Monday, December 22, 2008 - Vol. 10, No. 304

How the Credit Crunch is Changing the Rules for Some of the World's Greatest Offshore Havens...

"...But I expect Singapore to come under pressure too," said Prime Minister Lee Hsien Loong in the muggy pressroom of Singapore's parliament house. You could tell from the look on his face that the tiny haven's cinderella story might be slowing to a crawl as tax-hungry foreigners target its fast-growing economy.

So far, the increasingly intrusive practices of the Organization for Economic Co-operation and Development (OECD) and the catastrophic mismanagement of banks in the Western World have actually worked wonders for the tiny principality...

"Many of the world's wealthy have moved from traditional tax havens of the Caribbean, Switzerland and the Channel Islands to Singapore," says our own Legal Counsel and Offshore Expert, Bob Bauman. "One of the prime reasons for this movement is pressure in those places from OECD member countries, most notably the United States."

Sovereign Society Council of Experts member - and resident Singapore Legal Counsel - Lawrence Fong explained it to us in greater detail, "With the introduction of EU Savings Tax Directive - especially in financial havens like Switzerland, Luxembourg, and Jersey - Singapore has become a channel for avoiding these intrusive policies."

"And in recent years, Singapore, known as the country run like an efficient corporation, has changed its marketing strategy... To ensure bank secrecy, Singapore made it a crime to breach the confidentiality of bank customers. They dictated penalties that are even stricter than Switzerland's confidentiality laws."

"Singapore companies have also become a much sought after brand in the realm of tax structures. After all, the Republic has a premium reputation of being a first class, legitimate, and respected business arena. Her companies do not get labeled as 'offshore' jurisdictions."

But Will It Last?

As the fallout from gross mismanagement at CreditSuisse and UBS drives even greater funds into Singapore's banks, the attention of the OECD has followed.

Without much official warning, the OECD is beginning to hint at Singapore as a potential target. "Increasingly Singapore is looking out on a limb," says Jeffrey Owens, director of the OECD's Center for Tax Policy Administration.

Bob Bauman shares this view from the front-line, "Local Singapore bankers expect this pressure probably will grow once president-elect Obama takes office in January."

So the window of opportunity isn't closed just yet...but I may not be able to say the same thing this time next year. If you're interested in taking some assets offshore, Singapore might still be your best alternative...and not just for its beautiful weather.

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China & Japan Fess Up. It's Getting Bad...and Fast

As we talked about last week, the Christmas season has helped America - for better or worse - to monopolize the bad news being reported in recent weeks. It seems that trend is in for an about-face...

ISI's Ed Hyman is bucking the trend of perpetual optimism and shedding another layer of 'bubble mentality.' He went on-the-record with a forecast of just 2% GDP growth for China - the world's manufacturing powerhouse - in Q3 of 2008, and a forecast of negative growth for Q4 of 2008. Huge factory closures, massive unemployment and Olympic-year overproduction have all put the skids on what was the world's fastest growing economy just last year.

China has so far engaged in every form of saber-rattling possible. From slightly devaluing their currency, threatening to stock up on gold, and demanding a new world reserve currency to demands that western Central Banks "fix their own mess," the country is doing about all they can to make their voice heard.

But as the largest foreign holder of U.S. treasuries, China's fate (and their savings) is too closely bound to ours for any brash or drastic maneuvers...at least yet.

And over the weekend we also heard that Japan's exports have declined by 27% since this time last year. Due to the collapse in demand for consumer electronics and new cars, the drop was the largest in the last 22 years for the world's second-largest economy.

And the drop has frightening implications for some of the world's landmark automotive & consumer electronics firms. Toyota will record their first quarterly loss in the company's 70-year history, and Sony is laying off workers and looking to cut US$1 Billion in operational costs before the end of the year.

My Brother's Keeper

Earlier this year - before everyone hated Ben Bernanke for giving billions of our dollars to banks who'd loan it back to us at interest - many well-respected commentators still talked about "decoupling" in a purely academic sense. These seasoned veterans, including the likes of commodity legend Jim Rogers, thought that China could shake off a gradual collapse of the Western World's economy. These scholars argued that we were dependent on China...that the 21st century titan didn't need us to continue its rampant prosperity.

At this point, I think we can dismiss that idea as poppycock.

In reality, their overproduction depended on our overconsumption even more than our overconsumption made us dependent on their overproduction.

For example, it led the Chinese to make the classic deflationary mistake...overproducing and backing up inventory in the middle of a consumption boom.

