August 2002 Newsletter
Issue Eight, Volume Three

DROWNING IN A SEA OF FOOLS

By Mike Gasior

I admit immediately that the title of this month's edition sounds a bit ominous and perhaps even a tad egomaniacal. We'll tackle those issues as this newsletter progresses and you can decide for yourself whether or not you agree with me. As is my standard procedure, I promise to make my case with the facts, but sadly not the procedure of some in the media, and just about nobody in politics.

Let me get right to work on the topics for this edition.

A NICE INTERVIEW AND ARTICLE WITH THE MAINSTREAM MEDIA

I had the pleasure of being interviewed by reporter Jennifer Beauprez from the Denver Post for an article she was writing about the increasing debt load of U.S. corporations. You have been heard me dwell on this topic for a couple of years, but it was heartwarming to have someone outside the financial media even thinking about this problem. The article she ultimately wrote was well thought out and substantiated with facts, which has always been my favorite way of approaching such things. You can read the article for yourself by visiting:

http://www.denverpost.com/Stories/0,1413,36%257E11%257E801767,00.html

Another thing to remember though is that the problem doesn't just end with U.S. corporations. The U.S. government is back to a deficit situation in their budget and their level of debt is rising once again. Not to mention that American consumers are already at record levels of personal debt and that is rising as well which brings me to my next topic.

THIS MONTH'S SIGN OF THE APOCALYPSE

In the Wall Street Journal last week there was an article about how Americans are spending money like drunken sailors (no offense to sailors everywhere please) in their pursuit of the latest in ATV, dirt bike, recreational vehicle and boat. The article talked about how Polaris, who makes ATV's and jet skis, is struggling to keep up with demand and how Winnebago sales have never been so good.

The article had quotes from many of these recent purchasers talking about how they have decided to pull money out of the stock market and spend it, since spending it made them feel better because they could enjoy this equipment. Besides, if they leave the money in the stock market they might just lose it anyway, so why not take the money and spend it, which is more fun.

Well I have one fairly simple idea...WHY DON'T YOU TAKE THE MONEY OUT OF THE STOCK MARKET AND SAVE IT FOR THE FUTURE YOU MORONS??!! What is wrong with people? It is no economic secret that Americans are among the worst savers in the entire world, yet we seem inclined to only get worse and worse with regard to this statistic. It was just in the March edition I shared with you the fact that more than HALF of all Americans have LESS than $1,000 in savings. Total.

It seems like every month I share things with you readers that are terribly obvious to me, and here we go again, so pay attention. This economy is going to get worse before it gets better. There are going to be lots and lots of people hurt by this bad economy because of the leverage that occupies peoples lives, and this damage is going to be unlike what anyone of my, or my father's generation has ever seen. You have no idea, and I promise you it's coming so having a couple of extra bucks in the bank isn't going to hurt you. And don't give me any crap about how interest rates are so low, and why should we put any money there when we can earn so little. The fact remains that at least your money is safe, and growing at a positive rate, which you will be unable to say about many other asset classes in the next few years, which now spills into my next subject.

BE CAREFUL WITH REAL ESTATE

I know if I mention one more time my predictions about the NASDAQ back in March of 2000 many of you are likely to puke right then and there, so I won't do that. I had strong feelings about a decline in that market and I am suffering from similar feelings about the current state of the real estate market.

While I don't think the comparison to the NASDAQ is there with regard to the level of decline that we will experience I am pretty darn confident that the residential real estate market is going to suffer a tremendous blow fairly soon. Housing, as a component of personal income, has never been more expensive than it is right now and I think the low interest rate market is fueling an unrealistic increase in value. Speaking as someone who bought a house at the top of the real estate bubble in the Northeastern U.S. in the late 1980's I see way too many parallels to that time in history which crushed values in the Northeast and Southern California for over a decade. Just because cheaper mortgage money enables homeowners to afford more housing doesn't mean that the real estate is worth what is being paid for it in this current market.

As much as it may seem like I enjoy making predictions, I walk very cautiously here since you know my skepticism about anyone forecasting anything. My gut feeling is, based on the current economic climate and my feelings about the imminent future the U.S. could suffer a 20% to 25% decline in current real estate values in the next 3 to 5 years and then stagnate for the better part of a decade while digesting the downward move. The troubling thing about a move downward in price that far will be the sad fact that many families will be totally wiped out with regard to their net worth since this typically reflects many household's major asset holding. You will then see the phenomenon seen across California, New York, New Jersey, Connecticut and Massachusetts in the early 1990's, where many homeowners had mortgage balances considerably higher than the value of the home the mortgage was on. This was the situation for tens, or hundreds of thousands of homeowners, yet no one currently seems to have any memory of it even though it was only ten years ago. It only reinforces to me that premise that humans have no ability to vividly recall pain...I suppose that's my job.

