The Sneakiest Tax of All

Posted On May 4, 2016 By Dave Gonigam

  • Negative interest rates: A tax by any other name
  • Like bread and butter: Negative rates and a ban on cash
  • China’s recipe for an ailing economy: A crackdown on doom-and-gloomers!
  • Intellectual property run amok: A copyright on herringbone-pattern cheerleader outfits?
  • A reader’s stillborn startup idea… in search of bug spray for bureaucrats… the wildest gold chart you’ve ever seen… and more!

“The government pulled a fast one on millions of unsuspecting retirees,” says our Michael Covel, pied piper for the investing approach known as “trend following.”

“For as long as anyone can remember,” he says, “retirees have relied on interest income on their savings to add to their Social Security benefits. But the government has all but eliminated that. By manipulating interest rates all the way down to zero, the government has millions of older Americans scrambling to find ways to make ends meet.”

But you know that already, right?

“The feds have something new in store for you,” Michael warns. “It’s a new stealth ‘tax’ aimed directly at your savings. And if you’re not prepared for it, it will wreak havoc on your retirement plans.”

Indeed, it could cost you thousands in income each year.

If you haven’t already guessed, Michael’s talking about negative interest rates — the sort already facing savers in Europe and Japan.

As a reminder, the Federal Reserve imposed a seven-year state of monetary emergency during the Panic of 2008 — cutting its benchmark fed funds rate to near zero. Only last December did it bump the rate up a tiny bit… and Fed chief Janet Yellen is signaling no more increases unless the economy perks up meaningfully.

“But what happens if we have another market meltdown?” asks Michael. “How will the Fed try to play the hero again?

“In the bizarro world to come, you’re actually going to pay the bank interest for holding and using your money,” says Mr. Covel.

“Imagine making a deposit of $10,000 and getting back just $9,800 one year later. Well, that’s what’s coming. That’s their new plan. And you’ll never see it before it goes. It will just be removed from the balance of your account automatically. Just like employers withhold taxes from paychecks.

“And forcing people to pay banks to hold their money is a tax, no matter what name the Fed gives it.”

To make sure collection of this tax is fully enforced, the government will escalate the war on cash.

We told you in February how negative interest rates in Japan have prompted a run on safes. Better to hold cash at home than in a bank where it’s guaranteed to lose value.

Solution? “Politicians are already considering a ban on paper money,” says Michael. “Without cash, you’ll be forced to keep your money in a digital account in a bank, where they can access it and tax it.”

As evidence, Mr. Covel submits the following. We’ve related most of this in The 5 already — just not all at once…

  • JPMorgan Chase no longer allows its customers to store cash in their safe-deposit boxes
  • And Chase is already imposing negative interest rates on customer funds in excess of $250,000
  • Former U.S. Treasury Secretary Larry Summers has even called for a ban on the $100 bill
  • Citigroup’s chief economist Willem Buiter has called for cash to be abolished. He said that nothing larger than a $5 should be in circulation.

“The government says these new currency laws are for fighting terrorism, money laundering and drugs,” Michael reminds us. “If you believe those are the reasons, I have a bridge in Brooklyn I’d like to sell you.

“By banning cash, the government can force you to keep your money in the digital banking system, where it can be accessed (and swiped). If your money is digitally trapped, you can’t escape the tax that’s coming.”

So what can you do? “You need your money to grow in a safe way,” says Michael — “if you want a comfortable retirement.”

Michael lays out a three-step solution in the current issue of Trend Following With Michael Covel. And he’ll expand on that solution during a conference call with readers tomorrow at 9:00 a.m. EDT. (If you’re busy at that hour, or if you’re on the West Coast and that’s too early, fear not: A replay will be available.)

You can even submit questions in advance. But this event is open only to subscribers of Trend Following With Michael Covel.

Not sure if his publication is for you? If you’re not familiar with Michael’s work, you can get to know him better at this link.

The major U.S. stock indexes are adding onto yesterday’s losses. At last check, they’re all down about a half percent, give or take. The S&P 500 rests at 2,051 — barely seven points above where it started the year.

But that’s a darn sight better than the Nasdaq, which is down about 5% year to date. Names like Apple, Google and Twitter have been a drag on the Nasdaq, and the Nasdaq is proving a drag on the market in general.

“This tech funk is ripping through the market rally like a bad a case of chickenpox,” avers Greg Guenthner in today’s Rude Awakening. “And it could get much worse before it gets better.” If you’re of a short-term trading mindset, “now’s not the time to take any big chances.”

Gold, at least, is holding its own — still above the $1,280 level. And crude is up more than 75 cents, at $44.43.

The Chinese government has come up with a new strategy to counter the perception that its economy is in trouble. At least within China, anyway.

“Securities regulators, media censors and other government officials have issued verbal warnings to commentators whose public remarks on the economy are out of step with the government’s upbeat statements,” says today’s Wall Street Journal — citing “government officials and commentators with knowledge of the matter.”

“Zhengnengliang” Chinese leaders call it — which translates to “positive energy.”

The paper says the chief economist at a brokerage has gotten two warnings about her bearishness. Stock analysts, meanwhile, are becoming cautious about issuing critical reports. “At least one Chinese think tank,” says the paper, “was told by propaganda officials not to cast doubt on a planned government program to help state companies reduce debt, economists familiar with the matter say.”

