Why the Stock Bulls Are Dead Wrong -
and I'm Stocking Up on Gold Instead

Today's comment is by Eric Roseman, Investment Director and Editor of Commodity Trend Alert.

Dear A-Letter Reader,

It's no surprise that the U.S. dollar is finally mustering a bear market rally (in truth, our currency experts have been predicting a dollar bounce for quite some time). And it's no surprise that gold prices are pulling back, either - we've been waiting for that pullback too.

But what is quite shocking is there's now a general consensus on Wall Street and in the Federal Reserve that we're approaching the end of this easing cycle.

Investors are growing increasingly optimistic that the United States will escape this recession quickly. They think this currency crisis will be similar to the 2001 recession. I think they're dead wrong.

Never mind that housing prices are still plunging, job losses are mounting each day at major corporations and we're in the middle of a contraction in credit for both companies and individuals. If you factor all that in, it's lunacy to believe the Fed has reached the end of this monetary easing cycle. In fact, I am projecting the Federal Funds rate will head to at least 1% or maybe even 0% before this bear market is over in 2009.

The Biggest Sucker's Rally Since April 2001

Why am I so bearish? This economic cycle marks the first time in the post-WW II period that inflation and deflation are running side by side. It is unprecedented. Consumers are spending less, losing their jobs and banks are denying credit. Also, soaring food and energy costs are killing consumers' discretionary funds.

Housing, however, is my primary concern. New home sales tanked 8.5% in March to their lowest levels since 1991. Housing shows absolutely no signs of bottoming. In my opinion, that's the biggest deflationary tug on the economy.

What we are seeing now is a long overdue bear market rally for stocks, including the homebuilders and REITs. This is the biggest sucker's rally since April-May 2001.

After topping out earlier last month at US$1,033 an ounce intraday, the June gold contract has pulled back to US$887 an ounce Friday morning in New York, a 14% decline.

This marks the second time in six weeks that gold prices have corrected below US$900 an ounce on the heels of a U.S. dollar rally. The dollar, of course, has been dumped relentlessly for the last several years with a brief bear market rally in 2005. This time will be no different.

Central bankers are putting enormous pressure on the Fed to stabilize the dollar. You can understand why. With the cheap dollar, inflation is now spreading just about everywhere.

The Fed talks a good game, but in the end has no choice but to grow the money supply to arrest housing and credit deflation. The broadest monetary aggregate available to the public, M2, shows a massive 16% gain year-after-year. That tells me the Fed is desperate to grow inflation at all costs.

Buy Gold If It Falls Anywhere Near US$850 an Ounce

I would use any intermittent weakness in gold prices to accumulate positions. Gold should hold above US$850 on this correction. Supplies remain very tight, especially in South Africa. Plus, new mined supply is virtually nil. The major gold mining companies have to shell out huge input costs to replace declining reserves or net new supplies.

In 2005, gold prices rallied 18% even as the dollar posted a bear market reversal. I expect the same to happen this year, especially as the European Central Bank (ECB) starts cutting lending rates over the second half of the year.

As the ECB starts cutting, gold will head off to the races once again as that part of the world joins the Fed in reflating the money supply. Germany is now slowing and several other countries are faring even worse, because they're already suffering from real estate deflation.

Investors have seriously miscalculated a bottom in financial markets. The Bear Stearns bailout was not a "buy" signal. Instead, it marked an acceleration of desperation as the Fed prints money like there is no tomorrow. The war is against deflation. Buy gold on weakness.

ERIC ROSEMAN, Investment Director

P.S. My apologies for sounding the warning alarm. But I honestly believe we're simply not out of this mess yet. And at our Total Wealth Symposium next month, I'm going to focus my presentation on targeted commodities and specific funds that let you wage your own private war on deflation in your portfolio. I specifically handpicked all these investments because of how safe they are. These plays will ensure you continue to profit while the Fed slashes rates to 1% -- even 0%. By the way, I hear we're almost sold out. So if you're still planning on joining us in Panama May 14-17, by all means - please register today. Hope to see you there.