"IT'S THE ECONOMY STUPID"

As much as I hate to quote the Clinton campaign motto of 1992, it seems like nobody wants to pay much attention to the current state of the economy. Let me run some bullet items past you:

--I have felt for six months that this economy will suffer a double dip recession and I believe more strongly than ever that we are heading into one this very moment.

--Most of Europe is slowing worse than the U.S. and will catch pneumonia if the U.S. catches cold.

--Asia has a host of issues right now, and Japan continues to be a train wreck with no clear signs of improving anytime soon. There will be increased pain and chaos here as the U.S. and Europe slip into deeper recession.

--With all the noise regarding Iraq, oil prices have crept upward of $28.50 a barrel, which is, more than a $2.00 increase from just a year ago. This will reach into consumer's pockets and take money in many different ways, which will only further reduce their ability to spend themselves out of recession.

--Corporate profits fell 1.7% in the second quarter of 2002 versus the first and there are many signs they will decline further.

--Gross Domestic Product (GDP) that showed a 5% annual rate of growth in the first quarter only grew at a 1.1% annual rate in the second quarter.

--Unemployment rose above 400,000 last week, which is a level usually, associated with a weak job market. What was particularly worrisome about this rise was that most economists were expecting a decline. Overall U.S. unemployment is now at 5.9% and economists are predicting it could rise to 6.3% to 6.5% before yearend. My own feeling is that those predictions should be easily reached.

--Several large employers including Boeing and many of the airlines are suddenly playing hardball with their unions and I feel this bodes poorly for other upcoming labor negotiations.

In my own view, you cannot see the economy improve until consumers have the ability to spend more. You cannot see consumers spend more until they have sufficiently cleared up a lot of the debt they are carrying. They cannot clear up a lot of the debt they are carrying unless employers increase paychecks or the government cuts their taxes. Employers will have no appetite for increasing paychecks in the coming economy, and will actually be laying more people off. The governments, federal, state and local, are all suffering from budget deficits of their own and will only be seeking to raise income, property, sales and estate taxes which will only further dig into consumers pockets. Around and around we go.

ANOTHER REASON I HATE POLITICIANS

This list only grows each and every day, but I want to give you an important education before I publicly disembowel a U.S. Senator who clearly is either a liar or a moron.

All of the recent publicity about Stanley Works, the Connecticut based hardware manufacturer voting to move its headquarters to Bermuda has caused many a politician to use the whole thing as a platform to campaign for the American taxpayer. The only unfortunate thing is that this campaign has no real meat to it, and the politicians are once again using it to distract people from issues that would be far more important.

Lets begin with some background facts. Number one, I personally have had the opportunity to become tremendously familiar with both the Bermuda and Cayman business community they have been made too much of a villain in all of this noise. It is any country's prerogative to set it's own tax rates and regulate their business community any way they see fit, and it strikes me as unusual that the "land of the free, and home of the brave" will just throw a temper tantrum when somebody else's game seems better than ours. If Bermuda or the Cayman Islands business environment is better than that of the United States, perhaps there are lessons to be learned on our part. First let me give you a few more facts before I get to my politician de jour.

Moving a corporation to a locale like Bermuda or the Cayman Islands with a better tax situation to save money has been around for over twenty years, so isn't it a little surprising that only about 24 of the thousands and thousands of publicly traded companies have actually moved off-shore in the past 10 years?

Even if Stanley had moved itself to Bermuda, it would STILL have to pay U.S. taxes on every single dollar in sales that occur in the United States. All of the U.S. employees would have to pay taxes on their income too. Every dollar taxed at whatever the respective tax rate is. Period. Paragraph.

