Praetorian Trust

Wegelin & Co Private bankers: Farewell America

We live at a time of shifting power and influence in the world. Asia is on the rise, and Brazil too, probably. Australia will catch on to their coattails, and Europe may once more be able to position itself within these countries’ recoveries. The USA will remain the unquestioned military power and also an enormous repository of debt and other problems. Because they are painful, and there is always an inclination to shift the blame for them onto third parties, re-dimensioning processes always harbour the potential for aggression. Switzerland is currently experiencing just this. But it won’t end there. Potential aggression and economic progress are mutually exclusive. Which is why we are well advised to take a general farewell of America. This will be painful, for the USA was once the most vital market economy in the world.

But for now, it’s time to say goodbye.

(Wegelin & Co Private bankers, Investment commentary No.265, 24.08.2009)

(Full text article here)

Dear Sirs:

We are dismayed by your unsubstantiated assertion that “International tax evasion has become a major threat to government finances in countries big and small…” (Views 24.08.09 “ IF SWITZERLAND CAN…Providing the names on UBS secret accounts…end of International tax cheating”)

This is clearly untrue.

Surely it is not popular to defend those who choose to avoid paying taxes: all citizens should pay taxes according to the law. In fact,in the US and most European nations ( save perhaps in Italy where tax avoidence seems to be a national sport) most people pay their taxes. Many people in Europe, and particularly those that can afford it in the US, attempt to minimize there taxes by government approved and legal tax planning. In the western countries and Japan, tax evasion is hardly the norm, however,tax avoidence is a legal an acceptable practice for all citizens, both businesses and individuals.

Tax havens exist because tax laws vary from country to country and tax paying citizens the world over , just as multinational corporations, like to keep there hard earned money in their own pockets, and out of the hands of spendthrift politicians and governments. To suggest Switzerland exists and gains substantial benefit from the ill gotten wealth of tax cheats is both an unfair characterization and out right wrong. Indeed, the country does benefit from the fact that other nations tax may not have business friendly tax regimes, but this may have more to do with the Swiss notions that the state serves the individual and not the other way around.

The fact is, that even if the US government could recover all of the estimated 18 billion dollars of assets hidden by wealthy Americans abroad, it would not be enough to fund just one month of the wars in Iraq and Afghanistan. ( Congressional Budget Office report 2009). To state that the tax cheats, and those with secret accounts, have somehow placed government finances at risk in the face of this one simple fact about US government spending, let alone the current policy of fiscal easing, is quite disingenuous.

Perhaps the real threat to government finances are not the few individuals with secret bank accounts, and they are not to blame for the either the implosion of the financial system or the explosion of government spending. Rather, it is the government printing press and the many ways that our elected officials choose to spend our tax dollars, that is destroying both value and government finances in countries both large and small.

A YouTube clip:

China is spending its Reserves Building Strategic Infrastructures Jim Rogers

14 (Bloomberg) — Former Treasury Secretary Henry Paulson, describing nine U.S. banks as “central to any solution” of the credit crisis, told their leaders to take government aid or be forced to by regulators, according to a memo his staff prepared for a private meeting in October.

“If a capital infusion is not appealing, you should be aware that your regulator will require it in any circumstance,” Paulson’s one-page list of talking points for the session with the banks’ chief executive officers said.

“We don’t believe it is tenable to opt out because doing so would leave you vulnerable and exposed,” the memo said.

Investing $125 billion in the financial institutions was a shift for the Bush administration, which had proposed buying troubled assets with $700 billion Congress approved 10 days earlier. The memo is among newly released Treasury Department documents containing details about the Oct. 13 meeting.

“Most Americans are going to be uncomfortable with the government forcing the banks into this arrangement,” said Tom Fitton, president of Judicial Watch, a nonprofit research group in Washington that obtained the documents under a Freedom of Information Act request.

Andrew Williams, a spokesman for the Treasury, didn’t return calls seeking comment.

Banks worldwide have taken $1.45 trillion in writedowns and losses during the worst credit crisis since the Great Depression.

