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Ownership meme creates personal liability

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An underlying meme proliferated throughout the American economic system is ownership.  The so called "American Dream" is to own; own a home, own a car, own as much as you can; and keep it all in your name.  Many American teenagers and 20 somethings of many social classes experience a brief period of freedom in their lives when they have little or no ownership.  Work hard, then spend your money so that you can say 'it's mine' - this is the mantra drilled into the minds who go through the education system.

They reinforce this by unfairly comparing the American 'ownership' society to societies where ownership was illegal or impossible.  So we are supposed to feel lucky by owning things.

Anyone who has ever been through a bankruptcy, divorce, or lawsuit, will probably understand that ownership is a liability.

The simplest example is physical assets, most notably any real estate.  Property requires maintenance, taxes must be paid, in the case of residential areas association dues, etc.  Also it's an accident waiting to happen; someone breaks their leg on your property and sues you.

Katko v. Briney

The defendant owned an old unoccupied farmhouse in Iowa, the property was boarded up, had "no trespass" signs around it, and had been unused and was in a deteriorating condition for several years. Briney was very upset with the constant burglaries and break-ins into his unoccupied farmhouse. To solve this issue, Briney mounted a 20-gauge spring-loaded shotgun in the farmhouse to fire when the north bedroom door was opened. The gun was aimed to shoot an intruder's legs so as not to cause a mortal injury. Five days later, Katko went into the farmhouse with the intent of collecting some old bottles and dated fruit jars that Katko considered antiques. Upon entering the room, the trigger mechanism was tripped and the shotgun fired into Katko’s legs at point blank range. The gunshot wounds sustained by Katko were sufficiently severe for him to require hospitalization. Katko sued Briney after his release from hospital.

The case had several subsequent results. The Brineys sold 80 of their 120 acres (0.49 km2) to pay the judgment while proceeding with an appeal. Three of Briney's neighbors bought the property at auction, paying $1 more than the minimum bid of $10,000. After the appeal was denied, they made a leaseback arrangement with Briney, but eventually one sold his share to his son for a profit. Briney and Katko then joined in a lawsuit against the neighbor to create a constructive trust on the profit, but the case was settled before trial in an amount sufficient to close out the judgment against Briney.[1]

As Katko's injury was misreported by the United Press International wire service as having taken place in the Briney residence, several states introduced what were called "Briney Bills" for self-defense, which was not at issue in the case. The Nebraska Legislature act, stating that no person ... shall be placed in ... jeopardy ... for protecting, by any means necessary, himself, his family, or his real estate property ..., was overturned due to improper delegation of sentencing authority in State v. Goodseal (1971).[1]

Four years after the case was decided, Briney was asked if he would change anything about the situation. Briney replied: "There's one thing I'd do different, though, I'd have aimed that gun a few feet higher."[2]

This case shows how even an abandoned property can create liability; you have to protect it, maintain it, and even a burglar can sue you!

Taxes

Most taxes are the obligation to the individual receiving the income.  There is no way around income tax, everyone claims deductions but aside from that income tax is personal liability.  There are hidden costs to income tax such as if you utilize credit, making payments to loan obligations (with a few small exceptions such as interest on mortgages) is not deductible.

The Elite

Long ago the Elite learned that ownership is a liability.  This is why they limit personal income and assets to a reasonable level and keep most assets in trusts, charities, corporations, and other types of entities.

Historian Howard Zinn points to the Ludlow Massacre as the watershed event that caused the Elite to rethink their social position.

The Ludlow Massacre was an attack by the Colorado National Guard and Colorado Fuel & Iron Company camp guards on a tent colony of 1,200 striking coal miners and their families at Ludlow, Colorado on April 20, 1914.

In 1914, when workers at Colorado mine went on strike, company guards fired machine guns and killed several men. More battling followed, during which 2 women and 11 children were killed and John D. Rockefeller Jr., the chief mine owner, was pilloried for what had happened.

The massacre resulted in the violent deaths of between 19 and 25 people; sources vary but include two women and eleven children, asphyxiated and burned to death under a single tent. The deaths occurred after a daylong fight between militia and camp guards against striking workers. Ludlow was the deadliest single incident in the southern Colorado Coal Strike, lasting from September 1913 through December 1914. The strike was organized by the United Mine Workers of America (UMWA) against coal mining companies in Colorado. The three largest companies involved were the Rockefeller family-owned Colorado Fuel & Iron Company (CF&I), the Rocky Mountain Fuel Company (RMF), and the Victor-American Fuel Company (VAF).

In retaliation for Ludlow, the miners armed themselves and attacked dozens of mines over the next ten days, destroying property and engaging in several skirmishes with the Colorado National Guard along a 40-mile front from Trinidad to Walsenburg.[1] The entire strike would cost between 69 and 199 lives. Thomas G. Andrews described it as the "deadliest strike in the history of the United States".[2]

The Ludlow Massacre was a watershed moment in American labor relations. Historian Howard Zinn described the Ludlow Massacre as "the culminating act of perhaps the most violent struggle between corporate power and laboring men in American history".[3] Congress responded to public outcry by directing the House Committee on Mines and Mining to investigate the incident.[4] Its report, published in 1915, was influential in promoting child labor laws and an eight-hour work day.

The result of this situation led to the beginnings of workers rights institutions, as well as the Elite heavily using foundations and charities they funded, owned, and controlled, to have the appearance of 'giving back' - but also giving them big tax breaks.

The Rockefeller Foundation was founded in 1913, around the same time as the founding of the Federal Reserve Private Central Bank System, and the beginning of a new 'institutional' era of ownership.  The previous generation was 'owned' by individuals such as Rockefeller, whereas the modern system we have now is owned and controlled by institutions.  This took hold during and after WW2, with the foundation of institutions across multiple industries, but most notably banking and intelligence institutions such as the IMF and the CIA.

The Problem

People are reluctant to transfer assets out of their name.  But strangely, they are doing this every time they make a deposit in a bank account!  But since the bank produces a paper with their name on it, they feel that the account is actually 'theirs' which we've seen proven false with all the institutional problems of late.

The way most trusts are setup they are more like a contract with a 'trusted' agent called a fiduciary, usually an attorney or financial professional, who acts as a trusted custodian.