What would have changed for Stanley, however, is that if they were to make a hammer in Brazil and then sell that hammer in Brazil, the U.S. would have had no claim to tax any of that money because Stanley would have been based in Bermuda and Bermuda has no corporate taxes. Oddly, the U.S. government doesn't care that the hammer wasn't made in the U.S., or sold in the U.S. The moment Stanley brings that money onto U.S. shores the government wants to tax that money. In case you didn't know it, most other large countries like the U.S. wouldn't tax that money. Haven't you noticed that nearly every large merger in the past decade that involved a U.S. and Non-U.S. Company, the merged company located itself in the non-U.S. country (read Daimler/Chrysler)? Or that so many of the start-up companies in the past few years have chosen to headquarter outside the U.S.?

One other thing before you start thinking that I'm some sort of unpatriotic stooge, most Americans don't even know that they are exempt from paying taxes on up to $80,000 a year as along as they didn't earn it in the U.S. and weren't living in the U.S. during that time either. Nobody likes to pay taxes and all most people want is for things to be fair. Clearly there seems to be plenty of things unfair in the way the U.S. taxes it's own companies. Now on to my politician.

I am going to directly quote from an editorial that appeared in USA Today on Friday, August 26, 2002 and was WRITTEN by Senator Max Baucus of Montana who is quite frighteningly the CHAIRMAN of the Senate Finance Committee. When I am quoting the Senator directly, his words will be contained in quotations. I will debate some of his quotations below. Here goes:

"Our American system of government and enterprise is the best in the world. But it comes with a cost. Many Americans have given their lives to protect the rights of individuals to pursue the American Dream. For many Americans, that includes owning their own business and building an economic future for their families and their employees. In turn, taxes are collected from these businesses to support our country's infrastructure, build a military and maintain the American Dream for future generations."

This was the Senators opening paragraph and he is clearly setting the stage for calling these companies not only unpatriotic, but perhaps HELPING terrorists since the reduced tax base will somehow affect the military. This is not only outrageous and disgusting, but perhaps detracts from the fact Congress might have some actual, direct control over national security and defense against terrorism, and the blame or responsibility doesn't belong to some hammer and screwdriver manufacturer.

"Recently, however, a number of businesses have chosen to locate their headquarters in low-tax nations where they have no operations, own no real estate and have no employees. The executives still enjoy the privileges afforded and paid for by honest U.S. taxpayers while they, in effect, renounce their U.S. citizenship just to cut taxes."

The executives still enjoy the privileges afforded and paid for by HONEST U.S. taxpayers??!!! This entire paragraph and statement is a true outrage. It is clearly beneficial for Senator Baucus that no intelligence testing is necessary to become an elected official. Is he now accusing these executives of being dishonest and also accusing them of tax evasion?? First and foremost, the executives are STILL paying every dime of U.S. taxes that the law requires of them because THEY did not move their personal residence anywhere, nor did ANYONE renounce their citizenship although it certainly make for a certain drama however asinine. Not to mention that the corporation itself continues to pay every dime of tax it owes on monies made in the United States, which I promise dwarves whatever taxes Senator Baucus pays annually.

"Corporations should not be able to avoid U.S. taxes on their U.S. profits earned by their U.S. operations built with U.S. capital."

This sentence is an outright lie and is entirely wrong. The only profits that would escape U.S. taxes are profits earned outside the borders of the United States by the non-U.S. operations. The distinguished Senator is clearly either an idiot or another scumbag liar politician, and I tend to not like either.

"We must ensure that our small American businesses have a fair chance to grow. The mom-and-pop hardware store doesn't have the resources even to consider moving its headquarters to another country to cut its taxes. Small businesses are the backbone of our country. And even with their limited resources, our small businesses pay their fair share in taxes, while corporations with extensive resources manage to avoid paying theirs. Our hardworking Americans are counting on Congress to make sure that corporations pay their fair share. I am committed to protecting the American Dream that our small-business owners represent."

More outrage to me. First of all, if our friends "Mom and Pop" were to move on down to Grand Cayman after retirement and open a little store on Seven Mile Beach, I think both Mom, and Pop, would be pretty outraged in the U.S. Government was asking for income taxes on that money since Mom and Pop were no longer living in the United States, nor were they earning any of their income there either. I have the feeling that this would strike Mom and Pop as quite unfair and ridiculous. If our friend Senator Baucus REALLY wanted to help out the "backbone" of this country, why doesn't he propose making health insurance deductible for sole proprietors? Most Americans don't know that 90% of new businesses formed in the country every year are sole proprietors, yet they only get to deduct of 70% of health insurance premiums. Oddly, the evil corporations the Distinguished Senator Baucus seeks to protect us from get to deduct all health insurance premiums paid for employees. If the Senator would REALLY like to help out this "backbone" of America, he would pull his head out of wherever he has it stuck and address ACTUAL issues that affect ACTUAL Americans.

