July 13, 2010
Beware The Value Added Tax
The Investment View From Prescott, Arizona
In Norway a few weeks back, I was struck by the high cost of things, such as $25 hamburgers for lunch. They were nice hamburgers, but still just hamburgers. The restaurants were nice places, too, but then I only paid $10 last year for a great burger at the country club of Bill Gates and Bush 41 over in Palm Desert, CA, so how much of the cost could be due to the rent? (No, I didn’t get to meet them.)
That got me to thinking about the Value Added Tax (VAT) that they have in Europe. Norway is the highest at 25%, which is probably why I noticed prices so much there.
On the surface VAT looks like just another sales tax and is often touted as a flat tax or “national sales tax”, but VAT is charged at each level of production, not just once at the end like our sales tax. This creates a multiplier effect of taxes being charged on taxes.
Let’s take a look at the difference of the effect of a low VAT, such as Switzerland’s at 7.6%
and a large one like Norway’s.
Let’s assume I own some forest land and I cut logs to sell to a paper mill for $1,000. With VAT added on top of my price the real cost of the logs to the mill becomes $1,250 in Norway and $1,076 in Switzerland. The governments make $250 and $76 respectively.
If the paper mill adds a 100% markup and sells the paper to a wholesaler, the price to the wholesaler is $2,500 or $2,152 depending on which country one is in. The wholesaler’s cost with VAT added in becomes $3,125 in Norway and $2,342 in Switzerland. With this second transaction the government’s take has risen to $875 and $266 respectively.
The wholesaler then adds his 100% markup and sells the paper to stores for $6,250 or $4,684 and VAT gets added in again. The ultimate price to the store: $7,813 in Norway and $5,159 in Switzerland. The governments have now taken in $2,438 and $741 respectively.
When the store sells the paper to the consumers for $15,625 or $10,318 depending upon which country, VAT makes the ultimate price the consumer pays $19,531 in Norway and $11,506 in Switzerland.
The total tax collected throughout the process on the original $1,000 load of wood: $6,344 in Norway and $1,929 in Switzerland. As you can see, even a lower VAT adds up to huge taxes.
There is no such thing as a small VAT due to this multiplier effect.
Value Added Tax is a very slippery and treacherous slope, and I have not even discussed the cost of the bureaucracy needed to enforce a VAT – another totally unproductive expense. So if you hear any public figure suggest that the U.S. adopt a Value Added Tax, put your hand over your wallet and back slowly away from them.
Or else get ready for $25 hamburgers.
How’s The Market Doing?
Stock markets around the world had a good week ending July 9th, one of only a few positive weeks in the past 3 months. Many hope the downtrend is over but it is still too early to tell for sure.
Up-trends and downtrends are made up of many zigs and zags which are just smaller trends within a larger trend. The question becomes, is this just another zig or zag in a continuing downtrend, or will the zig (or zag) keep going and become a new trend of its own.
The length and strength of the market’s bounce this week does not yet show a clear change in the larger trend for US markets. It is possible that it is just a zig or zag in the larger downtrend. So this is a time to be patient. Risk is still very high.
I like to be heavily invested in clear up-trends, and spend time in safe havens in dicey markets. Although the market has moved up, the trend is still unclear.
Global markets look closer to a turnaround than US markets, but are also not quite there yet.
Perhaps the difference is that the world markets are not facing a nasty election season where candidates will be accused of all sorts of things with many new scandals announced causing investors to pause.
All it takes for markets to drop is an absence of buyers and this kind of election has the capacity to scare buyers away in large numbers.
Is this a reason to run? No, but it is a reason to be more cautious. One more risk factor to consider.
However, now is a good time to begin looking for investments that have performed best in this market so that your shopping list is ready if the market does resume an up-trend.
I have been writing for a year that I expected 2010’s 3rd and 4th quarters to be tough ones for the markets. Because I am never certain of these things, I let the market show me what it is going to do. I wait to act until I see what I expect to happen actually show up in the markets.
Although it looks like my analysis is proving to be right on, I still have to be prepared in case I am wrong. I have to know how recognize that and minimize the cost of being wrong.
Having a watch list ready so that we can dip our toes in the water if the markets turn up in earnest is one way of dealing with the uncertainties of the market.
