How the Average Joe Can Protect His Dough Part II

Today's comment is by Mark Nestmann, our Wealth Preservation & Tax Consultant, and President of The Nestmann Group.

Dear A-Letter Reader,

If you caught my comment a couple weeks ago, you've already met Joe Smith.

Joe's an average American guy. He and his wife Jane live in a three-bedroom tract home in the suburbs with a couple of children. Joe has a solidly middle-class occupation. So does Jane - they both have to work to pay the bills.

Joe and Jane don't worry much about asset protection, privacy and have never invested a dime outside the United States. But one day, they read an article stating that more than 50,000 lawsuits are filed every day in the United States. Of course, John and Jane ignore it, because they "know" that there's nothing "average people" can do to protect themselves from such threats.

Fortunately, that's a misconception. Joe and Jane, and almost every other "average American," can benefit from an integrated program of wealth protection, and protect their privacy to boot. And they don't need to spend a fortune to enjoy these benefits - even if they're interested in diversifying offshore.

Why the Average Joe Should Even Look Offshore

Many countries have enacted laws and regulations that are much more protective of privacy and wealth than the United States. Each offshore jurisdiction is unique, but in general, they each...

1. Protect financial privacy much more than the United States. Financial information enjoys far more protection in most other countries than the United States. Even if there are no "bank secrecy" laws in effect, taking your wealth offshore will take otherwise-visible assets off the radar screen of domestic financial investigators.

2. Lack U.S.-style "civil forfeiture" laws. Most countries view the government seizing your property as a punishment that can only be imposed in a criminal proceeding. That means, unlike the United States, you and your property are presumed innocent until proven otherwise. In most of these countries, law enforcers can only take your property after you've been convicted of a crime.

3. Have procedural rules that discourage frivolous lawsuits. Unlike the United States, Most foreign legal systems discourage or prohibit lawsuits brought on contingency. This means in offshore courts, the attorney bringing the lawsuit is NOT rewarded with a percentage of the assets awarded by the court. Foreign courts also often have a "loser pays" rule in civil litigation and prohibit awarding punitive damages without a criminal conviction.

4. Have set up laws and regulations that are designed to protect wealth. Some foreign jurisdictions have enacted trust laws that make it very difficult to prevail in any claim against the assets conveyed to a properly structured trust. Others accomplish the same objective through insurance contracts. In virtually all cases, assets are better protected, and less visible, than in the United States.

5. Facilitate access to non-dollar-denominated investments. It's possible (although not always easy) to purchase foreign currency CDs and securities denominated in foreign currencies from a U.S. bank or broker. However, numerous restrictions apply, a consequence of laws enforced by the Securities and Exchange Commission, the Internal Revenue Service and other government agencies. Outside the United States, most of these restrictions don't exist, or are less onerous.

How You Can Take Advantage of
Such Offshore Perks

If you're a small time investor, you can still take advantage of the opportunities offshore. Here are a few ideas:

1. An offshore commercial bank account. It's still possible to open small accounts in a handful of offshore jurisdictions. While an account of, say, US$20,000 may not be large enough to provide access to the full range of the bank's services, it will generally be sufficient to fund investments in savings accounts and foreign currency CDs. Most of these accounts are available at commercial banks, which means you shouldn't expect personalized treatments you get at a private bank.

2. Offshore safekeeping arrangements. It's also possible to use safekeeping arrangements to hold precious metals or other valuables offshore. There is no minimum investment to qualify for such services, as they are strictly fee-based. These arrangements may be legally non-reportable to the IRS or U.S. Treasury, unless the holdings are sold for a profit. However, persons with less than US$20,000 to protect may find the expense involved in transporting valuables abroad and paying the annual safekeeping fees too high to be practical.

3. Offshore variable annuities. If you're looking for an easy way to provide asset protection, currency diversification and tax-deferred growth, an offshore variable annuity is worth considering. With a minimum investment of around US$50,000, they don't cost a fortune, either. Several offshore jurisdictions provide statutory asset protection for the death benefit and investments held by an insurance policy. It's also much more expensive for a creditor or disgruntled family member to bring a claim before a foreign court than a domestic court.

One disadvantage of an offshore annuity is that you're not allowed to manage the investments within it yourself. If you do, you lose tax deferral. However, you can usually make a non-binding request to the insurance company to purchase particular types of investments or name an outside investment manager.

4. Invest offshore through your IRA. Offshore investments through a self-directed retirement plan are another option. You can purchase offshore stocks and bonds, offshore funds, even offshore real estate through your retirement plan. Unfortunately, most retirement plan custodians won't permit you to place offshore investments in your IRA, but there are a few exceptions. The minimum investment to make this a viable strategy is approximately US$100,000.

If you decide to proceed offshore, remember that for U.S. investors, offshore income or gain is generally not tax-deferred, other than the exceptions I've already mentioned. Extensive tax reporting requirements also exist for many types of offshore investments and contractual relationships.

Finally, no matter what options you choose for your offshore asset protection plan, please don't proceed until after you've consulted with a qualified professional.

MARK NESTMANN, Privacy Expert & President,
The Nestmann Group
www.nestmann.com

EDITOR'S NOTE: At this November's Offshore Advantage Academy, our offshore experts will give you the ins and outs of each of these offshore strategies so you can walk away with the knowledge you need to meet your personal financial goals. Plus, we'll have the right qualified offshore professionals and domestic tax attorneys on hand so you can implement your chosen offshore strategy right on site. This year, we're holding this popular event at the world-famous Atlantis Resort on Paradise Island, The Bahamas, and we expect it to sell out quickly. So don't wait - sign up today and guarantee your spot.

