they made this ruling on a Friday, mid-market-session, hints to me that whatever it was that they were trying to avoid (a counterparty failure, perhaps?) had been worked out and was no longer an issue.

Confirming this take is the fact that the market wiggled a bit when the news was released, but did not gyrate or plummet as if something truly bad had just happened.

Of course, the final ruling will have to be on March 19th, when the CDS paper will be priced at an auction, which is how these contracts are settled. So keep that date on your calendar.

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Off the Cuff: When The Going Gets Tough, The Tough Want Their Gold

Wednesday, March 7, 2012, 11:07 PM

In this week's Off the Cuff with Mish & Chris podcast, Mish and Chris address:

  • Holding the Bag in Europe

    • At this point, it would take a miracle to save taxpayers from getting stuck with the bill for this mess
  • Got Gold?
    • All of a sudden Europe's leaders are demanding their gold. Think it's still a "barbarous relic?"
  • Sliding back into Recession

    • The data on the worldwide economy looks bad and is getting uglier

The quick takeaways from this week's podcast? Pay no more attention to what Europe's leaders say -- instead, watch what they do. Prepare for a Greek (and Spanish and Portuguese and ...) default, and keep your precious metals close.

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Implications of a Collapsing Japan

Monday, March 5, 2012, 12:00 PM

Implications of a Collapsing Japan

by Chris Martenson
Monday, March 5, 2012

Executive Summary

  • Why Japan can no longer increase its US Treasury debt levels
  • Japan's ticking insolvency time bomb
  • Why its current recession is adding gasoline to the fire
  • The most likely progression the Japanese collapse will follow
  • The impact a collapsing Japan will have on global markets
  • What investors should do now

Part I: Japan Is Now Another Spinning Plate in the Global Economy Circus

If you have not yet read Part I, available free to all readers, please click here to read it first.

Part II: Implications of a Collapsing Japan

Back in March of 2011, when the Fukushima situation was just unfolding, one scenario that had me concerned was this one:

For decades, the world has been running its own nuclear-style reaction, only in the currency and debt markets, where exponentially-accelerating piles of debt and money have spun about faster and faster in a gigantic, complex, coordinated reaction, the core of which is, and always has been, the United States.

At the very center of this ungainly money reactor is the main fuel pile itself, the US Treasury market. With any interruption to smooth flow of money through this pile, it will immediately become unstable.

The threat I see goes like this:

Stage 1:  The world watches, riveted, as Japan suffers a tragic and horrible earthquake and tsunami, but as horrifying as these are, they are localized phenomenon affecting a relatively small percentage of the country. The real trouble lurks within damaged nuclear plants, which are now ruined and will never again produce electricity for Japan, creating instant shortages that will take years to remedy. Worse, a dangerous plume of radioactivity is carried south by winds. Tokyo partially empties and shuts down for all practical purposes.

Stage 2:  The abrupt slowdown of the world's third largest economy alters the smooth flow of cash around the globe, and even causes reversals of some other long-standing flows. Chaotic eddies emerge in a decades-old pattern of ever-increasing flows of money into and out of the money centers, and various carry-trade and other interest-rate-sensitive strategies blow up. Manufacturing in Japan screeches to a halt, disrupting just-in-time manufacturing strategies both internally and across the globe.

Stage 3:  In order to fund the rebuilding effort, Japan has to buy a lot of items from foreign suppliers at the same time that its exports plunge precipitously. At first Japan simply does not participate in US Treasury auctions, leading to a shortage of buyers. But eventually Japan has to sell some of its vast hoard of US bonds in order to pay for external items needed for its reconstruction. Further, insurance companies, huge holders of US bonds, face stiff liability claims in the wake of the worst natural disaster to hit a heavily industrialized center and are forced to redeem enormous amounts of Treasury paper. US Treasury yields begin to climb.

Stage 4:  Continuing unrest in the MENA region serves to keep oil elevated and local funding needs high, while Europe's weaker players (the PIIGS) continue to slip under the waves. Money continues to ebb away from the US Treasury market. Forced by circumstance, the Federal Reserve reverses its linguistic course and opens the monetary floodgates once again. There's nothing like a crisis to justify more money printing, especially to a one-trick pony (the Fed) that only knows how to stamp its hoof on the 'print' button.

Stage 5:  An increasingly chaotic monetary and fiscal situation spills over into the derivatives arena, creating a number of financial accidents. Stressed governments find themselves in more of an arguing mood than a pull-together-and-sing-Kumbaya mood, and agreements are hard to come by. Banks begin to fail again, global trade falls off, unrest continues to build, and then it happens - a currency crisis.

Stage 6:  Everything changes. Faster than you think.

Obviously, Tokyo did not get evacuated as the scenario postulated, but given that the piece was penned on March 15th and posted on March 16th, just four days after the devastating earthquake, it was a reasonable scenario to consider (especially considering the Japanese government was considering that exact possibility at the very same time). Looking back on that scenario now, it stands up pretty well in all other regards. 


When a Default Is Not a Default

Friday, March 2, 2012, 3:48 PM

The definition of a default is quite clear, and very simple.

Definition:  Default – n. Failure to meet a financial obligation.

Here’s the deal with Greece. The holders of outstanding bonds are being asked to swap those high-interest bonds for new bonds that have a face value of 50% of the old ones, and an interest rate of just 4%.

Because the private investors in these bonds are being asked to agree to these conditions, the argument is that there is no default because everybody ‘voluntarily’ agreed to the deal. Well, not everybody is voluntarily agreeing to the deal, especially those who hold the CDS paper against those bonds who would like to be paid for what is obviously a default by any other name.

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Off the Cuff: Seeing Through the Spin

Thursday, March 1, 2012, 6:16 PM

In this week's Off the Cuff with Mish & Chris podcast, Mish and Chris tackle:

  • US GDP

    • With only a little inspection, the reasons for optimism behind the latest rosy US GDP numbers wither quickly
  • Europe

    • The flood of free money continues. Too bad it's going into the banks vs. the European economies that need it
  • Threats from the East

    • While all eyes are looking towards Europe, larger risks to the global economy are appearing in Japan and China

This week's podcast was recorded on the road (with apologies for not having the usual crystal clarity). But that didn't slow Mish and Chris down in identifying the growing risks behind the otherwise positive announcements released this week. More than ever, keep an eye to the data -- not the cheerleading -- as it is proving critical in making decisions to preserve one's wealth.

» Read more


Key Insights for Those Buying Real Estate as an Income-Generating Investment

Monday, February 27, 2012, 10:24 AM

Key Insights for Those Buying Real Estate as an Income-Generating Investment

by Charles Hugh Smith, contributing editor
Monday, February 27, 2012

Executive Summary

  • Determining true net cash flow from your investment
  • The myth of "passive" ownership of real estate
  • The criticality of finding the right tenants
  • How important, really, is location?

Part I: Is Housing an Attractive Investment?

If you have not yet read Part I, available free to all readers, please click here to read it first.

Part II: Key Insights for Those Buying Real Estate as an Income-Generating Investment

In Part I, we looked at a variety of factors affecting the demand for housing, both resident-occupied homes and rental properties, because demand ultimately establishes valuation and price for both sales and rentals. In Part II, we address the many issues investors have to consider when they buy real estate for income generation (i.e., they become landlords or absentee owners).

As someone who has owned rental property for over 25 years, I have seen the pitfalls and the positives. As with all investments, it’s prudent to go in with eyes wide open and to ask, am I prepared if the future doesn’t unfold as anticipated?