And websites of foreign media outlets are being blocked, even more than in the past.

Hmmm… For all the China-bashing we hear from Donald Trump, we can’t help but wonder if he has his minions taking notes about the Chinese leaders’ new tactics. Mrs. Clinton, too, for that matter. A bit ominous for us newsletter types…

OK, let’s see if we’ve got this straight: A herringbone pattern on clothing is not a unique thing worthy of copyright. And a cheerleader outfit, by itself, is not a unique thing worthy of copyright. But a herringbone pattern on a cheerleader outfit is.

Or so claims the plaintiff in a case that’s somehow made it all the way to the U.S. Supreme Court.

Varsity Brands Inc. is suing a smaller rival, Star Athletica, for copyright infringement — citing the very circumstances we just described.

“Under federal law,” explains the AFP newswire, “a design may be protected by copyright if it is possible to separate its original decorative aspects from a product’s essential functional elements.” Clear as mud, huh?

We couldn’t readily find a picture of cheerleaders wearing uniforms with a herringbone pattern. You’ll have to use your imagination…

A federal appeals court ruled in Varsity Brands’ favor. Star Athletica appealed to the Supreme Court… which has agreed to take the case. The justices will likely hear arguments this fall or sometime next year.

The stakes are higher than you might think. Says Susan Scafidi of the Fashion Law Institute at Fordham University (no, we had no idea such a thing existed either): “The Court’s mission may be to state a single, unified test that will give the same result in every case involving items that are both artistic and functional — whether that means clothing, carpets or cars.”

Oy… U.S. intellectual property law is already a train wreck. Why can’t we shake the feeling these robed clowns are about to drive another nail in the coffin of American innovation?

“Interesting insights about business startups,” a reader writes after yesterday’s episode.

“I have started many. Most were successful. I don’t do many now (not since my triple bypass).

“Recently tried to sell my idea ‘Your Personal Gopher’ concept, connecting students and 50-plus demographic in Phoenix, Arizona, for odd jobs a la Uber-style venture with the Arizona Newspapers Association.

“Said they were interested in new revenue sources, but despite my biz plan, logo and domain names… they didn’t even have the bare-bones business courtesy to get back with me after I flew out to the Valley of the Sun from Michigan to meet with them. Perhaps that’s why the newspaper industry is dying.”

The 5: Hope they paid for your plane ticket at least. Isn’t The Arizona Republic a Gannett paper? Heh…

“Maybe this time it’s the BBC, The Economist and GQ that got punked,” writes a reader who’s skeptical that Australian entrepreneur Craig Wright is the “Satoshi Nakamoto” of Bitcoin fame.

“I can’t claim to be a Bitcoin expert, but I did write a paper on the RSA cryptosystem in college 20-odd years ago. So I have at least a nodding acquaintance with the one-way ‘trapdoor’ functions involved in public-key cryptography.

“It seems Mr. Wright has done a somewhat sloppy magic trick, but there’s no sign yet that he has proven his claim to having access to Satoshi Nakamoto’s private key.”

The 5: We see this morning that one of the believers has turned skeptical. Gavin Andresen, chief scientist at the Bitcoin Foundation, now says he was hasty when he wrote on Monday that Wright’s evidence had him “convinced beyond a reasonable doubt.”

Wright, for his part, is promising to furnish further “extraordinary proof.” On the other hand, he says he’s done doing interviews. To be continued…

“As a Reserve member, I feel it is my duty to comment occasionally on the current events as presented by The 5 (whether I have anything important to say or not — this is primarily in the second category).

[Oooh, this is our favorite kind…]

“There has been a lot of talk about bureaucrats lately and their impact on everyone’s financial health in one form or another. As a business owner, I have to deal with them more often than some. In truth, many are relatively harmless — just putting in their time, really.

“There are, however, those that take their jobs seriously, and those are the ones that can cause real blood pressure issues. There also seems to be a formula in play that is a ratio of the more fees they assess, the more trouble they cause in direct proportion. That one always caused my head to hurt trying to bend it into some kind of real-world logic.

“I would suggest that if anyone wants to make a large fortune, a great new innovation would be a spray, or possibly a small packet with a belt clip, sort of like the ones used to repel mosquitos and other pests, but formulated to keep bureaucrats at a distance.

“A more potent spray such as Raid for bureaucrats might be pushing the envelope a little far and possibly could get one in trouble with the animal control people.”

The 5: Wow, if someone could come up with a solution that would ward off bureaucrats while not harming anyone else, that would be worthy of Nobel Prizes both in chemistry and world peace!

Best regards,

Dave Gonigam
The 5 Min. Forecast

P.S. From the Twitter feed of Ronald Stoeferle, the European analyst who puts out the chart-packed In Gold We Trust report each summer…

Hmmm… the first two rallies look like false dawns. But as we’ve been saying for a couple of months now, the current rally appears to have legs, as global faith in central bankers is finally starting to crack.

Jim Rickards has opened many eyes with his latest book, The New Case for Gold — in which he makes his strongest argument yet for gold marching to $10,000 an ounce.

Last week, we mentioned in passing how gold stocks are outperforming the metal itself. We’ll expand a bit on that fact later in the week. For now, we continue to advise caution with gold stocks. You need a strategy, one that’s tailored to the unique market circumstances we face right now.

Our team has a strategy in the works, rest assured. Details to come…


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