Why a Fed Rate Cut May Be No Quick
Fix for Credit Markets

All this week, I heard a deluge of financial pundits harping about how the Fed MUST cut benchmark interest rates when they meet next Tuesday, but would a quarter-point (or even a half-point) cut in the Fed funds rate really be the cure-all for gridlocked credit markets that everyone seems to believe? Call me skeptical!

There's no doubt a very strong argument can be made for why the Fed can afford to cut interest rates on September 18, officially ending its restrictive policy stance held over since the Greenspan era.

Recent data indicates that inflation expectations have receded. The yield spread on U.S. Treasury issued inflation protected (TIPS) bonds has fallen to just over 2% - which indicates that the current 5.25% fed funds rate is too high.

We've also seen a dramatic decline in yields on all Treasuries across the entire yield-curve, from shorter-term Bills and Notes, to long bonds. Benchmark 10-year Treasury yields have tumbled to 4.3%.

So the fed funds rate at 5.25% sticks out like a soar thumb! Even the Fed is having trouble maintaining this high target rate.

It's true that a Fed rate cut is probably a forgone conclusion after the weak August payroll numbers last Friday, and lackluster retail sales data out this morning, leaving pundits to debate only the degree of easing that should be forthcoming. But to a certain degree, the Fed may be pushing on a string next Tuesday even as it slashes its target fed funds rate.

To be sure, such a move should improve market psychology, by giving the investment "crowd" what it wants. But even a half-point cut in fed funds may not be enough to reenergize the flow of credit in global capital markets.

You see, there's still this troubling matter of the slow-motion housing crash to sort out.

According to research from the Bank Credit Analyst, "about 60% of sub-prime mortgages carry an adjustable rate, and US$650 billion of these toxic loans will reset at a higher interest rate in the next 16 months."

There are more than 6.2 million outstanding sub-prime mortgages, nearly half of which are adjustable rate. Delinquencies on these mortgages rose to almost 15% of all loans last quarter, but estimates call for delinquencies to rise much, much higher in the months ahead.

In fact, the peak in sub-prime resets won't occur until spring 2008, so the credit crunch is liable to get even worse, before it gets better.

MIKE BURNICK, Senior Editor & Global Markets Analyst

P.S. The sub-prime credit crunch correction is one market shock that hasn't run its course yet - not by a long-shot. Amid signs of a consumer downshift, I just alerted subscribers to my new service Market Shock Trader, about how they can profit as consumer spending rolls over. To get all the details, sign up for a NO-RISK trial today.

Bonus Wealth

Commodities Have Barely Noticed Global Risk

Wall Street economists have lowered their growth forecasts for the second half of 2007 amid the ongoing credit turmoil, raising the odds of an economic recession.

The United States last suffered a recession - defined as two consecutive quarters of negative growth - in 2001. The last serious recession was in 1990-1991 when the Savings & Loans debacle and the unwinding of junk bond speculation drove the country into a painful economic slump.

But if the United States is truly entering recession territory, why have benchmark commodity indices rallied over the last few weeks? The Goldman Sachs Commodity Index, soaring mainly due to surging oil prices, is now in record territory. Meanwhile, the CRB Index is just four points away from a 52-week high on the heels of high oil prices, gold's newfound strength and a wicked bull market for the grains.

Normally, an economic slowdown threatens consumption, driving commodities sharply lower as demand cools. Yet, this is not happening in September - despite the credit-crunch and bear market in housing.

One explanation is that although the United States might already be in an economic recession this quarter, the rest of the world is still growing at a far healthier clip. Unlike 10 years ago when the U.S. drove global consumption, most international economies now rely less on the American consumer. Plus, China remains a major demand equation for global growth.

China, where inflation hit a 10-year high through August, continues to devour almost every conceivable commodity to bolster her booming economy. China was barely a dent in commodity consumption 20 or 30 years ago. Today it is a massive importer of raw materials and increasingly, a significant regional consumer of manufactured goods.

In addition to commodities remaining at elevated levels, high-yield bond yields have not risen sufficiently to warrant recession risk.

Historically, risk premiums for high-yield bonds and emerging market debt have soared on the heels of a U.S. recession. Fears of a slowdown result in a scramble for safe-haven securities, which has indeed occurred over the last six weeks.

But this scramble to find liquidity has more to do with a clog in mortgage-backed funding than problems relating to rising defaults or deteriorating business conditions. If we were truly in a recession or heading into a period of economic contraction, high-yield bond spreads would be much higher right now. Instead, buyers are returning to these markets and driving yields down.

I'm not entirely convinced the United States will avoid a recession because of deepening housing-related woes and over US$500 billion worth of mortgage resets occurring next April. That's going to put more pressure on the economy.

Plus, the Fed has been too slow to act, delaying much-needed interest rate cuts. But the good news is that the world's largest economies outside of the United States are still growing, mainly the emerging markets where balance-sheets and trade-flows are booming.

Hopefully, China and the rest of the world can help spare a severe U.S. recession in 2008 by accumulating cheap U.S. assets and keeping interest rates low to resuscitate growth.

ERIC ROSEMAN, Investment Director