When you have assets in your personal name you are a target.  Not only are you liable to manage the assets, you're only one situation away from potentially losing them.  A business deal gone bad, angry ex lover,  desperate family members, or a desperate government trying to create new revenue, are all potential problems.

The Solution

The solution is simple; establish an entity for yourself or immediate family, ideally in a 2nd country.  Don't be misled thinking there is a paradise of some jurisdiction.  The fact is that it's always better to work with 2 countries than one.  For those living in the EU, the US may be a good jurisdiction to setup an entity.  The reason for this is there is usually special treatment for foreigners.  For example in the case of Malta, Malta has rules regarding "International Trading Companies" that are not applicable to Maltese residents.  Only foreigners with assets in Malta can receive tax benefits, it is not available to locals.  The same applies to IRS rules where a double taxation treaty exists.  The point is not to dissect the rules in each jurisdiction, rather to understand that working in 2 jurisdictions is always better than one.  Also, as the global situation changes, it may be difficult to get established offshore as they close the borders, whereas existing entities may be grandfathered in with old rules.

Transferring assets out of your name is a big leap for many who have been taught to be 'owners' - but there are many structures that would allow the same degree of control over your assets while providing protection from the threats listed in this article.  If you are considering doing this, understand that it will be required for a law firm to establish the entity for you, but much of the work can be done yourself if you choose.  Otherwise you will need to find a financial adviser in the jurisdiction where you are considering establishing your entity.  DO NOT consult with US advisers about offshore structures unless it is their specific specialty.  Similarly, if you are in the EU, do not consult with EU advisers about US rules.

Structured Consulting can assist in establishing an offshore corporation or trust for you, or simply put you in contact with our network of international professionals.  Contact Structured Consulting

Are your funds safe with your custodian?

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A custodian maintains custody of your funds.  When you open an account at a bank, brokerage house, or hedge fund, at some point you transfer assets to the institution who holds them for you in your name (Your account name).  If funds are not on your person in cash or on your property, they are usually kept with some institution.  This could be a bank, broker dealer, hedge fund, futures broker, credit union, or an individual known as a 'fiduciary' who usually is licensed to hold funds.  In an electronic world this is mostly cash and cash equivalents, stocks, bonds and other instruments.  But our regulations and laws were written before computers existed.  As one interesting example, it used to be possible to open an account at a commodity brokerage with land or a herd of cattle.  The FCM would create a cash margin account for you with the cattle held as collateral (which made sense for farmers who needed to hedge their business by trading futures contracts).

While financial institutions are generally heavily regulated, you no longer own your funds when held at a custodian.  A deposit is not considered bailment, meaning when you deposit money in a bank you are transferring ownership to the bank and your account statement is effectively an IOU.

A deposit, by legal definition, is not considered a bailment, but even if there was a question involved, all contracts with all commercial banks explicitly state that deposits of funds are a full title transfer of ownership to the financial institution. The fact that funds can be 'repaid' to you 'on demand' is incidental. When you make any bank deposit, you are giving up title to your funds to the bank, and the bank does not have to store them, and may do with those funds as it pleases. Your funds become the immediate property of the bank, in return for what is essentially an IOU.

Under normal conditions, technicalities such as this are irrelevant.  But in the case of institutional default or fraud, they can mean the difference between getting your funds back, or not.

We've seen due to the financial crisis situations like PFG, MF Global, and Bernie Madoff, where investors were subject to their custodian default in varying ways.  Banks have been considered to be historically speaking the safest of any type of financial institution mostly because of FDIC protection (and similar protection in other countries) and their regulation.  But we've seen bank failures since the crisis started.  More importantly, we've seen banks in Cyprus have their deposits wiped out to 'shore up' bank balance sheets.  Now, the bail-in policy is a template that could happen anywhere, in the US, the EU, and even New Zealand has proposed similar solutions for bad banks.  Now there is talk of potential IRA confiscation, based on rumor, but also chilling requests for information such as the US Department of Labor's "Fact Sheet - Lifetime Income Options for Retirement Plans."  See what CFTC disclosures are now required to be included in CTA/CPO disclosure documents:

IF THE COUNTERPARTY BECOMES INSOLVENT AND YOU HAVE A CLAIM FOR AMOUNTS DEPOSITED OR PROFITS EARNED ON TRANSACTIONS WITH THE COUNTERPARTY, YOUR CLAIM MAY NOT BE TREATED AS A COMMODITY CUSTOMER CLAIM FOR PURPOSES OF SUBCHAPTER IV OF CHAPTER 7 OF THE BANKRUPTCY CODE AND REGULATIONS THEREUNDER. YOU MAY BE A GENERAL CREDITOR AND YOUR CLAIM MAY BE PAID, ALONG WITH THE CLAIMS OF OTHER GENERAL CREDITORS, FROM ANY MONIES STILL AVAILABLE AFTER PRIORITY CLAIMS ARE PAID. EVEN FUNDS THAT THE COUNTERPARTY KEEPS SEPARATE FROM ITS OWN FUNDS MAY NOT BE SAFE FROM THE CLAIMS OF PRIORITY AND OTHER GENERAL CREDITORS.

That means if you have an account at an FDM (Forex Dealer Member) and they become insolvent, creditors may be paid before account holders if a judge deems them as 'priority.'

So what is the solution?

For many it's not possible or they are not willing to convert all of their assets into physical assets (even including cash) to keep on their property, and those not in financial services are not sophisticated enough to open their own private bank (which is what the elite do).

Solutions have been presented such as by finding AAA+ rated banks and credit unions, looking at their balance sheets to determine the possibility of failure.  This is a very prudent practice, however, it doesn't guarantee that bank won't be seized by the government, bought by a bigger bank, or is managed by a lone fraudster who just got hired recently to improve profits.  Before it's collapse, PFG was considered to be one of the most honest and credible futures brokers in the industry.  Russ Wasendorf, Sr. would speak about the importance of compliance at industry events, and was on the advisory committee of the NFA.

Actually it's possible to insure your deposit externally by use of derivatives (Buy CDS on your institution), or by non-cash funding of an account by use of letter of credit or bank guarantee.  But the minimum transaction for these options is millions if not tens of millions.

