Sunday, April 3, 2016

The World’s Favorite New Tax Haven Is the United States

Last September, at a law firm overlooking San Francisco Bay, Andrew Penney, a managing director at Rothschild & Co., gave a talk on how the world’s wealthy elite can avoid paying taxes.
His message was clear: You can help your clients move their fortunes to the United States, free of taxes and hidden from their governments.
Some are calling it the new Switzerland.
Featured in Bloomberg Businessweek, Feb. 1, 2016. Subscribe now.After years of lambasting other countries for helping rich Americans hide their money offshore, the U.S. is emerging as a leading tax and secrecy haven for rich foreigners. By resisting new global disclosure standards, the U.S. is creating a hot new market, becoming the go-to place to stash foreign wealth. Everyone from London lawyers to Swiss trust companies is getting in on the act, helping the world’s rich move accounts from places like the Bahamas and the British Virgin Islands to Nevada, Wyoming, and South Dakota.








“How ironic—no, how perverse—that the USA, which has been so sanctimonious in its condemnation of Swiss banks, has become the banking secrecy jurisdiction du jour,” wrotePeter A. Cotorceanu, a lawyer at Anaford AG, a Zurich law firm, in a recent legal journal. “That ‘giant sucking sound’ you hear? It is the sound of money rushing to the USA.”
Rothschild, the centuries-old European financial institution, has opened a trust company in Reno, Nev., a few blocks from the Harrah’s and Eldorado casinos. It is now moving the fortunes of wealthy foreign clients out of offshore havens such as Bermuda, subject to the new international disclosure requirements, and into Rothschild-run trusts in Nevada, which are exempt.
The firm says its Reno operation caters to international families attracted to the stability of the U.S. and that customers must prove they comply with their home countries’ tax laws. Its trusts, moreover, have “not been set up with a view to exploiting that the U.S. has not signed up” for international reporting standards, said Rothschild spokeswoman Emma Rees.
Others are also jumping in: Geneva-based Cisa Trust Co. SA, which advises wealthy Latin Americans, is applying to open in Pierre, S.D., to “serve the needs of our foreign clients,” said John J. Ryan Jr., Cisa’s president.
Trident Trust Co., one of the world’s biggest providers of offshore trusts, moved dozens of accounts out of Switzerland, Grand Cayman, and other locales and into Sioux Falls, S.D., in December, ahead of a Jan. 1 disclosure deadline.
“Cayman was slammed in December, closing things that people were withdrawing,” said Alice Rokahr, the president of Trident in South Dakota, one of several states promoting low taxes and confidentiality in their trust laws. “I was surprised at how many were coming across that were formerly Swiss bank accounts, but they want out of Switzerland.”
Rokahr and other advisers said there is a legitimate need for secrecy. Confidential accounts that hide wealth, whether in the U.S., Switzerland, or elsewhere, protect against kidnappings or extortion in their owners’ home countries. The rich also often feel safer parking their money in the U.S. rather than some other location perceived as less-sure.
“I do not hear anybody saying, ‘I want to avoid taxes,’ ” Rokahr said. “These are people who are legitimately concerned with their own health and welfare.”
No one expects offshore havens to disappear anytime soon. Swiss banks still hold about $1.9 trillion in assets not reported by account holders in their home countries, according to Gabriel Zucman, an economics professor at the University of California at Berkeley. Nor is it clear how many of the almost 100 countries and other jurisdictions that have signed on will actually enforce the new disclosure standards, issued by the Organisation for Economic Co-operation and Development, a government-funded international policy group.
There’s nothing illegal about banks luring foreigners to put money in the U.S. with promises of confidentiality as long as they are not intentionally helping to evade taxes abroad. Still, the U.S. is one of the few places left where advisers are actively promoting accounts that will remain secret from overseas authorities.
Illustration: Steph Davidson
Rothschild’s Reno office is at the forefront of that effort. “The Biggest Little City in the World” is not an obvious choice for a global center of capital flight. If you were going to shoot a film set in Las Vegas circa 1971, you would film it in Reno. Its casino hotels tower above the bail bondsmen across the street, available 24/7, as well as pawnshops stocked with an array of firearms. The pink neon lights at casinos like Harrah’s and the Eldorado still burn bright. But these days, their floors are often empty, with travelers preferring to gamble in Las Vegas, an hour’s flight away.
