Thursday, August 28, 2008 - Vol. 10, No. 205 Today's comment is by Eric Roseman, Investment Director and editor of Commodity Trend Alert. It's time to shift your focus to the most unloved, abused securities. Here's why: As the global economy slips into an economic recession over the next several months, those unwanted securities will yield the fattest profits for your portfolio. The last time the global economy suffered the tribulations of a major economic recession was back in 1990. We can thank the last U.S. real estate "bubble" (a.k.a. Savings & Loans Crisis), and the demise of the European Exchange Rate Mechanism (ERM) for that contraction of output. You may remember the European Exchange Rate Mechanism (ERM) as the euro's predecessor - the European Currency Unit (ECU). Asia, however, saw the biggest decline in economic output since WW II starting in 1997 when Thailand triggered the Asian economic crisis. That watershed event led to the massive destruction of credit, currencies, and stock-market values. As a result, regional economies plunged into the abyss until they finally bottomed in late 1998. The last U.S. recession in 2001 was mild by historical standards. That's because housing values continued to appreciate during that span while financial assets were decimated. Basically, money had somewhere to flow unlike this year. Until recently, commodities have been the only "game" in town for investors. And now, even commodities are pulling back. The Worst Worldwide Recession in 20 Years The economic slowdown now threatening the United States and other industrialized economies will probably lead to the worst recession in almost 20 years. The world economy will continue to struggle with the heavy burdens of rising food and energy inflation. On top of that, industrialized nations are facing deflation in housing and bank credit. And all the while, consumption will continue to erode because consumers will save more and spend less to address balance-sheet erosion. For the first time in the post-WWII era consumers are facing a bizarre mix of lethal food and energy price inflation and deflation (or declining prices) in real estate and financial assets (stocks and bonds). Never in the post-war period have consumers and investors alike faced such a challenging environment. We've simply never had to deal with two powerful economic forces converging with lightening speed. Deflation, not inflation, does far more destruction to consumers and the global economy. That's because debt burdens become increasingly difficult if not impossible to finance. That's the lesson of the 1997-1998 Asian economic crisis, the Russian ruble collapse in 1998 and now, the credit and real estate deflation attacking the United States and Western Europe since August 2007. Inflate or Die In a typical deflation environment, credit "bubbles" deflate. This process or monetary phenomenon can take several years to control until finally the forces of inflation eventually win. At that point, global central banks usually try to print their way out of economic distress. The only way to beat deflation or an environment of rapidly declining prices is to expand bank credit like there's no tomorrow. That's what Asian central banks did in 1998 and the United States started in 2001. The last U.S. deflation, back in the 1930s, was eventually cured by the Second World War. The war led to renewed economic production as the United States converted from a sleepy, peaceful country to a wartime economic juggernaut. But today, the sub-prime crisis has morphed into a diabolical monster as it spreads from one facet of credit to the next. In the process, debt deflation or credit destruction is now underway. The entire gamut of credit deflation reads like a bad movie script - and it's still unfolding. Bank credit continues to tighten in the United States and Europe, particularly in the United Kingdom, Ireland and Spain. As a result, default rates are now rising for companies and consumers. Credit card delinquencies are surging and even top-notch investment-grade companies are being denied credit. Corporate bond spreads trade at multi-year highs, banks' capital ratios have plunged amid a blizzard of unprecedented losses, and mortgage markets are hemorrhaging. The Debt Deflation Strategy According to data from Morgan Stanley, only U.S. Treasury bonds posted gains during the last deflation or Great Depression of the 1930s. Gold, however, might have gained in value had FDR not confiscated ownership in 1933. In my view, gold along with the U.S. dollar would post significant gains versus most assets, including foreign currencies in a debt deflation. Silver, however, might not appreciate as strongly as gold in a severe recession. Silver remains mostly an industrial metal and I doubt it would appreciate in the same context as gold during price deflation. That's because industrial demand for silver would collapse in a hard recession, unlike gold - viewed universally as a surrogate currency and a long-term store of value against fiat currencies. Other commodities, including oil, are unlikely to rise in value if the current economic situation deteriorates further. There's no historical case to be made for holding raw materials in a debt deflation. Not even China will save commodities from a major decline. High quality Treasury bonds and non-financial A and AA-rated corporate bonds are also ideal hedges against credit destruction. As interest rates collapse amid an outright deflation or severe recession, long-term debt prices should rise markedly. Avoid junk bonds and any other category of bonds that aren't of the highest quality. The U.S. dollar is also poised to rise vis-à-vis most currencies as the recession unfolds. That's because foreign economies lag behind the U.S. credit squeeze by about 12 months and will increasingly find debt deflation at their doorstep. Foreign central banks will begin cutting interest rates in 2009 to offset rapidly deteriorating output. That makes the dollar more attractive on a relative basis because the Fed has already aggressively reduced lending rates to boost growth. That's certainly not the case in Europe and Asia. Get Out of Dodge While You Can I would also consider opening a foreign bank account to hold some gold and U.S. dollars as a safe-haven strategy. It is not unfathomable that some sort of foreign exchange control may arise over the next few years. If that happens, it will restrict your overseas transfers and stop individuals from opening a foreign account. The British government imposed such controls in the early 1970s during an economic crisis. It can happen again. I have little faith, apart from the above short list of strategies, that other assets will protect investors. Debt deflation is the absolute worst nightmare for investors, central banks and the general populace. The key is to protect what you have. At some point, as the crisis eventually subsides, great bargains will beckon in distressed debt, bankruptcy reorganization securities, common stocks and real estate. For now, I'd brace for some difficult years ahead and start planning for a hard economic landing. In a worst case scenario, it's better to be safe than sorry. ERIC ROSEMAN, Investment Director EDITOR'S NOTE: This is truly a "duck and cover" market. In response, The Sovereign Society hosted a special broadcast this week to help you "get out of dodge." Market Analyst, David Newman and Executive Editor, Justin Ford introduced a type of investment that we guarantee you won't hear about anywhere else. Plus they're giving you real recommendations to shield your portfolio in the short-term. Thousands of viewers tuned in yesterday to this broadcast. But if you missed it, you can listen in right now absolutely FREE.