Questions to ask about the institution where your funds are held

  • What is the legal system in the jurisdiction where the institution is registered?
  • Who are the owners of the institution?
  • What is the background of the management of the institution?
  • Are there any damaging reports or rumors circulating about the institution or it's managers (Google "REPLACE THIS TEXT WITH MY INSTITUTION fraud") - Years before Madoff was uncovered a lone analyst Harry Markopolos published documents proving mathematically that Madoff was running a Ponzi scheme.
  • If a bank, what is the leverage of the institution (loan to asset ratio)?
  • If regulated, are there any past complaints, fines, or other marks against the institution or it's managers?
  • If available, what are CDS trading at and what are the spreads?  (CDS indicate chances of default)

Due diligence techniques

DO NOT directly ask questions like this to your institution, it's a waste of time and has no real information value.

Google is a great tool, you can combine your institution name with 'fraud' or 'default' or 'bankrupt' or other terms to see if there is anything returning in search results.  If you don't find anything it's not proof of that there's nothing to find, as it's unlikely such information would be found on the public web but it does happen.

Forums and review sites are great ways to engage other concerned customers and read any complaints, if any.

Ask an independent financial adviser to do due diligence for you.  With connections inside financial services they may have contacts or other means to collect info not available to the public.

Remember, each type of institution will have a different regulatory structure, which is also different in each jurisdiction.  For example hedge funds, although regulated, have reporting requirements in the US but are not required to publish statistics about data such as Assets Under Management and other key data.

Global Intel Hub Due Diligence Services

MEMBER OFFER - Structured Consulting can provide professional due diligence & research services about your institution(s) Please contact SC for more info.  Members of Global Intel Hub can also suggest a topic for research that will be published for all members.

Resources

The FDIC failed bank list: http://www.fdic.gov/bank/individual/failed/banklist.html

Likely to fail resources

http://www.businessinsider.com/25-banks-default-2010-5?op=1

End Of The Great Market Illusion

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A series of data which normally would be considered anomalous is growing at such an accelerated rate, it's no longer 'black swan' data; now the flock seems to be all black and it's flying north for the winter.

Take a look at the following chart showing Consolidated Foreign Transactions in Long Term US Assets:

(click to enlarge)

This shows more foreign selling than after the credit crisis in 2008/2009, and this data is from June, the only down month in the S&P 500 since November of 2012. Why does this matter? Foreigners own more than $15 Trillion of US assets, according to the Federal Reserve. Foreign money flowing into the US in all forms not only is a boost for the markets and the economy, it is now significant because it provides a balance of real money inflows to the Fed's artificial QE.

Wal Mart (WMT)

(click to enlarge)

The biggest retailer in the US struggles with revenue growth. Wal-Mart is the largest private employer in the United States, also with one of the worst track records as far as employee treatment. Finally someone notice the obvious fact economists seem to miss: employees are consumers! If Wal-Mart paid it's employees more they would have more money to shop in their stores. That's not the entire reason for the above chart, but being the biggest private employer also means that they have ability to increase discretionary spending of large consumer base, and could incentivize them to keep the money in the company by offering discounts or giving them gift card bonuses. In any event, the above chart is disturbing coming from a retail behemoth such as Wal Mart .

10 Year breaches key level 2.75

The 10 year today went beyond a key 2.75% reaching a high of 2.88%.BofA/ML says:

With a 14bps move higher in 10-year interest rates over the past two days, the key question is how much will it take to accelerate outflows from bond funds enough to lead to wider high grade credit spreads? While we already expect outflows from (non-short term) funds to increase based on the move in interest rates so far (see Figure 4 at the end of this piece), clearly a move to 3.0% on the 10-year over the next several weeks would lead to much more meaningful outflows. Whether such scenario actually leads to wider credit spreads depends on the extent of institutional buying interest at the new more attractive levels. That in turn depends on whether interest rates are perceived to stabilize at the new higher levels - thus the other key variable to watch is rates volatility.

These levels come at a time when China and Japan are selling more US paper than ever. And it should be noted the Yuan has reached an all time high against the dollar, and is currently a growing means ofexecuting international trade deals.

Many institutional traders watch the 10-year yield as a type of market sentiment based on the Fed's QE program.

Gold near backwardation

While the price of Gold (GLD) is up today, it's far from it's peak. At the same time, demand for physical gold is surging making Gold traders scratch their heads. Large Gold trader Paulson cut his holdings by 53%in the Gold SPDR.

Another strange phenomenon is happening with Gold , warehouse supplies used to back commodity contracts are near all-time lows. Gold is being repatriated by Germany and other countries, while China and Russia are buying Gold at a record pace, increasing their reserves.

Hindenburg Omen

Wall Street is a buzz with sightings of the "Hindenburg Omen" named after the great crashed Zeppelin. Art Cashin of UBS says the last time we saw this many omens was before the start of the 2007 bear market.

With the latest market rally, the Omens are flaring up again. There have been 5 Omens triggered out of the past 8 trading sessions (your data may vary - we're using the same sources we've always used for historical data). That's actually the closest-grouped cluster since early November 2007.

It's extremely rare to see as many Omens occurring together as we've seen over the past 50 days. The last time was prior to the bear market in 2007. The time before that was prior to the bear market in 2000.

The Fed

Market focus is on the Fed with "Taper Talk" the discussion. Fedwatchers remember the Greenspan days when paparazzi would photograph Alan and Fedwatchers would speculate on decisions based on the size of his briefcase (bulging briefcase, Fed worried, unexpected rate decision). In an interview Greenspan later admitted that usually his briefcase contained his lunch. Today the Fed is a different Fed, having gone through audit the Fed proposals by congress, a series of Fed assisted asset relief programs, and an unprecedented QE infinity program.

The taper question is with all the Fed money floating inside the system, what will happen during a big sell off considering the Fed's recent report on LETFs, and the increase in margin debt usageespecially on the NYSE?

Does the stock market really matter

Traders and investors live and breathe the markets. Certainly the more than 100 Million unemployed Americans would rather get a job than have the stock market go up. Corporations, rich people, and banks are sitting on record amounts of cash. This contributes to the decline in velocity of money, which is at depression levels. Instead of hiring full time employees, the trend is to hire temp workers just enough that they don't get benefits. Temp jobs have seen a 50% increase.