When you add up all the taxes annually by the 24 companies who moved offshore in the past 20 years it wouldn't even equal a rounding error in the scope of the U.S. Federal Budget and Senator Baucus is only using the topic to distract attention from more serious issues.

Considering our Senator Baucus is actually the Chairman of the Senate Finance Committee is completely horrifying since his own words make clear he has no actual concept of the U.S. tax code or business in general. It only makes me wish we could hire some actually talented individual for such a job, rather than some know-nothing, ill-informed politician.

TWO GOOD IDEAS FOR THE SEC

With all the tumult regarding the current accounting scandals, I heard two decent ideas recently that could vastly improve the ability of the SEC to enforce securities laws. The ideas were simple and would be fairly easy to implement.

1) Make the SEC a law enforcement agency.

2) Give the SEC the ability to audit any public company at any time without notice.

Currently, when the SEC seek to pursue anything criminal about the activities of a company, they need to get the various law enforcement agencies working with them in the investigation such as the FBI or Postal Authorities. Making them a law enforcement agency in their own right would make it much easier and faster for them to pursue criminal actions against companies or executives.

Also, if the SEC could pop into any company at any time to double check the books, it would make it easier for the SEC to detect troubles earlier. It seems to me the only companies that would be hostile toward this idea would be dirty ones. The threat of an unexpected audit alone would serve as a decent deterrent.

OUR DIGITAL AGE

Do you know what I ran into when rummaging through some old boxes of crap in my office the other day? A 5.25 inch floppy disk. Can you imagine that? But here is an interesting question for you: Of the several hundred thousand people reading this e-mail delivered newsletter, how many of them do you think would have a 5.25 inch floppy drive to read it with? What's my point you wonder? I'm getting to it.

Think about the things that used to be exclusively kept on paper which are now being kept exclusively in some sort of digital form. Birth records, real estate deeds, tax records, school transcripts, motor vehicle information and more are all currently being routinely kept in only digital files, often with no paper or microfilm backup.

The first U.S. Census to be kept in a digital form was the 1960 Census, which is on digital tape. Want to guess how many computers in the United States of America have the ability to read those 1960 tapes? Exactly one, and it's housed in an exhibit in the Smithsonian Institute.

I have learned from first hand experience the lifespan of video tapes, floppy disks and more, and it is suddenly beginning to bother me that so much critically important data is kept in no other form than a digital form. I have marveled in the past when I would search real estate records in the City Hall in my hometown and read land records, which were recorded literally hundreds of years ago. I have luckily saved literally EVERY computer I have ever owned going back to my first one in 1984 (perhaps someday the "Mike Gasior Computer Museum") and own a few machines which could have read that 5.25 inch floppy disk. I suppose I should just be glad there was nothing of importance on it.

BRAIN TEASER QUESTION FOR THIS MONTH

I have to tell you all that I took a lot of crap last month from people who thought the July brainteaser was just too easy. It is those people you have to blame if this month's is a little tougher, so here goes:

If you were to toss a coin five fair tosses, what is the probability of the coin landing heads five times in a row? As a hint, remember that the tosses constitute a sequence of events.

It has begun to worry me that I've been making it too easy giving you a link to the answer, but I'll have to trust you're making a good effort at solving the question before peeking.

http://www.afs-seminars.com/brainteaser_Aug2002.html

PAST MONTHS AND NEXT MONTH

I seem to get questions every month about past issues of this newsletter. You can view every past issue by following this link:

http://www.afs-seminars.com/newsletter.html

I am also underway preparing next months topics and I'm already looking forward to sharing them with you. Some of them might even result in some "breaking news" between now and then.

TO UNSUBSCRIBE

I am strongly against sending unsolicited emails to those who do not wish to receive my newsletter. You, or perhaps a friend or colleague have opted in to receive this newsletter by visiting the American Financial Services homepage. I have also attained the services of an independent 3rd party to overlook list management and removal services. This is NOT unsolicited email. If you do not wish to receive further mailings, please use the link below to be removed from the list. Please accept my apologies if you have been sent this email in error. I honor all removal requests.

http://www.afs-seminars.com

Copyright 2002, Michael Gasior. All Rights Reserved.

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