What We Were Saying a Year Ago
From my July 14, 2009 Newsletter article “Questions for Your Financial Adviser”:
. . . be sure to ask your adviser what their plan is for dealing with the bear market if it continues. How will he/she manage your portfolio if this recession continues, God forbid, for another five or ten years? No one likes to think about that happening, but it IS a possibility. How will your adviser deal with it?
If you’re not sure about your adviser’s performance, take a look at your account statements for [2008]. What did your investment advisor actually do for you during the crash? What did he/she do to protect your assets?
The harsh light of these questions can tell you if you have an adviser who is just a salesperson or one who can really add value in tough times. Sadly many advisers are great talkers, but are clueless about protecting money in tough times.
Successful investing is not a one-decision process, it never has been. Sitting back and doing nothing while markets change is not a plan – it is the lack of a plan no matter what it is called! If your advisor is not doing something to earn his/her fee or commissions, it might be time for you to move on. You can’t undo the past, but you can certainly do something about your future. Investing is a life-long journey.
If you would like a second opinion on how an actively managed portfolio might improve your situation, call the office at 778-4000 to compare your results to my actively managed portfolios. There is no charge for initial consultations.
Riddle:
Q: You can have me but cannot hold me;
Gain me and quickly lose me.
If treated with care I can be great,
And if betrayed I will break.
What am I?
A: Trust
What’s Going On In Your Portfolio?
Lots of cash. That is what is going on in portfolios. There have been no material portfolio changes in the past two weeks. 60% of assets are in the relative safety of the money market fund.
Careful Growth* portfolios hold about 20% gold or gold mining stocks and 20% junk bonds.
Flexible Income* portfolios hold about 10% of a currency fund, 10% gold (acting as another currency) and 20% junk bonds. The rest is cash.
Gold had a huge down day on July 1st, and has struggled to just go sideways since then. I am watching it closely since a relatively small downward movement from here would fit my criteria for a downtrend and I don’t like to hold anything while it is in a confirmed downtrend.
As I have mentioned before, I am still unconvinced that gold is the end-all investment many advertisements would have you believe. I think deflation is the biggest risk right now, bigger than the inflation gold sellers talk about.
The facts are that we don’t have high inflation right now.
When the price has been rising, I bought gold for your accounts, just as I would any other investment that was going up. But I am still not convinced about its potential over the next year or two.
The July 1st one-day plunge of $43 per ounce struck me as very odd due to the timing. Mutual funds and other institutional investors make semi-annual reports to shareholders, usually on June 30th. These reports include a snap-shot of their holdings on that day.
If a lot of money managers are unconvinced, like I am, but want to pander to shareholders who clamor for gold, they might resort to “window dressing” the portfolio by buying gold before June 30th and quickly selling it after the report “snapshot”.
There is no way that I can confirm this type of action, or even if the managers were correct in their assumptions – only time will tell that. But my sixth-sense is twitching on this one.
Our Spotlight Strategy
The FLEXIBLE INCOME STRATEGY seeks high total return consistent
with preservation of capital.
Just Let Me Know:
As a client of mine you may know me as an investment manager, but I have years of related experiences to draw upon. Just let me know if there is anything else I can help you with. Membership has its privileges, you know. The only thing I ask in return is that if you have any friends that could use my services that you think of me. I’ll treat them just the way I have treated you. That is the way I do business.
* The model accounts mentioned in this article are hypothetical examples of how the strategy may work as designed. Activity in client accounts may be different from that in the model in amount of each investment, specific timing of trades, and actual security used, which may vary from account to account. Not all trades are profitable. It should not be assumed that current or future holdings will be profitable. A list of all trades in these accounts for the past 12 months will be provided upon written request.
** The S&P 500 and Nasdaq Indexes are unmanaged lists of stocks considered representative of the broad stock market. Investors cannot invest directly in the S&P 500 Index.
Balanced Strategy Description and Performance Information
Careful Growth Strategy Description and Performance Information
Flexible Income Strategy Description and Performance Information
This newsletter may contain forward-looking statements, including, but not limited to, statements as to future events that involve various risks and uncertainties. Forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause actual events or results to differ materially from those that were forecasted. Information in this newsletter may be derived from sources deemed to be reliable, however we cannot guarantee its accuracy. Please discuss any legal or tax matters with your advisors in those areas. Neither the information presented nor any opinions expressed herein constitute a solicitation for the purchase or sale of any security
