In the news…

China is going to build an 8 billion dollar oil refinery in Nigeria. It is the first of 3 refineries that comprise a $23bn agreement between NNPC and CSCEC. Nigeria’s state oil company, NNPC, will cover 20% of the cost while the state of Lagos will provide the land. The China State Construction Engineering Corporation, CSCEC, will cover the additional 80% of the cost. Nigeria already has 4 oil refineries but they are run very poorly and are estimated to be operating at only 40% capacity. Due to this inefficiency, Nigeria has to import some refined oil.

China’s dependence on energy (especially in the form of fossil fuels) is increasing dramatically and will continue in a strong upward trend. New power plants will be built, and more energy will be expended. One of the most obvious indicators of the trend for increased fuel demand is the automobile market.

In the past year, China’s car market expanded by almost 40%. Contrast that to the U.S. where new car sales plunged more than 20 percent in 2009 to a 27-year low of 10.43 million vehicles, less than the 12.23 million sold in China during January-November, making the Asian giant the world’s largest car market for the first time. Since the year 2002, about 50% of all motor vehicles in China have been purchased by individuals instead of large corporations or the government previously. As incomes increase, the high annual growth rate of private ownership is expected to accelerate. A new generation of young adults is emerging in China. This generation demands higher wages, better working conditions, and new material possessions.

However the Chinese government is taking steps to slow inflation, curb overspending, and control the economy. China’s economy expanded 11.9 percent in the first quarter. China International Capital Corp. has said that it expects growth to slow to 7.5 percent by the fourth quarter.

More cars mean more fossil fuels. Therefore along with this comes an increased demand for energy, particularly in the form of fossil fuels, which is still the cheapest form of energy available. Moreover it appears the Chinese government is taking steps to obtain that oil independently, even if that means teaming up with Nigeria.

Ed Lowell, contributing writer

According to a recent Bloomberg article, Russia is adding Australian and Canadian dollars to its international reserves.  The Russian central bank deputy chairman, Alexei Ulyukayev along with Dmitry Medvedev have recently suggested that the world needs a new reserve currency and the US dollar no longer should be used.

Central banks around the world have been diversifying their own reserves out of the US dollar and into other gold and other commodity currencies like the Canadian dollar, Australian dollar and Brazilian real.  This shift in central bank policy around the world can have a significant impact on your wealth if you are completely in US dollars.

Most Americans believe the US is the land of milk and honey and will always be so.  History proves otherwise.  The US has been on a downward slide for many years and as the snowball rolling down the mountain, it has gained too much momentum to stop.

If you have all of your assets denominated in US dollars, now is the time to act.  You don’t want to be permanently tied to the woes of the US economy.  Diversify your assets through ‘geo-arbitrage’. 

From a practical standpoint, this just means to spread your wealth around the world.  Register a company in a low or no-tax jurisdiction.  Open a multi-currency bank account offshore.  Hold some of your investments outside of the US.  Buy real estate and gold.  But the time to act is now.  Tomorrow may be too late.

In a recent article from Bloomberg on June12th, Senator Snowe, a Republican from Maine, called the new jobs bill a ‘poison pill’ for small business growth and investment. 

Snowe is talking about HR 4213, so aptly named the “American Jobs and Closing Tax Loopholes Act of 2010″.  Ironically, the loophole that looks to get closed is going to destroy inflows of investment capital into small businesses.

Basically this new act has a provision that requires S-corporations to pay as much as 15.3% payroll tax on all  reinvested earnings.  This is the same tax that is paid to workers (although the worker pays half – 7.65%), but now will be applyed to any net income regardless of whether it is paid out or not. 

This is in addition to the regular income tax that small businesses must pay.  Keep in mind the top tax rate in 2010 is 35% federal and going to 39.6% in 2011.  In addition, for earners over $200,000 single or $250,000 married, there is an additional 3.9% medicare tax.  And we haven’t even talked about state taxes yet. 