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Offshore:

Where In the World is Vanuatu? Part II As I said yesterday, Vanuatu is a group of 80 islands in the South Pacific Ocean, about three-quarters of the way between Hawaii and Australia. And most recently, this small tropic paradise is gaining a new reputation as a "tax haven." But does this island chain deserve that title? Whenever we at The Sovereign Society rank offshore havens, we review the laws, political stability, economic climate, available legal entities, the tax situation, financial privacy rules, and the overall financial reputation of a jurisdiction. (Our top favorites remain Switzerland, Panama, Liechtenstein, and Hong Kong.) For almost 40 years, Vanuatu certainly has been known to some as a tax haven. That explains why so many accountants, bankers, and lawyers are clustered in this small island nation. But the archipelago's reputation as an offshore financial center has been highly questionable, to say the least. In 2000, the Asia-Pacific Group on Money-Laundering claimed the Russian mafia was laundering billions of dollars through offshore banking systems in the Pacific, including Vanuatu. There are about 2,000 registered institutions offering a wide range of offshore banking, investment, legal, accounting, and insurance and trust company services. Vanuatu also maintains an international shipping register in New York City. In an unprecedented action in December 1999, a group of leading international bankers, pressured by the U.S., placed a ban on U.S. dollar denominated transactions involving three Pacific island nations - Nauru, Palau, and Vanuatu. The bankers accused them of laundering money for the Russian mafia and the South American drug cartels. At the time Vanuatu had 63 licensed offshore banks. These bankers put a banking ban on these three countries because they were concerned about a report issued by the OECD's Financial Action Task Force. The report called Vanuatu a "jurisdiction of prime concern" for money laundering because of these same mafia and drug cartel concerns. Perhaps this small country is eager to distance itself from this past history, because the Vanuatu Government now welcomes outside investment to help develop their country. The lack of income tax, capital gains tax, death and estate tax is an obvious attraction for outside investors. Plus, the country has no exchange controls. In 2002, following increasing international concern over money laundering, Vanuatu increased oversight and reporting requirements for its offshore sector. But it was not until 2008 that Vanuatu agreed to release account information to other governments or law enforcement agencies. International pressure, mainly from Australian tax collectors, influenced the Vanuatu government to move to increased transparency. Tax police raids in Australia this year have spurred a debate on whether Vanuatu will remain a tax-free haven. Bottom line: We don't recommended Vanuatu as an appropriate offshore financial haven, because of the history and other reasons stated above. But we also steer clear of this haven because it has a less developed offshore professional sector than other havens. Also, the government is not stable at all. We wish the Vanuatu islanders well, and we remain open to change our current opinion. But in the meantime, there are too many other well-established offshore financial centers to choose from that deserve more serious consideration. BOB BAUMAN, Legal Counsel EDITOR'S NOTE: This November, Bob will join offshore experts from around the world to give you the best offshore alternatives for stronger banking, slashing your tax bills, shielding your assets from future lawsuits and more at this year's premiere offshore event in Cancun, Mexico. Specifically Bob will be teaching you Lesson 3 - Proven Legal Entities to Protect Your Invested Wealth - from Asset Protection Trusts to LLCs, IBCs and More. Learn more about the only "Offshore Academy" designed for Americans here.

Privacy & Rights:

Attorney-Client Privilege: Use It, Don't Lose It When you retain a licensed attorney, you generally have the right to refuse to disclose all "confidential communications" you and he or she share. You also have the right to prevent others from disclosing confidential communications. In U.S. law, this is known as "the attorney-client privilege." If your attorney delegates responsibilities to others, the privilege usually extends to these people. This is true even if they aren't licensed attorneys. In addition, the privilege generally extends to communications between your employees and your attorney. To be enforceable, there should be a written agreement between the attorney and those working under his or her supervision. However, what the courts consider "confidential communications" protected by attorney-client privilege isn't as broad as you might think. For instance, documents and other written materials your attorney produces ("work product") aren't generally privileged unless prepared "in anticipation of litigation." The privilege also doesn't extend to work your attorney does at the direction of another person; i.e., an accountant. In addition, if your attorney isn't acting as a lawyer, but in another capacity (e.g., to provide investment advice), the privilege generally doesn't apply. There are also important differences between the states in the scope of protected communications. California law, for instance, has a more expansive interpretation of confidentiality than virtually any other state. Unfortunately, it's easy to waive attorney-client privilege in a number of situations: If you disclose to others information that your attorney conveyed to you in confidence, or that you conveyed to your attorney If someone who isn't a client, employer or under contract to the attorney participates in a conversation between you and your attorney If your engagement with an attorney involves tax planning, especially planning construed by the IRS as a tax shelter If written communications to and from your attorney do not contain a statement stipulating that they are confidential and subject to attorney-client privilege If you communicate with your attorney via unencrypted email. If you must send and receive unencrypted e-mail to and from your attorney, use a computer that only you can access Finally: Discussions with an attorney someone else is paying for (e.g., your employer) aren't always protected. In any kind of investigation by your employer or a government agency, hire your own attorney. Don't rely on the "free" advice provided by an attorney employed by your own company. MARK NESTMANN, Privacy Expert & President of The Nestmann Group www.nestmann.com

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