Due to the national fervor of the 2008 Olympic celebration, most manufacturers satisfied annual quotas in the first few months of the year. Lately they've watched their demand fall off a cliff, and they're left with huge, backed-up inventories and without the crucial cash flow necessary to pay workers and keep the lights on. Result? Bankruptcy and millions of unemployment claims start to rack the country overnight.

But here in America, we're confronted with retailers begging us to buy. We get our TVs at cut-rate prices this Christmas, and if you're lucky you can find a brand new computer for half-price.

That's not to say that this crisis won't ultimately hit us harder than China. They're still the center of the world's credit system, and they'll probably emerge with a new place in the world economy. What you should see here is that in a global economic system, we are all our Brother's Keepers.

Nothing is "decoupled" at this point and everyone relies on everyone else...to varying degrees. Clawing out of this crisis will require the world's leaders to work together and steer clear of the "beggar-thy-neighbor" policies that only deepened the Great Depression. However, we can safely expect defensive xenophobia to take hold as everyone begins to assume they're worse off than the rest.

Without suppliers for all the goods Americans import, we can assume that we'll have trouble returning to the economic stature we took for granted in 2007. But the knife cuts both ways. Without a healthy consumption-based economy on our side of the pond, China and Japan won't be taking over the world...or even recovering...any time soon.

With oil prices at a 4.5-year low and Commodity bulls re-considering their long-term strategies, Investment Director Eric Roseman takes a look at the supply-and-demand factors at play during the global downturn...and whether oil's future rests at US$10 a barrel...

Yours in Personal Sovereignty
MATTHEW COLLINS, A-Letter Editor

P.S. The Sovereign Individual's 2009 forecast issue is headed for the printers. But if you enroll today, you could be looking over your digital copy in a matter of minutes. Enroll today and be sure not to miss out on the kind of forecasting that kept investors in the black and taking profits in 2008. Interested? Click here.

SPECIAL COMMENT: Elastic Band Theory Stretches Oil Price Crash

The "Elastic Rubber Band" theory is a popular investment term to describe wide price swings in asset markets. Market moves are usually exaggerated on both sides of the trade and this year's volatility in oil prices is a testament to that swing.

In a bull market, trends tend to rise far above anyone's boldest predictions while the same is true when a major reversal lends to big price declines. Could anyone have possibly predicted crude oil would be trading at $35 six or even twelve months ago?

Now oil producing countries are looking to arrest a crash in oil prices - down a formidable 76% since peaking in July at US$147 a barrel. Oil now trades at a 4-year low and is down a dizzy 62% in 2008 - its first calendar year decline since 2001. In late 1998, amid the Asian economic crisis and the Russian debt default, oil prices bottomed at US$10.50 a barrel (see above chart).

Is it possible we'll see US$10 oil again? I don't think it will happen, barring another Great Depression.

Global governments are in the midst of the greatest expansion of credit in modern history. As liquidity eventually finds its way back into credit markets and lending commences once again, commodities, including oil, should find a bottom. That's what happened in 1998 as the Asian economic crisis ended; ten years later, oil is still trading 233% higher though down a mind-boggling 76% from its all-time high in July.

O.P.E.C. (Organization of Petroleum Exporting Countries) announced production cuts of 2.2 million barrels per day this week to stem the rapid decline in crude. With the global economy now either in recession or heading into a serious period of economic contraction in 2009, demand for oil and other distillate products has declined sharply since September. China, the largest importer of most raw materials and the world's third largest importer of oil, saw exports decline in November for the first time in years.

It would seem logical to assume that oil prices have clearly overshot to the downside at this point. I would imagine most of the decline in global demand has already been priced into oil at $35 a barrel. The fact is, global long-term supplies are not being replaced by annual production, with most oil fields now in decline.

Only several months ago, the world stood at a net deficit of about 2 million barrels per day or, roughly, 86 million barrels of demand per day against supplies of 84 million barrels. Now that gap has not only narrowed but, in the span of just three short months, has turned into a gusher as supplies overwhelm producers.

It's unlikely that a new bull market is taking hold in oil any time soon. We've just had a bust. Yet it would be a mistake to dump oil and the energy stocks at this point after huge declines since July. If anything, this is the time to buy oil ahead of aggressive U.S., European, Chinese and Japanese economic stimulus in 2009. If history is any guide - the Asian experience ten years ago, a depression by all accounts, eventually saw oil bottom at a ridiculously low level - it's hard to believe we'll see $10 oil again.

ERIC ROSEMAN, Investment Director