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Our Ace Asian Experts Give Us the Inside Dirt on the Power of San Tong

Share prices in mainland China soared 16% this week. The benchmark CSI 300 Index climbed over 9% on Thursday alone - that's the largest single-day gain ever recorded.

It's clear that Beijing is serious in its attempt to put a "floor of support" under mainland stock markets in Shanghai and Shenzhen. China's two mainland stock exchanges have lost about 50% of their market value since October 2007.

That's an amazing US$1.7 trillion in wealth destruction. That makes the sub-prime credit crunch losses of US$300 billion seem like peanuts in comparison.

As I said in last Wednesday's A-Letter, Beijing's recent tax cut caused last week's strong rally. This widely expected "stamp duty" will cut retail investors' taxes on stock trades from now on.

However, what's less well-known is China has made some other moves recently that indicate authorities are coordinating their efforts to shore up China's capital markets.

We're fortunate to have friends like Jack Flader, at Global Consultants and Services Limited (GCSL) in Hong Kong. Jack and his GCSL team bring us "local intelligence" on what's really going on in this dynamic part of the world. According to GCSL, other rule changes in China could help sustain this rally.

Johnson Chien, who holds the fort in GCSL's Shanghai office, writes: "Mutual fund companies in China will temporarily be exempt from corporate tax for their stock market investment revenue which includes profits from stock and bond trading."

So in addition to much lower transaction costs for retail investors, thanks to the cut in the stamp duty, China's institutional investors are getting a very big tax cut too.

If that wasn't enough, Beijing recently tripled the amount of foreign investments allowed to flow into mainland shares to US$30 billion.

Also, Chinese regulators just opened the sale of new mutual funds to mainland retail investors after a five month hiatus. That means even more retail cash is likely to flow into the mainland markets soon.

Johnson also makes a bullish case for Taiwan, which reinforces my own views. The landslide victory of the KMT in recent elections sends a clear signal that "the policy of San Tong between Taiwan and China will come to fruition," according to GCSL's analysis.

According to Johnson, San Tong is taken from the 'Cross-Straits Act' which Taiwan and China discussed 10 years ago. This early-stage economic détente between China and Taiwan sought to liberalize transportation and trade links between the two nations. It was also meant to reduce business investment restrictions across the Taiwan Strait.

Well, Taiwan's recent election result paves the way for San Tong in a big way. In fact, the desire for economic reconciliation between the two is crystal clear in the US$3 billion in cash that returned to Taiwan in the days after the election.

This post-election cash influx triggered a huge spike in the Taiwan dollar - which has risen nearly 7% in U.S. dollar terms in just two months! And these capital flows are rapidly finding their way into Taiwan stocks as well.

According to GCSLs Johnson Chien, "The central bank of Taiwan is now expecting another infusion of US$20 billion."

It looks to me like both Taiwan stocks - AND the currency - are good BUY candidates right now!

MIKE BURNICK, Senior Editor & Global Markets Analyst

EDITOR'S NOTE: Taiwan is one of Mike's favorite markets right now - not only because Taiwan is getting friendly with China - but because Taiwan is currently selling at the best prices. In fact, Mike just recommended that his Market Shock Trader subscribers stock up on the ideal option that lets you go long on this dynamic market. And of course because we're investing in options, your risk is strictly limited - that's it. And like any other option, this gem has the potential to leap 100% or more - just like the other gems in Mike's portfolio. Click here to test-drive his service.

Now Take That:
Feds Put Billionaire Expat on No-Fly List

Each year, a few hundred Americans give up their U.S. nationality and passport. It's a radical step, not to be taken lightly.

If you look at the expat list the Federal Register publishes quarterly, you'll notice most expats have foreign-sounding names. Many in this group are presumably individuals who by circumstances of birth or parentage unintentionally became U.S. citizens.