The offices of Rothschild Trust North America LLC aren’t easy to find. They’re on the 12th floor of Porsche’s former North American headquarters building, a few blocks from the casinos. (The U.S. attorney’s office is on the sixth floor.) Yet the lobby directory does not list Rothschild. Instead, visitors must go to the 10th floor, the offices of McDonald Carano Wilson LLP, a politically connected law firm. Several former high-ranking Nevada state officials work there, as well as the owner of some of Reno’s biggest casinos and numerous registered lobbyists. One of the firm’s tax lobbyists is Robert Armstrong, viewed as the state’s top trusts and estates attorney, and a manager of Rothschild Trust North America.
The trust company was set up in 2013 to cater to international families, particularly those with a mix of assets and relatives in the U.S. and abroad, according to Rothschild. It caters to customers attracted to the “stable, regulated environment” of the U.S., said Rees, the Rothschild spokeswoman.
“We do not offer legal structures to clients unless we are absolutely certain that their tax affairs are in order; both clients themselves and independent tax lawyers must actively confirm to us that this is the case,” Rees said.
The managing director of the Nevada trust company is Scott Cripps, an amiable California tax attorney who used to run the trust services for Bank of the West, now part of French financial-services giant BNP Paribas SA. Cripps explained that moving money out of traditional offshore secrecy jurisdictions and into Nevada is a brisk new line of business for Rothschild.
“There’s a lot of people that are going to do it,” said Cripps. “This added layer of privacy is kicking them over the hurdle” to move their assets into the U.S. For wealthy overseas clients, “privacy is huge, especially in countries where there is corruption.”
One wealthy Turkish family is using Rothschild’s trust company to move assets from the Bahamas into the U.S., he said. Another Rothschild client, a family from Asia, is moving assets from Bermuda into Nevada. He said customers are often international families with offspring in the U.S.
For decades, Switzerland has been the global capital of secret bank accounts. That may be changing. In 2007, UBS Group AG banker Bradley Birkenfeld blew the whistle on his firm helping U.S. clients evade taxes with undeclared accounts offshore. Swiss banks eventually paid a price. More than 80 Swiss banks, including UBS and Credit Suisse Group AG, have agreed to pay about $5 billion to the U.S. in penalties and fines.
Those firms also include Rothschild Bank AG, which last June entered into a nonprosecution agreement with the U.S. Department of Justice. The bank admitted helping U.S. clients hide income offshore from the Internal Revenue Service and agreed to pay an $11.5 million penalty and shut down nearly 300 accounts belonging to U.S. taxpayers, totaling $794 million in assets.
The U.S. was determined to put an end to such practices. That led to a 2010 law, the Foreign Account Tax Compliance Act, or Fatca, that requires financial firms to disclose foreign accounts held by U.S. citizens and report them to the IRS or face steep penalties.
Inspired by Fatca, the OECD drew up even stiffer standards to help other countries ferret out tax dodgers. Since 2014, 97 jurisdictions have agreed to impose new disclosure requirements for bank accounts, trusts, and some other investments held by international customers. Of the nations the OECD asked to sign on, only a handful have declined: Bahrain, Nauru, Vanuatu—and the United States.
“I have a lot of respect for the Obama administration because without their first moves we would not have gotten these reporting standards,” said Sven Giegold, a member of the European Parliament from Germany’s Green Party. “On the other hand, now it’s time for the U.S. to deliver what Europeans are willing to deliver to the U.S.”
The Treasury Department makes no apologies for not agreeing to the OECD standards.
“The U.S. has led the charge in combating international tax evasion using offshore financial accounts,” said Treasury spokesman Ryan Daniels. He said the OECD initiative “builds directly” on the Fatca law.
For financial advisers, the current state of play is simply a good business opportunity. In a draft of his San Francisco presentation, Rothschild’s Penney wrote that the U.S. “is effectively the biggest tax haven in the world.” The U.S., he added in language later excised from his prepared remarks, lacks “the resources to enforce foreign tax laws and has little appetite to do so.”
