That Was The Weak That Worked: Part I

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unanswered, and the police also declined to comment on the case. Mr Taniguchi has denied doing anything to Ms Yoshimatsu. “I’m no stalker,” he told The Japan Times. “I called her father at least twice to try and reach her manager to solve my financial dispute with him. I have no grudge against her.”

Coverage of Ms Yoshimatsu’s claims by the television networks, however, has been strangely muted. Critics claim this is due to the influence of the talent agency and other powerful agencies that keep them supplied with actors and stars. Jake Adelstein, a specialist on Japan’s crime syndicates, said that Ms Yoshimatsu’s fight had embarrassed the industry. “Most of the mainstream media has refused to cover the story because that means no access to talent,” he said.

On Tuesday last week, the scandal deepened at a Tokyo ceremony to hand the Miss International crown to Ms Yoshimatsu’s successor, Bea Rose Santiago of the Philippines. The chair of the current title-holder was empty because, Ms Yoshimatsu claimed, she was barred from attending. She said sponsors and shareholders had been threatened and she was told to “play sick” and stay away. When asked about the situation, a spokesperson for the event organiser, International Culture Association, told the AP news agency it did not want the controversy “to overshadow the event”.

*** THE UK INDEPENDENT / LINK

2013 Year In Review

Who’s to say that markets are under- or overpriced? The price is the price, right? Two New York Federal Reserve economists delivered a paper concluding that U.S. stocks were as cheap today as any time in history, which is a little odd given they were 60% cheaper in March 2009. Although the world equity markets rise, the GDP is looking a little green around the gills (Figure 10, below). You can graphically overlay anything on anything and say anything, but Figure 10 does seem to say something.

Let’s focus on the U.S. forward-looking earnings, which are said to appear reasonable. Of course, these earnings do not exist except in the minds of optimistic analysts. By contrast, the Case-Shiller p/e using time-averaged earnings is in the scary 24 zone. John Hussman, a brilliant analyst who must be losing clients by the scores owing to his attempts to protect them, suggests bear market bottoms occur at a Case-Shiller p/e of about 8. The S&P 500 price/revenue ratio of 1.6 is twice its pre-bubble historical norm of about 0.8.

(The 1987 peak occurred at a price/revenue ratio of less than 1.0.) The Russell 2000 is now sporting a p/e of 40 using 2014 fabricated earnings but a p/e of 60 times trailing earnings. Stockman says that by excluding charges—”ex-items”—companies fabricate an additional 30% to the earnings numbers. You can find distortions of comparable magnitude by using the forward earnings that are invariably waaaay too optimistic. As the forward earnings become discredited by reality, analysts quickly switch to forward earnings.

There are smart guys questioning whether price discovery is working (Fama aside). Jeremy Grantham, the wise old man with $150 billion under management, puts fair market value on the S&P 70% below the current levels, coincidentally the same percentile as the bloated profit margins. Cliff Asness, looking across all markets, concludes that “the 60-40 portfolio has been cheaper than it is now 98% of the time.” (Cliff wins no award for direct prose.) David Einhorn notes that “the S&P 500 index has advanced this year mostly through multiple expansion”; the gains of 2012 were all multiple expansion as well. Are the distortions attributable to “ex-items” and “forward earnings” additive? I don’t know, but Peter Boockvar summed it up nicely: “There is 0% chance this ends well.”…

*** DAVE COLLUM (VIA PEAK PROSPERITY) / LINK

Moguls Rent South Dakota Addresses to Dodge Taxes Forever

Among the nation’s billionaires, one of the most sought-after pieces of real estate right now is a quiet storefront in Sioux Falls, South Dakota.

A branch of Chicago’s Pritzker family rents space here, down the hall from the Minnesota clan that controls the Radisson hotel chain, and other rooms held by Miami and Hong Kong money.

Don’t look for any heiresses in this former five-and-dime. Most days, the small offices that represent these families are shut. Even empty, they provide their owners with an important asset: a South Dakota address for their trust funds.

In the past four years, the amount of money administered by South Dakota trust companies like these has tripled to $121 billion, almost all of it from out of state. The families needn’t actually move to South Dakota, or deposit their money at a local bank, or even touch down in the private jet. Little more than renting an address in Sioux Falls is required to take advantage of South Dakota’s tax-friendly trust laws.

States like South Dakota are “creating laws that are conducive to a massive exploitation of a federal tax loophole,” said Edward McCaffery, a professor at the University of Southern California’s Gould School of Law. “We have a tax haven in our midst.”

South Dakota’s sudden popularity illustrates how, at a time of rising U.S. economic inequality, the wealthiest Americans are embracing ever more creative ways to reduce taxes legally. Executives at South Dakota Trust Co., one of the biggest in the state, estimate that one-quarter of their business comes from special vehicles known as “dynasty trusts,” which are designed to avoid the federal estate tax. Creation of such trusts has surged in recent years as changes in federal law enabled more money to be placed in them.

While the super-rich use various tools to escape the levy — some have exotic names like the “Jackie O” trust and the “Walton GRAT” — the advantage of dynasty trusts is that they shield a family’s wealth forever. That defies the spirit of the estate tax, enacted almost 100 years ago to discourage the perpetuation of dynastic wealth.

The dynasty trust isn’t South Dakota’s only lure. Another attraction, for customers in places like New York and Massachusetts, is the chance to shelter their investments from income taxes in their home states. In November, a government commission in New York recommended tightening trust laws to avoid income-tax leakage to states like South Dakota, estimating the change would raise an extra $150 million a year.

Still others are drawn to South Dakota’s iron-clad secrecy, and protections of trust assets from creditors and ex-wives. Many of these features emulate those available in Bermuda and other island havens. Some wealthy families are also attracted by South Dakota rules that enhance their control over investment decisions and make it easier for them to set up their own trust companies rather than rely on a bank trustee.