It's not surprising that someone with no significant ties to the United States might wish to give up their U.S. nationality. Among other responsibilities, U.S. citizenship brings about a legal obligation to comply with U.S. tax laws, filing an annual U.S. tax return, and paying U.S. tax on all income, anywhere in the world.

But not all Americans who expatriate are accidental U.S. citizens. Indeed, some very prominent Americans have given up their citizenship, including Sir John Templeton, chairman of The Templeton Group, Michael Dingman, chairman of Abex and a Ford Motor Co. director, Campbell Soup heir John Dorrance III, former Star-Kist Foods Chairman Joseph Bogdanovich, and Kenneth Dart, an heir to Dart Container and the US$1 billion Dart family fortune.

Why would a wealthy American give up U.S. citizenship? For such Americans, they pay for their American citizenship with millions in annual tax payments. But that's not all. These wealthy Americans also can lose business and investment opportunities just because they're Americans. That's because an increasing number of individuals and institutions globally refuse to do business with U.S. citizens or residents. Laws like the USA PATRIOT Act, the Treasury Department's "qualified intermediary" rules" and the long arm of the Securities and Exchange Commission have all inspired foreigners to just leave Americans alone.

However, expatriation is politically unpopular. The image of former U.S. citizens living tax-free in some tropical paradise is an irresistible populist target. As a result, anti-expatriation rules penalize U.S. citizens and long-term residents who give up their citizenship or residence for tax avoidance reasons. We've had these laws on the books for decades. First imposed in the 1960s, the rules were tightened in 1996 and again in 2004.

These rules impose an alternative tax regime on expatriates' income and estate for 10 years after they give up U.S. citizenship. You apply for these extra taxes if your income and/or past income tax liability at the time of expatriation meets certain thresholds.

Currently, the rules come into effect for expatriates with an estate larger than US$2 million or who paid more than an average of US$136,000 in income tax for the five-year period preceding expatriation. They apply to the net combined amount of U.S. source income and income "effectively connected" with a U.S. trade or business, along with several other sources of income.

Various proposals before Congress would tighten these rules, most notably by imposing an "exit tax" on the unrealized gains of an expatriate's worldwide estate, including assets in retirement and pension plans. (Click here for more on this stringent exit tax. )

While careful planning is essential, it's relatively easy to avoid U.S. taxes for the 10 years after giving up U.S. citizenship, should you be subject to the alternative tax regime. The most important precaution is to avoid U.S. source income - although U.S. source income under the anti-expatriation regime has a wider scope than elsewhere in the tax code. It's also possible to avoid tax on gains from certain types of U.S. assets by postponing their sale until after the 10-year period has elapsed.

Without careful planning however, the results can be catastrophic. Such was the case of a gentleman I know. This successful entrepreneur has a billion-dollar business, and he's lived outside the United States for over a decade. He recently gave up his U.S. citizenship, and not only wound up paying millions of dollars in unnecessary taxes, but also found himself on the Transportation Safety Authority's (TSA) "no-fly list."

This individual just happens to be a long-time vocal critic of U.S. economic, political and military policies. In other words, he has been a thorn in the U.S. government's side for decades. So it's not surprising he ended up on the "no-fly list."

He's not alone. Many such critics have found themselves mysteriously on the no-fly list. I have no way of proving it (all documents to prove this would be confidential). But I suspect that my billionaire acquaintance's expatriation may have upset enough high-level government officials to result in his current "no fly" status.

It's a sad commentary on the United States when it stoops to such petty means to punish someone whose only "crime" was to take legal steps to end his permanent obligation to pay U.S. tax. And it will be sadder still when the exit tax, which enjoys overwhelming support in both the House and Senate, effectively slams the door shut for those considering following his example.

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

P.S. Once again, expatriation takes careful planning. If you'd like more information on this option, check out my colleague, Bob Bauman's report.

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