Firms aren’t wasting time to make the most of the current environment. Bolton Global Capital, a Boston-area financial advisory firm, recently circulated this hypothetical example in an e-mail: A wealthy Mexican opens a U.S. bank account using a company in the British Virgin Islands. As a result, only the company’s name would be sent to the BVI government, while the identity of the person owning the account would not be shared with Mexican authorities.
The U.S. failure to sign onto the OECD information-sharing standard is “proving to be a strong driver of growth for our business,” wrote Bolton’s chief executive officer, Ray Grenier, in a marketing e-mail to bankers. His firm is seeing a spike in accounts moved out of European banks—“Switzerland in particular”—and into the U.S. The new OECD standard “was the beginning of the exodus,” he said in an interview.
The U.S. Treasury is proposing standards similar to the OECD’s for foreign-held accounts in the U.S. But similar proposals in the past have stalled in the face of opposition from the Republican-controlled Congress and the banking industry.
At issue is not just non-U.S. citizens skirting their home countries’ taxes. Treasury also is concerned that massive inflows of capital into secret accounts could become a new channel for criminal money laundering. At least $1.6 trillion in illicit funds are laundered through the global financial system each year, according to a United Nations estimate.
Offering secrecy to clients is not against the law, but U.S. firms are not permitted to knowingly help overseas customers evade foreign taxes, said Scott Michel, a criminal tax defense attorney at Washington, D.C.-based Caplin & Drysdale who has represented Swiss banks and foreign account holders.
“To the extent non-U.S. persons are encouraged to come to the U.S. for what may be our own ‘tax haven’ characteristics, the U.S. government would likely take a dim view of any marketing suggesting that evading home country tax is a legal objective,” he said.
Rothschild says it takes “significant care” to ensure account holders’ assets are fully declared. The bank “adheres to the legal, regulatory, and tax rules wherever we operate,” said Rees, the Rothschild spokeswoman.
Penney, who oversees the Reno business, is a longtime Rothschild lawyer who worked his way up from the firm’s trust operations in the tiny British isle of Guernsey. Penney, 56, is now a managing director based in London for Rothschild Wealth Management & Trust, which handles about $23 billion for 7,000 clients from offices including Milan, Zurich, and Hong Kong. A few years ago he was voted “Trustee of the Year” by an elite group of U.K. wealth advisers.
In his September San Francisco talk, called “Using U.S. Trusts in International Planning: 10 Amazing Feats to Impress Clients and Colleagues,” Penney laid out legal ways to avoid both U.S. taxes and disclosures to clients’ home countries.
In a section originally titled “U.S. Trusts to Preserve Privacy,” he included the hypothetical example of an Internet investor named “Wang, a Hong Kong resident,” originally from the People’s Republic of China, concerned that information about his wealth could be shared with Chinese authorities.
Putting his assets into a Nevada LLC, in turn owned by a Nevada trust, would generate no U.S. tax returns, Penney wrote. Any forms the IRS would receive would result in “no meaningful information to exchange under” agreements between Hong Kong and the U.S., according to Penney’s PowerPoint presentation reviewed by Bloomberg.
Penney offered a disclaimer: At least one government, the U.K., intends to make it a criminal offense for any U.K. firm to facilitate tax evasion.
Rothschild said the PowerPoint was subsequently revised before Penney delivered his presentation. The firm provided what it said was the final version of the talk, which this time excluded several potentially controversial passages. Among them: the U.S. being the “biggest tax haven in the world,” the U.S.’s low appetite for enforcing other countries’ tax laws, and two references to “privacy” offered by the U.S.
“The presentation was drafted in response to a request by the organizers to be controversial and create a lively debate among the experienced, professional audience,” Rees said. “On reviewing the initial draft, these lines were not deemed to represent either Rothschild’s or Mr. Penney’s view. They were therefore removed.”
With assistance from David Voreacos and Patrick Gower