But is the stock market really a driving economic factor? If companies are sitting on cash, not hiring full time workers, and a company the size of Wal Mart has zero YOY increase in revenues, what difference does it make what the stock price is? This rally has proven to be an illusion. Rumors circulate about a bond market bubble, dollar bubble, stock market bubble, and real estate bubble. Paul Craig Roberts calls this the triple bubble (Dollar, Bond, Stock). But aside from long stock investors losing in the event of a market crash, would a potential stock market crash cause other externalities or 'collateral damage' ?

One near certainty, it will prove the failure of QE as a means of solving the credit crisis of 07/08, and show the recent rally for what it is, a financial illusion.

Just imagine if the Fed gave the QE to the unemployed 100 Million people how that would benefit the economy. Like the controversial 'entitlement' programs, what do people do when they get paid? They spend their money. Banks don't - banks are sitting on massive amounts of QE dollars, in some cases keeping them in custody right back at the fed, gaining a risk free 50 bps by doing nothing! The US economy is losing it's largest value: human capital.

Actionable intelligence

Of course no matter how much data indicates the broader market may decline, it means nothing if the Fed keeps propping the market albeit indirectly with QE and other instruments. Also, in the age of high frequency institutional trading in dark pools, there's no way to know if some type of high frequency Plunge Protection Team has been put into place, the stock equivalent of the Fed's bond buying program. In a world where the NSA is recording all emails and internet traffic in and out of the United States, but can't track its own internal emails, anything is possible.

But if we take the data on face value, it might be a good time to take profits if you are long the market. Not every stock will decline in a market collapse and some will even benefit. Otherwise, it's a good time to buy (SPY) puts while they are still cheap.

Wal Mart data is not alone, Cisco (CSCO) dropped 10% recently due to poor growth. These are not small companies, they are large and very integrated in the economy. How many Cisco employees shop at Wal Mart , and how many Cisco products does Wal Mart buy?

In the case of potential Gold backwardation, why not buy some far out calls on itself, again while they are cheap? If any Gold contract defaults, we could see rise huge in 1 day. Other events could cause to rise, even if it's not so extreme, such as the situation in Egypt and potential escalation of neighbors. Just remember, the Fed can print as much money as it wants (and give it to banks and institutions who can buy stocks or increase margin debt), but there is limited quantity of Gold in the world. Of course this is true of any commodity, but the metals have financial allure throughout human history.

To conclude, buy puts on and calls on and take any profits in long stocks before its too late.

Trading Forex becomes complex

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During the beginning years of the Forex market, trends developed that lasted months and years. Even recently, trends have developed even though they may have reversed.

But when the Forex markets are subject to one speech by Ben Bernanke, or another Fed chairman, how is a trader to know when that will happen and how the market will react?

We've seen evidence of market manipulation in other markets, most recently Friday's bond market frontrunning. The problem with finding data of such frontrunning in Forex is that since Forex does not trade on a centralized exchange, and the market is so liquid, data about trading activity such as referenced above is not available.

But traders will attest to price moves before data releases, and large Forex traders tipping each other off (currently not illegal). Also there is a growing WM/Reuters scandal showing how Forex traders manipulated the fix rates.

The Euro

Some believe the Euro highly overvalued. Europe has a banking crisis, horrible economic data, and a deteriorating political situation. Yet the Euro continues to maintain levels near 1.32, baffling many traders. Some days, the Euro is even correlated with the S&P 500. But if you look at the daily chart of the EUR/USD it's basically hovering up and down around 1.30:

(click to enlarge)Euro around 1.30

Trading opportunities, yes. But clear direction?

Quality data that proves how difficult it's becoming to make decent returns by trading Forex are provided by Barclay Hedge Currency CTA index:

(click to enlarge)barclay

In 2013 currency traders returned 1.62% so far for the year. In 2012 they returned 1.71%, not beating inflation. But look back in 1990 they returned 57.74%. Of course the Forex market is a different market today, but that's exactly the point. Every month Forex becomes more erratic, more random (not to be confused with volatility).

Automated Systems

Some automated algorithmic systems, may not have such problems trading, especially high frequency systems that thrive on volume and price movement rather than trends or technical analysis. These systems are now offered to investors via CTA programs, signal services, and other means (they are not only for well funded high profile traders). Automated systems will thrive in the future Forex market, especially those with some intelligence, while traders will be faced with increasing black swan events, such as Fed announcements, political crisis (such as currently in Europe) and others.

Example of Snowden wildcard

While not explicitly a market event, the revelations of Edward Snowden have the potential to significantly impact global markets, including Forex.

In the short term, the London summit mitigated financial contagion emanating from southern Europe; gave the World Bank additional resources to deal with the problem of trade finance for emerging-market exports; appeared to give the IMF more firepower and legitimacy; and seemed to catalyze coordinated fiscal stimulus to restore confidence.But only the more technical of these four achievements - the first two - stood the test of time. Everything else that was agreed at the London summit turned sour. The follow-up summits were lame. The idea of coordinated fiscal stimulus became problematic when it became obvious that many European governments could not take on more debt without unsettling markets and pushing themselves into an unsustainable cycle of increasingly expensive borrowing.

And yet, however limited the London summit's achievements proved to be, the summit process itself was not fully discredited until Snowden's intelligence revelations.

The possible outcome is so uncertain, because there is no telling how leaders will react, but it's certain that the revelations will impact negotiations. In the current environment markets are subject to heavy influence of agreements made by politicians, especially in the EU which is undergoing rapid financial reforms due to the banking crisis. In the most significant recent example, the Troika implemented a bail-in policy in Cyprus which is now being used as a template around the world, even in New Zealand.

How would a Forex trader include the potential political outcomes of such events in any strategy? The answer is that it's impossible, because there are too many variables and none of them are discreet.

Investment recommendations

To put in one sentence, trading Forex via ETFs or invidual currencies in the next few years will be more and more challenging. One exception to prudently invest in Forex ETFs is to hedge currency risk of your portfolio or business.