In South Dakota, a farm state that’s home to two of the 10 poorest counties in the U.S., lawmakers say they’re bolstering the trust industry to generate work for local law firms and bankers, and forge ties with prosperous families that may one day decide to build a factory or a warehouse here. The legislators are turning the Mount Rushmore State into the Bermuda of the prairie.

As much as anyone, Pierce H. McDowell III can take credit for this transformation. He works upstairs from the hall of empty offices, on the second floor of the old Kresge five-and-dime, where he’s president of South Dakota Trust Co.

At 56, McDowell has been promoting the state he affectionately calls “North America’s Siberia” for most of his career. In 1993, he published an article in a national estate-planning journal recommending that wealthy people across the country establish dynasty trusts in South Dakota.

Because the estate tax is imposed on large fortunes at death, McDowell wrote, wealth that’s big enough to last for generations will have to contend with multiple tax bills. A father pays the tax when he leaves his money to his children, who pay again when they pass it down. Each generation faces a toll. The current rate is 40 percent.

McDowell’s solution was for the father to establish a never-ending trust that pays each generation of heirs only what they spend, while the rest of the money grows. In 1993, when McDowell was writing, that wasn’t possible in 47 of the 50 states because of an ancient rule limiting the duration of trusts to the lifetime of a living heir, plus 21 years. The concept has been a part of Anglo-American jurisprudence since a case decided by England’s Lord Nottingham in 1681….

*** BLOOMBERG / LINK

Spend, spend, spend. Because your savings aren’t worth a damn

Organising my 2012-13 UK tax return this month, I compiled the year’s interest earnings. Joint current account: net interest received £1.68, tax £0.39. Personal current account: interest received £0.19, tax £0.06. Then the big kahuna, my savings account, where I really sock away what I might need for a rainy day: interest received £14.10, tax £3.55. Wow — at least enough to pick up a handsome selection of Quality Street.

I can’t be the only UK taxpayer who records these miserable bank payments in a state of rage. I could have earned more than I made in interest last year in the time it took me to type the account numbers. Such a pittance does interest income now produce that savers would at least appreciate the issuance of a blanket policy statement: “Not wishing to add insult to injury, HMRC no longer requires taxpayers to humiliate themselves by reporting contemptuously small interest payments, in which the nation’s fiscal authorities are complicit. FYI, we’ll no longer dun your pathetic interest for taxes, either, as it costs us more than 6p to extract those pennies from your current account.”

The recent economic recovery in the UK is apparently driven not only by a renewed property boom, but by savers spending their reserves — quite sensibly, too.

With interest zilch and inflation at 2.1% — down from 5.2% in September 2011, the highest in the history of the consumer price index — keeping cash in the bank is like stuffing your refrigerator with red meat. It doesn’t accrue value. It rots. It’s little wonder that rational citizens are rushing out to turn their putrefying pounds into iPads and Xboxes before the smell sets in.

This is just the behaviour that the government and the Bank of England have hoped for. Spending born of hysteria that money is spoiling helps to jack up the GDP stats. But for the economy, the spree is a short-term windfall. Sadly for account holders and statisticians both, savings run out.

More crucially, unprecedentedly low interest rates for five years and counting have protected debtors — mortgage holders, of course, but also this country’s biggest debtor by a mile, Her Majesty’s Government. Negligible interest rates so brilliantly depress the cost of servicing government debt that neither Whitehall nor Threadneedle Street has any motivation to raise them — well, ever.

So you’d be a fool to imagine that the governor of the Bank of England is happy that unemployment is dropping to the supposed benchmark of 7% much faster than expected, perhaps even by the end of this year — at which point interest rates were meant to rise. On the contrary, Mark Carney has been cool on the matter. A 7% unemployment rate will not, he’s made clear, obligate him to raise interest rates a jot. The metaphorical goalposts will simply shimmy down the field, for inflation combined with an artificially farcical interest rate — “financial repression” — is a nefariously lucrative form of tax.

Of course, we occasionally hear lip service paid to what a pity it is that we are “punishing savers” — in the same casual spirit in which people say: “Isn’t it a shame the pub has run out of prawn crackers?”

Anyone who has built a nest egg by scrimping, canniness, and self-denial — we are not talking of the super-rich here — has been railroaded into choosing between unpalatable options: 1) put capital at risk in shares. This option explains the growing stock-market bubble — money has to go somewhere. But many an investment ends in tears. 2) Watch the cash evaporate, an even more miserable exercise than watching paint dry. 3) Spend everything now. Alas, how many tins of chilli con carne can the average household stockpile?…

*** UK GUARDIAN / LINK

 

Charts That Make You Go Hmmm…

After falling to a low near 6,500 in March 2009, the Dow Jones Industrial Average doubled to hit an all-time high in March 2013. This is the first time since October 2007, but investors have called it quits. A look at then and now suggests what may be driving this behavior.

“The stock market’s volatility has scared retail investors for several years. A total of $556 billion has been taken out of mutual funds focused on American stocks since October 2007, according to the Investment Company Institute. That is an enormous pot of money that largely missed out on the market’s recovery.

—The New York Times, March 5, 2013.

*** US GLOBAL INVESTORS

CLICK HERE TO VIEW INFOGRAPHIC

Source: Dave Collum / Measuring Worth

A couple of charts stood out in Dave Collum’s year-end review (page 32), but I felt this one deserved a page of its own.

As you can see, current real GDP — the result of trillions in stimulus from the Federal Reserve over the last 5 years — is currently at its lowest level in over 200 years.

Something is very wrong in paradise; and whatever this chart might say, there is one thing that it doesn’tsay: “Buy equities at all-time highs.

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