Saturday, April 2, 2016

Wikileaks Reveals IMF Plan To "Cause A Credit Event In Greece And Destabilize Europe"

One of the recurring concerns involving Europe's seemingly perpetual economic, financial and social crises, is that these have been largely predetermined, "scripted" and deliberate acts.
This is something the former head of the Bank of England admitted one month ago when Mervyn King said that Europe's economic depression "is the result of "deliberate" policy choices made by EU elites.  It is also what AIG Banque strategist Bernard Connolly said back in 2008 when laying out "What Europe Wants"
To use global issues as excuses to extend its power:
  • environmental issues: increase control over member countries; advance idea of global governance
  • terrorism: use excuse for greater control over police and judicial issues; increase extent of surveillance
  • global financial crisis: kill two birds (free market; Anglo-Saxon economies) with one stone (Europe-wide regulator; attempts at global financial governance)
  • EMU: create a crisis to force introduction of “European economic government”
This morning we got another confirmation of how supernational organizations "plan" European crises in advance to further their goals, when Wikileaks published the transcript of a teleconference that took place on March 19, 2016 between the top two IMF officials in charge of managing the Greek debt crisis - Poul Thomsen, the head of the IMF's European Department, and Delia Velkouleskou, the IMF Mission Chief for Greece.
In the transcript, the IMF staffers are caught on tape planning to tell Germany the organization would abandon the troika if the IMF and the commission fail to reach an agreement on Greek debt relief. 
More to the point, the IMF officials say that a threat of an imminent financial catastrophe as the Guardian puts it, is needed to force other players into accepting its measures such as cutting Greek pensions and working conditions, or as Bloomberg puts it, "considering a plan to cause a credit event in Greece and destabilize Europe."
According to the leaked conversation, the IMF - which has been pushing for a debt haircut for Greece ever since last August's 3rd Greek bailout - believes a credit event as only thing that could trigger a Greek deal; the "event" is hinted as taking place some time around the June 23 Brexit referendum.
As noted by Bloomberg, the leak shows officials linking Greek issue with U.K. referendum risking general political destabilization in Europe.
The leaked transcript reveals how the IMF plans to use Greece as a pawn in its ongoing negotiation with Germany's chancelleor in order to achieve the desired Greek debt reduction which Germany has been pointedly against: in the leak we learn about the intention of IMF to threaten German Chancellor Angela Merkel to force her to accept the IMF's demands at a critical point.
From the transcript:
THOMSEN: Well, I don't know. But this is... I think about it differently. What is going to bring it all to a decision point? In the past there has been only one time when thedecision has been made and then that was when they were about to run out of money seriously and to default. Right?

VELKOULESKOU: Right!

THOMSEN: And possibly this is what is going to happen again. In that case, it drags on until July, and clearly the Europeans are not going to have any discussions for a month before the Brexits and so, at some stage they will want to take a break and then they want to  start again after the European referendum.

VELKOULESKOU: That's right.

THOMSEN: That is one possibility. Another possibility is one that I thought would have happened already and I am surprised that it has not happened, is that, because of the refugee situation, they take a decision... that they want to come to a conclusion. Ok? And the Germans raise the issue of the management... and basically we at that time say "Look, you Mrs. Merkel you face a question, you have to think about what is more costly: to go ahead without the IMF, would the Bundestag say 'The IMF is not on board'? or to pick the debt relief that we think that Greece needs in order to keep us on board?" Right? That is really the issue.

* * *

VELKOULESKOU: I agree that we need an event, but I don't know what that will be. But I think Dijsselbloem is trying not to generate an event, but to jump start this discussion somehow on debt, that essentially is about us being on board or not at the end of the day.