One alternative would be to find a Forex manager that has a substantial track record, or that uses automated algorithmic trading systems. While algorithmic systems are not risk-free, they will be able to trade the market better than human traders because they usually are analyzing data at a faster rate and look at Forex data simply as numbers, what the market really is. Also they typically trade in smaller time frames and are able to automatically deal with black swan events either by cutting losses or by capturing momentum at any time (whereas a trader may be out of the office or for whatever reason doesn't know how to capture the momentum).

The purpose of this article is to explain the challenges of manually trading individual currencies, not to recommend particular Forex investments. If you are considering investing in currencies, we suggest researching established managers and funds (there are many).

How to think Chinese – Developing a long term view

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Before we begin we need to clear a few biases.  People confuse culture, politics, and economy.  For example, there is confusion about the differences between socialism and communism; many people think they are the same.  Also people equate communism with USSR style communism, which was less communist than your local community.  The most communist organization in modern times is the Jewish Kibbutz.  To see more about communist ideas read about it here.  The USSR is best described as state capitalist, similar to what China is today.  That means it was a capitalist society but controlled by the state.  It certainly was not 'classless' and it was not a democracy.  Real communism as a political system includes a democratic approach whereby everyone has a vote and a say in what the group does.  Family is a small communist organization (sometimes ruled by a tyrant dictator!).

Another misconception is the current model of the United States, which is not democratic and not purely capitalist.  First, the US is a republic, not a democracy.  In a real democracy individuals vote (such as in referendums) on laws or other rules passed.  In the US system elected officials vote on rules on the behalf of voters which is a Republic.  Second, the US is not pure capitalism because there are government regulations.  Also large corporations control markets which is closer to an oligopoly or plutocracy.  Moreover, the US government is a big economic actor, actually employing more Americans than any single corporation.  Capitalism as described as it's original thinkers requires a political system similar to anarchy, complete rule by the markets and free enterprise with virtually no regulation.  Clearly this is not the system used in the United States.  This confusion can be traced to the British where they were trying to sell their mercantilism approach as a means of economic colonialism, as not to appear as an invading army when taking over a countries resources.  So they promoted 'capitalism' as the new freedom, and giving the lesser classes the hope that if they work hard, they can make a life for themselves.

But cultural influences also need to be considered.  For any system, it will look different in different cultures.  Americans have a free enterprise wild west mentality embedded in their culture so while the US is really a Republican Plutocracy, it resembles Anarchistic Capitalism because of the culture.  Americans are risk takers, mostly.  Americans comprise of people from all origins who risked everything to start a better life in a new alien world.  Once there, policies such as the land grab of the west created by the government to expand US territory, exacerbated these traits.  Millions of businesses have been started and failed.  The biggest myth about America is the statistics of success; it's true there have been cases of people rising from nothing to great power and wealth, but for every one Rockefeller you have thousands of losers who have bankrupt or died.  The American Dream is really a dream, like commoners who discuss what they would do if they won the lottery.  People do win the lottery but you have a higher chance of getting struck by lightning or dying in a car crash.  But these hopes and dreams kept lower class Americans slaving away in factories and plowing fields in a subsistence existence not much different than people lived in Feudal Europe.  But the hope kept them plowing.

Now that we've briefly discussed some important biases, let's try to think Chinese, culturally speaking.

China is a big place with thousands of sub-groups that speak different languages.  It's more fragmented than any part of the world.  We commonly believe there are 2 main languages, Cantonese and Mandarin, but there are thousands of sub-cultures and sub-dialects.  Without a unified China, the place would be a collection of villages and probably constant war.  The greater state of China keeps them all under one rule.  This is acknowledged by regional leaders such as the founder of Singapore.

The Chinese are not creative as such.  They are an extremely conservative group, one thing shared among most of the sub-groups.  They believe in traditional values, whatever they may be, and they are not innovative, culturally speaking.

They think in terms of 100 years or 1000 years.  This is difficult for Westerners or Western educated people to understand.  In some respects, Indians have succeeded by placating Western creativity while holding similar traditional values like the Chinese.

Farmers can understand this, especially those with fruit trees.  It may take 5 or 10 years for a tree to grow to the maturity required to produce nice tasting fruit.  Good wine, in addition to the growing process, is more valued when aged for decades.  The entire process can mean a lifetime.

It should be also noted that any nation-state strives to increase the wealth and power of their nation by any means, whether by mandate or by lust for power, regardless of the system used to do so.

Investing implications

It's hard for Western Investors to take a Chinese view of the markets, that is to say, a long term global macro view.  Certain hedge funds and analysts do this, realizing that macro fundamentals will ultimately overwhelm any short term market dislocations.  But it's harder for investors.  Saying that investors had a 'buy and hold' mentality for 20 years during the 80's and 90's is unfair because during this period the market relatively went up.  Would they have had the same view in a bear market?

This doesn't mean investors should sit on losing positions forever hoping they will return.  Simply, that with the right analysis, it can't lose.  Use any analogy; if you are selling water in the desert and people are dying of dehydration, it's just a question of time before business will explode.  Smart marketers use arguments to invest in their company, such as those promoting their business models using similar analogies.  Ultimately, reality always wins.  You can't fight gravity and you can't turn Iron into Gold for a price that would justify the process.

The mathematical analysis especially on a macro level, if done correctly, cannot be completely wrong.  Of course other factors may come into play, a common one recently are Fed speeches that have little information value but large impact on the market.  But these reactions are usually short lived.

Other implications

The same long term thinking can apply to any aspect of our lives; health, business, relationships, or projects.  The modern version of capitalism teaches us to think in the next 24 hours.  If we can't make a buck this quarter, it doesn't exist.  Taking a long term view requires patience, perseverance, and understanding.  If you look at any person's career, only after years of experience do they gain mastery of their industry.  Child development is another good example, it takes an entire decade for a small child to grow into a full adult.  Why do we take a different view on investing, or in our business?

Long term thinking isn't about disregarding the present, it's about understanding macro (global) implications on a longer time frame in synergy.  Those who have suffered through natural disasters like Hurricane's Katrina and Sandy are examples of how to look only in the short term.  In great contrast, the Great Pyramids in Egypt were actually built to withstand large earthquakes by using a brick locking system of non standard sizes (think Tetris).  Other ancient structures have also survived thousands of years, and new theories indicate the Pyramids may be actually much older than we think.  Whoever built such structures certainly had a long term view on construction.