Preferred Stock

In his memo, Paulson said the government would buy preferred stock in the banks, which he called “a significant part of our financial system” and “central to any solution.”

Three and a half hours after the meeting was scheduled to begin, Paulson had obtained the bankers’ signatures on half-page forms along with the handwritten amount of the federal government’s investment, according to the documents. He announced the actions publicly the next day.

“Government owning a stake in any private U.S. company is objectionable to most Americans — me included,” Paulson said Oct. 14. “Yet the alternative of leaving businesses and consumers without access to financing is totally unacceptable.”

Paulson said the Treasury would make up to $250 billion available to U.S. institutions in exchange for restrictions on executive compensation and other concessions by the lenders.

‘Little Off Track’ “It was the moment when the financial rescue

If you’re a self-professed “Goldbug,” feel free to read no further. Or at least spare me your hate mail. Because no matter what I say today, I know you’ll cry foul… or something much more colorful.

But for those of you with an open mind - especially after my last three contrarian predictions proved dead accurate - read on.

Because it’s time to start shorting gold!

You won’t find many, if anyone else, making this case. But as the first reason of 12 below reveals, that’s precisely why you should give it more credence.

12 Reasons To Start Shorting Gold

1. It’s decidedly contrarian. If a contrarian investor is someone who deliberately decides to go against the prevailing wisdom of other investors, shorting gold certainly fits the bill. Right now, everyone else is buying gold, or at least recommending it. If you have any doubt we’ve reached such fever pitch levels, consider No. 2. 
2. The infomercial factor. The best indicator of a turning point for any investment, in my experience, is infomercials. If an investment gets so popular it invades the pre-dawn hours with non-stop but-wait-there’s-more offers, it’s time to get out. And that’s exactly what’s happening now. So much so companies like Cash4Gold.com are invading primetime television. They even splurged for a Super Bowl ad spot. And they recruited washed-up celebrities Ed McMahon and M.C. Hammer to boot. In case you forgot, the Hammer filed bankruptcy in 1996. And Eddie boy almost lost his 7,000 square-foot, $6.5 million Beverly Hills pad to foreclosure. No offense, if you take investment cues from these two, you deserve to lose money. 
3. There is always some truth in a rumor. Recent news reports suggested Germany, the world’s second-largest holder of gold, was selling some from its vaults to trim its deficit. It turned out to be a rumor. But you gotta wonder if there’s some truth behind it. After all, high gold prices would be an easy way to raise cash. In other words, the scenario is completely plausible. And if Germany’s considering it, even remotely, so, too, are plenty of other deficit-ridden governments. It goes without saying that a government dumping supply on the market will send prices lower, quickly. 
4. The gold-to-oil ratio is out of whack. Historically, an ounce of gold will buy you about 14 barrels of oil. But with oil around $40 per barrel, an ounce of gold gets you almost 23 barrels - a whopping 64% above the historical mean. If you believe in statistics, a reversion to the mean is imminent! 
5. So is the gold-to-silver ratio. Historically, an ounce of gold will buy you 31 ounces of silver. But now the ratio stands at 73 - an unbelievable 134% above the historical mean. Here, too, a reversion to the mean is imminent. And I’d rather place my bets on a 57% decrease in the price of gold, than silver more than doubling to make it happen. 
6. The HGNSI index is too high at 60.9%. For the past 25 years, Hulbert Financial Digest has tracked the average recommended gold market exposure among a subset of gold-timing newsletters. It usually fleshes out around 32.6%. But now it rests at 60.9%, a level it’s only exceeded 13% of the time. The key - Hulbert found an inverse correlation exists between his proprietary index and the short-term market direction of gold. In other words, if the index is high, like now, gold is headed lower. 
7. Trinkets drive demand, not governments or speculators. Nearly 75% of gold demand comes from the jewelry market. And if Indian brides balk at buying above $750 per ounce as the Bombay Bullion Association reports - India’s gold imports cratered 81% in December - look out below. And don’t be fooled into thinking investors (governments or speculators) will pick up the slack. As HSBC reports, rising demand from investors, particularly from ETFs, only offset half of the 33% decline in jewelry market demand since 2001. 
8. What makes now “different?” If the global economic crisis keeps getting worse, as goldbugs like to point out, why hasn’t gold tested last March’s high of $1,030.80 per ounce? Or blown right by it? After all, gold is supposed to increase in value as economic conditions worsen. But it hasn’t lived up to expectations, not one bit. And I don’t think it ever will. Ultimately, when you factor in the massive amounts of stimulus being injected into the markets, on a global level, we’re close to the worst of times… and the peak for gold. 
9. Analysts love it. According to Bloomberg, 16 of 24 analysts surveyed by the London Bullion Market Association believe gold will reach a minimum of $1,032 per ounce this year. As we all know, analysts’ track records are deplorable. Instead of just ignoring them, why not bet against them? The odds are definitely in our favor. 
10. Hedge fund buying dried up. Institutional speculators (hedge funds) played a large part in gold’s run-up. But 920 of them went Kaplooey last year, according to Hedge Fund Research, Inc. Not to mention, hundreds of others hemorrhaged capital as investors demanded their money back, while those left standing ratcheted down borrowing to close to nothing, according to Rasini & C., a London-based investment adviser. In the end, gold prices will eventually reflect the absence of these former heavyweights. 
11. Gold is schizophrenic and the wrong personality is in control. Multiple motivations exist to buy gold including the desire for a safe haven, currency, adornment, raw material, or inflation hedge. But much like Treasuries, the bulk of buyers come from the safe haven camp today. And once the economy shows any signs of perking up, we can expect these same investors to flee for more risky assets. And don’t be so quick to rule out a second half recovery… 
12. The Fed, the President, history and the Baltic Dry Index concur - the economy’s on the mend. Despite dismal data, both the Fed and President Obama point to the current recession ending by the second half of 2009. Moreover, the average recession only lasts 14.4 months. So even if this one is longer than usual, we’re still near the tail end of it - a fact underscored by the recent 61.4% rally in the Baltic Dry Index from its early December low. As I wrote in November 2008, the index is the first pure indicator of an uptick in global activity. And once the economy gets back into gear, the Fed will act quickly to rein in the money supply and curb inflation. 