For a high earning small business owner in the US, their tax rate could be as high as 65-70%!!!!  Talk about incentive for productivity…

While this may all sound like negative news, the time to plant multiple offshore flags is now.  I know this legislation is only proposed at this moment and subject to change, but the fact remains that US political leaders (and I use this term lightly) are increasingly looking to boost federal and state revenues by taxation as opposed to promoting increases in productivity.

This leads to confusion and uncertainty in the business world.  We need consistency in order to be productive.  Who wants to invest heavily in their business when they don’t know when the next law will get passed that taxes them into oblivion?  Or when the next sovereign debt default is going to happen and the US is the one confiscating retirement funds, ala Argentina 2001.

Now is the time to take action.  Plant multiple flags.  Diversify your assets.  Establish your business offshore and take advantage of low or no-tax jurisdictions.  Establish residency and/or citizenship in another country.  Remember, buying healthinsurance after a heart attack is too late.  Don’t make that  mistake with your wealth.

Last week I discussed an investment conference in Zurich that I attended a few weeks back.  I came back armed with lots of new ideas and connections for those of us interested in the capital markets.  I don’t normally pontificate on money management, but after that conference in Zurich, my mind was full and I had no choice but to write about it.

Most of the presentations at Fonds were in German, but I attended two that were in English.  One was presented by Jim Rogers, former partner to George Soros at the Quantum fund and the other was presented by Robin Batchelor from Blackrock.  I was especially interested in attending these presentations because they focused on the future of commodity investing.  Considering the world we currently live in, commodities may be something you should personally look at from an investment perspective.  I know I am.

Rogers focused on foodstuffs and metals while Batchelor focused on energy.  They both had essentially the same message; we have a growing population and a shrinking base of investment into production of necessary commodities.  From a long term perspective, we have nowhere to go but up with commodity prices.  Think about it, how many people do you know tell their kids, go to school, get a good education, and work on the farm?  People need to eat and we need famers to produce.  Right now we have a shrinking base of farming activity, but the population of the world is projected to triple in the next 30 years.  We have to feed them somehow and the law of supply and demand says commodity prices must rise. 

The same holds true for oil.  Oil is primarily a transportation fuel.  Most of your developed nations are near a peak or even in a decline with oil consumption.  But China and India alone have nearly half of the world’s population with a hugely growing middle class.  Right now they are consuming the same amount of oil per capita as the US was in the ‘20s.  Do you think China and India’s consumption will go down, or up?  My suggestion here is to look into portfolio diversification and take a long, hard look at commodities.  There are many ETF’s now that track various commodities so it is no more difficult than buying Wal-Mart stock.

I also had a great meeting with a guy named Raoul.  Raoul runs a family office for wealthy individuals and families.  This is not a common practice in the US, but it is quite intriguing.  His firm does not actually manage your money, but they provide you with the tools to assist with asset allocation and risk management.  He also selects and works with your money managers, banks, financial planners, tax planners and anyone else involved with your finances to make sure you are getting what you are paying for.  He can help you find the best money managers, place your money in Swiss banks (or anywhere else), and make sure you aren’t taking unnecessary risks.  His firm can provide you with online access to your portfolio whether it is in real estate, cash, securities, gold, or cattle.  He can even tell you if you have too much money tied up in cattle at any given moment.  It is quite a revolutionary service he offers and for a very reasonable fee.  He charges a small fee based on your asset holdings.  He gets no commission for advising you to buy X stock, or Y commodity.  The more your assets grow, the more he earns.  And most importantly, he is connected.  Very well connected.  He can still provide American citizens with Swiss private banking services and connect you with money managers you would never be able to have access to otherwise.  If anyone is interested in contacting Raoul, please let me know.  I will make the introduction.

I would really like to hear from my readers.  If you have some specific topic of interest, please let me know.  I would be happy to discuss it with you personally, or I can write about it on our blog or in the newsletter.  Feel free to contact me today for your free 30 minute consultation.  Until next week, live well.

I realize this is completely off topic, but most of my posts are so serious, I felt the need to add a bit of humor.  And being a father, this video is just hilarious to watch.