How to do it

The first step is to develop a method of analysis, collect as much research and information as possible, and make a long term plan.  This should include considerations for social and political changes, market changes, technology influences, having a backup and redundancy, and long term suitability.  For example when investors have been creating portfolios they are not considering institutional risk, such as the collapse of their institution.  Now they are not considering the new 'bail-in' policy whereby deposits can be confiscated to shore up bank balance sheets.

If building a business, considerations should be made about potential future government regulations, market impacts based on demographic shift changes, and technological impact.  A good example of technology impact is in the internet industry where the technology shifts every few years.  Getting stuck in a legacy application will not give you the flexibility to adapt to new changes.

A good business example has been the growth of the water industry.  Only 10 years ago, it would have been difficult to imagine that something as simple as water would be a big business.  This has been seized by entrepreneurs offering both water to places where it's become difficult to find potable drinking water, and a growing demand for consumers for designer waters.

Just remember that if big companies are always on top of this, then Microsoft, Google, and Facebook wouldn't exist.  IBM was practically a market monopoly when Microsoft was founded, yet IBM didn't cash in on the growing PC business.  Microsoft grew and became a niche IBM, missing the trend in the internet giving rise to Google.  And Google did the same, missing the social media trend giving rise to Facebook.  This exists in all industries but it most obvious in the tech sector.

One could argue that the key is not trend spotting but proper planning.  It was obvious to many that a search engine would be needed with the rise of the internet.  Google capitalized on it.  It should be noted however that while Google is a common example because of it's notoriety, there were hundreds of other groups that capitalized on it, either being bought by Google or some other company.

Strategy

A good start is to read Sun Tzu - which has been recommended reading in business schools and especially for traders.  Download the book here: The Art of War, by Sun Zu

The interesting thing about Sun Tzu is that the strategy outlined in this ancient manuscript still applies to business and the markets today.  In other words, good analysis and strategy is timeless.  It can be applied to your portfolio, business, or anything.  Sun Tzu isn't a particular strategy per se (unless you are doing battle in Ancient China) it's a set of rules, or a doctrine, on which you can base your analysis system.  The problem with developing a strategy is the influence of biases and opinions.  "Thinking" that something will happen doesn't a good strategy make.  Sun Tzu provides an framework for developing "Chinese Thinking" or a long term view based on.  Sun Tzu isn't the only analysis framework.  A more modern approach has been developed by Carl von Clausewitz which to this day is taught at West Point.

Why all the military examples?  Simply, military analysis is by design no different than trading, or business.  As the Japanese say "Business is War."  With the military, and with trading, a flawed strategy that causes losses in money or life can be devastating.  The military is used when a diplomatic solution (political) is not possible, so any military is focused on strategy, tactics, operations, completing the mission.  Politics on the other hand, is a completely different animal, it's more similar to dating than to war-fighting.

Of course investing is not the only application of such an approach, although it may be more useful for investors and traders than in other applications.  Long term project development can use the same thinking to build strong foundations for their projects, and defend against outside threats, for a lasting success.

Further Research

https://en.wikipedia.org/wiki/Carl_von_Clausewitz

https://en.wikipedia.org/wiki/Sun_Tzu

https://en.wikipedia.org/wiki/Macroeconomics

Global Intel Hub

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Global Intel Hub is an online information brokerage service with a focus on analysis, intelligence, and research.

  • Breaking news research - When events such as 911, Hurricane Katrina, a plane crash in San Francisco, or the Fukushima event in Japan happen; it may take weeks or longer for a wide understanding of key facts.  In the initial hours and days following the event, much noise is generated by news agencies and others reporting on the topic.  Global Intel Hub sifts through the noise providing breaking analysis and posting key facts of the event.  This can be important for traders or investors when these events impact the markets.  Businesses can use this type of research as soon as possible to include in their planning, especially when they are impacted by such events.
  • Niche research - For important niche topics filled with biases and noise, Global Intel Hub will collect and post relevant research on the topic, as well as writing analysis reports on the topic.  Examples include the global tax regulation change, financial regulation changes, online security, technology development, region specific political analysis (such as situation in the EU), and others.  Members can always suggest a topic for research and premium members can receive customized analysis and research based on their needs.
  • Intelligence library - A collection of must read reports, books, and analysis created by our content partners as well as leading intelligence agencies such as the CIA, Stratfor; and from financial intelligence sources, corporate intelligence sources, and political intelligence sources.
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  • Insightful documentaries - Global Intel Hub finds must watch groundbreaking documentaries and educational videos important to the topic.
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  • Important news - The internet makes it possible to get most news available in minutes, and once scooped by a blog or website it filters through the internet quickly.  But how do you know what news is relevant?  More information or too much information can harm the outcome of analysis.  Global Intel Hub searches news sources for the one or two stories that matter, that are not always the leading story.
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Global Intel Hub provides all of this through our secure portal http://globalintelhub.wpengine.com for $10 /month.  As Global Intel Hub grows, we strive for the portal to be a one stop shop for all of your analysis, intelligence, and research needs.  Through our partner network, Global Intel Hub will offer its members special offers on services such as customized analysis and research for your organization, or for example information on how to setup a legal offshore tax efficient corporation, or customized portfolio structuring and analysis.  Members always receive full access to all content on globalintelhub.com

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12 facts all investors should know

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1) The Federal Reserve is a private bank.  It is not a part of the US Government.  Ironically, the FDIC is owned and operated by the US Government, as are many other government sponsored organizations that would bear the burden of any crisis.

“Some people think that the Federal Reserve Banks are United States Government institutions. They are private monopolies which prey upon the people of these United States for the benefit of themselves and their foreign customers; foreign and domestic speculators and swindlers; and rich and predatory money lenders.”

– The Honorable Louis McFadden, Chairman of the House Banking and Currency Committee, Republican Senator from Pennsylvania, in the 1930s

2) Since the original issuance of the US Dollar by the Fed, it’s down more than 97% (chart).  Article:

”By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens…There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose.”  John Maynard Keynes  attributed to Vladimir Lenin.

3) $1 Million in Gold in 2002 would equal $6 Million today, whereas a $1Million investment in the DJIA in 2002 would equal $1.4 Million today.