Clearly the gold rush is on. But that’s all the more reason to move in the opposite direction, against the herd. I realize this might be the most unpopular recommendation right now, but that means it could also be the most profitable.

And before you brand me a fool for recommending shorting Treasuries and gold in the span of two months, here’s the intersection. The driving force behind both assets in recent months has been safe haven buying. And it will remain the dominant variable in determining price in the months ahead. So when investors go back on the attack for more risky assets, prices for both assets will fall.

It’s already happening for Treasuries. And I’m convinced gold is next.

Investment U Editor’s Note: In the past year, Lou’s been dead on with his predictions. He called the U.S. dollar bottom versus the euro within 26 days… oil’s peak within 24 days… and the top in U.S. Treasuries within two days. So when he makes a big call like this, we listen. 

We recommend holding 5% of your portfolio in precious metals as part of our Asset Allocation strategy. Asset allocation refers to spreading your investments among different asset classes, not just different securities or market sectors. Doing this has allowed us to survive, prosper and build our wealth during the longest bear market since The Great Depression.

We’ve had money invested over the last five years in foreign stocks. While the stock market has gone down, these have gone up. We’ve also had money invested in six other asset classes. And over that five-year time period we’ve beaten the S&P’s return.

Now there are a couple of ways to limit your losses and lock in profits. If you’re heavily invested in gold you should definitely be using trailing stops. And if you are, you might want to consider lowering your stop percentage.

The other thing you should be thinking about is the balance of your portfolio’s allocation. If you’ve experienced gains in gold, or any other asset class, you should look at portfolio rebalancing. It’s a simple approach to guarantee you’re selling high and buying low. Lou explains more on how to put “Rebalancing in Action.”