Dow to Gold ratio 100 year historical chart shows Dow out-perform Gold by 238%.  Compare this to the DJIA’s explicit 700% increase during the same time.  Also consider that Gold remains Gold, while losing companies in the Dow are regularly removed, thus providing a misleading result.

4) European banking system is leveraged 26:1 meaning a 4% drop will wipe them out.

The European banking system is a complete and total disaster. Remember how bad Wall Street was in 2008? Europe’s banks are many multiples worse than that. The US at least recapitalized its banking system after the Crisis.  Europe hasn’t. At all. That’s right, the banks in Europe have not raised capital to bring down their leverage rations, which is why the ENTIRE EU BANKING SYSTEM IS LEVERAGED AT 26 TO 1.  Lehman, which was a total sewer of garbage debt, was leveraged at 30 to 1. Europe’s ENTIRE SYSTEM is leveraged at 26 to 1.

5) Hyperinflation has happened worldwide in more than 56 countries.

Hyperinflation effectively wipes out the purchasing power of private and public savings, distorts the economy in favor of the hoarding of real assets, causes the monetary base, whether specie or hard currency, to flee the country, and makes the afflicted area anathema to investment.

6) 99% of stocks are not owned by individuals, they are owned by the DTCC on your behalf.  The European equivalent is Euroclear.  Info on DTCC

So, do you think you own the stocks you've bought?  Think again. For those of you who have not heard of the Depository Trust & Clearing Corp. (DTCC) and you own stocks ... sit down.  This might change your your whole way of thinking.  Who is the DTCC and what does it do?  The DTCC actually provides clearing for 3.5 million securities from the United States and, get this, from 110 other countries and territories as well -- all valued at roughly $28 trillion.  In 2008 alone, the DTCC settled more than $1.88 quadrillion in securities transactions.  The DTCC is also the registered owner and holder of your stock. At present, the DTCC holds $23 trillion in assets.  It has a virtual monopoly on clearing.  In fact, 99% of all stocks in the USA are legally owned by it.

7) Currently several countries including Germany are repatriating their Gold stored in the US, France, and England.

Considering that the Federal Reserve and the Bank of France might not have all of Germany's gold in their possession, (after possibly 'lending' some of it) could be reason enough for deciding to repatriate it in the course of a seven year time period.  Legal accounting  "tricks" (gold swaps) currently allow central banks to "lease" and provide the physical metal to the market (causing gold price suppression) while still reporting it in their balance sheets.

8) Economically speaking, the British Economy is worse than during the Great Depression.

Economists from the Royal Bank of Scotland said the last four years have produced the worst economic performance in a non post-war period since records started being collected in the 1830s.

9) The real unemployment rate, as was calculated during the Great Depression would be greater than 20%.

Shadowstats.com is a website that analyzes government economic and unemployment statistics based on methodologies used by previous United States administrations, from the pre-Clinton era to the time of the Great Depression.[1] The author of the site claims that using Depression-era methodology, for example, the U.S. unemployment rate would have been 16.5% in January 2009, more than double the announced rate of 6.7%.[2] The site is authored by John Williams, an economic consultant with an economics BA and an MBA from Dartmouth College, New Hampshire.[3]

10) Although the United States has the highest corporate tax rate in the developed world at 35%, the effective tax rate (based on what US Corporations actually pay because of loopholes and the use of offshore tax efficient jurisdictions) is only 12%.  On a scale of OECD countries, the US has one of the lowest effective tax rates.

At 35%, the United States has the highest nominal corporate tax in any of the world's developed economies.  However, the effective corporate tax rate in 2011 fell to 12.1%, its lowest level since before World War I.

11) The world’s largest trading nation is China, not the US

U.S. exports and imports of goods last year totaled $3.82 trillion, the U.S. Commerce Department said last week. China’s customs administration reported last month that the country’s trade in goods in 2012 amounted to $3.87 trillion.

12) The nation in Europe with most hours worked is Greece.  Germans aren’t even in the top 10.

This week Greece is facing more spending cuts after agreeing to a deal of 130bn euros (£110bn, $175bn) to help it avoid bankruptcy.  But the statistics suggest the country has not lost its way due to laziness. If you look at the average annual hours worked by each worker, the Greeks seem very hard-working.  Figures from the Organisation for Economic Co-operation and Development (OECD) show that the average Greek worker toils away for 2,017 hours per year which is more than any other European country.  Out of the 34 members of the OECD, that is just two places behind the board leaders, South Korea.

The real economic truth about US China monetary ties

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This analysis is about debunking the myth that China has some power over the US because of it's large debt holdings.  Let's just say this is a myth created by propaganda or lack of understanding.  It's nonsense.

Another myth is that China is a currency manipulator.  The Yuan is pegged to the US Dollar (although recently it's been allowed to trade in a 'trading band').  Furthermore, if the Yuan would be allowed to freely float against the USD, if it appreciated as many expect it to, the US would see the cost of Chinese goods skyrocket.  So what gives?

Origin of relationship

Let's look at how this relationship started.  During WWII the Japanese invaded mainland China, and by the US eventually defeating Japan, even if for reasons other than China, the Chinese felt a sense of gratitude.  Arguably Nixon opened up China with the beginnings of what eventually became state run capitalism.  The US is currently China's 2nd largest trading partner, 2nd only to the EU.  For a long time the US was #1.  The Chinese Yuan is pegged to the USD, not the Euro.  Similar to the situation with the Petro Dollar, China invests much of it's USD profits in what it feels are the safest US investments, treasuries.  However China is also a big buyer of US stocks and the recent trend in Chinese business is M&A (used to be trade deals).  Covertly and overtly the Chinese are buying US assets as investments.  A Chinese investment group recently bought 200 acres of land in Michigan with the intent to build a "China City."

As far as cultural compatibility, the Chinese certainly have Americanized.  The Golf industry is booming in China, with over 650 golf courses even though there is an environmental ban on them (yes, contrary to popular belief Golf courses are bad for the environment).  By this year, McDonald's plans to have 2,000 restaurants in China.  That doesn't seem like much for a big country but consider it took them 19 years to build the first 1,000 and now they want to build another 1,000 in 3 years.  The Chinese love American culture.  Those who can afford watch NBA basketball through satellite connections.  And of course there is a growing obesity epidemic, whereas 30 years ago you'd be hard pressed to find a few slightly overweight people in a crowd.  They are also one of the world's biggest polluters, similar to the early 21st century America recently industrialized.  They are evolving, enacting regulations, and opening up their capital markets.  Yuan trading is exploding, with many swap agreements now in place with major trading partners.  Many parts of China look like US suburbs.

The nonsense about treasuries

If China decided in one day to sell all of it's US debt, this would present a few problems.  First, because of the size of their holdings, they may not immediately find buyers.  This would immediately drive the price down but cause the US to react in a few ways (potentially):

  • Buy all of China's debt back from them and 'monetize it' (The Fed would love this as another opportunity for QE, but in effect what would have changed except ownership?)
  • The US could default on it's obligations (Not the most likely, but anything is possible with Wall St.)
  • The US could ban Chinese imports, thus crushing their domestic economy (If China was serious to dump treasuries this would be likely political blowback)
  • Bomb China (While this may seem extreme, US military intervention is usually started with economic interest such as oil, rubber, bananas, etc. China manufactures large amount of US goods, the US wants to keep those factories open.)

Scenarios that are complete nonsense, that we can assume the US will NOT allow to happen:

  • China's bond selling is allowed to go on without any intervention, collapsing US bond market, dragging down the corporate bond market with it, and thus the stock market, and the US Dollar.  The world starts using Yuan in place of USD
  • China negotiates that in lieu of debt obligations they will take California instead - This is no joke there are articles written about how the Chinese are going to use their leverage to seize US properties.  See here
  • China abandons using USD completely and ceases trade with US

The Fed creates USD for nothing, sends it to China, who sends manufactured goods to the US.  What a great deal, the US is trading worthless paper for products.  Some of that money flows back into treasuries at the request of the US.  Isn't it in the benefit of the US that some of those USD profits are re-invested in US markets?  The alternative would be that China invests in the EU or domestically.  China is backing off, while they are not selling US treasuries they are buying less.  If China dumped treasuries the US could immediately cut off the supply of USD going to China.  Economically speaking they could restructure their economy but this could take decades, as they have used the US model and flow of USD to finance their growth.

Doing business in China

The relationship between the superpowers is mostly economic but fairly complex (maybe intertwined is a better description).  It's not only Chinese factories making cheap products for Wal Mart.  Now US companies are entering the Chinese market, and establishing themselves.  General Motors recently sold more cars in China than it did in the US.  Apple manufactures much of its supply line in China, as do many tech firms.  A big advantage of off shoring to China is the lack of labor unions and wage floors.  So on one hand the US is complaining politically (on the surface) that China is guilty of human rights abuse, while allowing US companies to take advantage of the human rights situation getting cheap labor (see Foxconn Suicides).

Chinese problems

To make this nonsense even more fantastic, China is in no position to stand up to the US even if it wanted to (and it doesn't want to, it would lose it's most valuable partner).  China has massive internal problems.  The internet is giving rise to a growing educated population (even with the Great Firewall of China).  Pollution such as the Asian Brown Cloud, dust storms, desertification, water shortages, smog in cities, and a host of other environmental problems are threatening the health of the domestic population as well as the economy.  In order to reform environmental policies sufficient to start solving these problems, it would require political change and an increase in cheap goods to justify the financing of it.

US partner

China relies on the US for much more than money and the US consumer.  The US gives credibility to China on the world stage, arguably, if the US pulled out of China the EU would be pressured to back off.  China can't exist in an Asian bubble with India and Russia at least for the next 50 years until their economies develop.  Also the Chinese rely on US technology, for whatever reason they are not innovative by themselves.  Many of the trade deals with US companies include clauses that Chinese companies are granted access to patents and other technological know how.  They are very industrious and shrewd but have never proven to be big innovators (unlike their Japanese cousins and many other Asian nations).  Losing the US as a partner would be a devastating blow for China.

China partner

While the US has the upper hand, the US would suffer greatly if China was no longer a partner.  The US has dismantled it's manufacturing base, and it would take decades to rebuild it, but it would be questionable how that could be economically feasible considering US standards.  Many US companies such as Apple rely on cheap Chinese manufacturing.  Also the US exports 122 Billion worth of goods and services to China, which is the 3rd largest export partner.  Politically, many in the US (especially neocons) see Asia and especially central Asia key regions to control.  While China has reluctance to bow to US whims, such as with Tibet and other disputed territories, China is the elephant in the room.  It borders India, Pakistan, Afghanistan, Tajikistan, Kyrgyzstan, Kazakhstan, Mongolia, Russia, North Korea, Vietnam, Laos, Myanmar, Bhutan, Nepal, and Hong Kong.  It's in the US interest to share close political ties with China for this reason, and also not to completely lose them to Russia.  Russia and China have a close political and military relationship which if taken to deeper levels, especially including other regional nations, could pose a regional threat to US interests.  Not to mention demographic changes make China one of the fastest growing consumer markets to which the US could market its goods.  Finally, there aren't too many countries in the world the size of China, so the US has no reason NOT to foster close relations.  China is now growing but in 20 or 40 years what will China look like on the world stage?

Conclusion

China does not plan to destabilize the US economy by selling treasuries, but even if they wanted to it's not possible.  China does not want to replace the United States.  It's focus, at least for the time being, is domestic growth and systemic evolution.  In many ways China is behind the times, although they are changing rapidly.  They do not have resources for foreign entanglements whether they be economic, political, or military.  This may not be the case in 50 years but much can happen before then.  For the time being, we can sleep soundly knowing the US and China have ties that bind, which if unwoven, would be catastrophic for both countries.

Research about China data

List_of_the_largest_trading_partners_of_China

China - Wikipedia, the free encyclopedia

The World Factbook - China

Golf in China

China Economy :: The Market Oracle

Articles

Yuan reaches record high against the US dollar

CHINA MANEUVERS TO TAKE AWAY US’ DOMINANT RESERVE CURRENCY STATUS

Yuan to replace Dollar

Chinese Central Bank to Test Program to Settle Trade in Yuan Rather Than Dollars

Year of the yuan: China's explosive currency goes global

Jim Rogers Shifts Assets Out of Dollar to Buy Chinese Currency (2007)

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