THOMSEN: Yeah, but you know, that discussion of the measures and the discussion of the debt can go on forever, until some high up.. until they hit the July payment or until the leaders decide that we need to come to an agreement. But there is nothing in there that otherwise is going to force a compromise. Right? It is going to go on forever.
The IMF is also shown as continuing to pull the strings of the Greek government which has so far refused to compromise on any major reforms, as has been the case since the first bailout.
As the Guardian notes, Greek finance minister Euclid Tsakalotos has accused the IMF of imposing draconian measures, including on pension reform. The transcript quotes Velculescu as saying: “What is interesting though is that [Greece] did give in … they did give a little bit on both the income tax reform and on the … both on the tax credit and the supplementary pensions”. Thomsen’s view was that the Greeks “are not even getting close [to coming] around to accept our views”. Velculescu argued that “if [the Greek government] get pressured enough, they would … But they don’t have any incentive and they know that the commission is willing to compromise, so that is the problem.”
Below is Paul mason's summary of what is shaping up as the next political scandal.
The International Monetary Fund has been caught, red handed, plotting to stage a “credit event” that forces Greece to the edge of bankruptcy, using the pretext of the Brexit referendum.

No, this is not the plot of the next Bond movie. It is the transcript of a teleconference between the IMF’s chief negotiator, Poul Thomsen and Delia Velculescu, head of the IMF mission to Greece. 

Released by Wikileaks, the discussion took place in Athens just before the IMF walked out of talks aimed at giving Greece the green light for the next stage of its bailout.

The situation is: the IMF does not believe the numbers being used by both Greece and Europe to do the next stage of the deal. It does not want to take part in the bailout. Meanwhile the EU cannot do the deal without the IMF because the German parliament won’t allow it.

* * *

Let me decode. An “event” is a financial crisis bringing Greece close to default. Just like last year, when the banks closed, millions of people faced economic and psychological catastrophe.

Only this time, the IMF wants to inflict that catastrophe on a nation holding tens of thousands of refugees and tasked with one of the most complex and legally dubious international border policing missions in modern history.

The Greek government is furious: “we are not going to let the IMF play with fire,” a source told me.

But the issue is out of Greek hands. In the end, as Thomsen hints in the transcript, only the European Commission and above all the German government can decide to honour the terms of the deal it did to bail Greece out last July.

The transcript, though received with fury and incredulity in Greece, will drop like a bombshell into the Commission and the ECB. It is they who are holding E300bn+ of Greek debt. It is the whole of Europe, in other words, that the IMF is conspiring to hit with the shock doctrine.
The Greeks are understandably angry and confused; As Bloomberg reported earlier, "Greece wants to know whether WikiLeaks report regarding IMF anticipating a Greek default at about the time of the U.K. June 23 referendum on its EU membership is the fund’s official position" government spokeswoman Olga Gerovasili says Saturday in e-mailed statement.  For its part, an IMF spokesman in e-mail Saturday said it doesn’t "comment on leaks or supposed reports of internal discussions."
Two side observations: i) has a "Snowden" leaker now emerged at the IMF; if so we can expect many more such bombshell accounts in the coming weeks; ii) it may be another turbulent summer in Europe.

Friday, April 1, 2016

Doug Casey Warns "We're Exiting The Eye Of The Giant Financial Hurricane"

Right now, we are exiting the eye of the giant financial hurricane that we entered in 2007, and we’re going into its trailing edge.
It’s going to be much more severe, different, and longer lasting than what we saw in 2008 and 2009.
In a desperate attempt to stave off a day of financial reckoning during the 2008 financial crisis, global central banks began printing trillions of new currency units. The printing continues to this day.
It’s not just the Federal Reserve that’s printing. The Fed is just the leader of the pack. The U.S., Japan, Europe, China… all major central banks… are participating in the biggest increase in global monetary units in history.
These reckless policies have produced not just billions but trillions in malinvestment that will inevitably be liquidated. This will lead us to an economic disaster that will, in many ways, dwarf the Great Depression of 1929–1946. Paper currencies will fall apart, as they have many times throughout history.
This isn’t some vague prediction about the future. It’s happening right now. The Canadian dollar has lost 25% of its value since 2013. The Australian dollar has lost 30% of its value during the same time. The Japanese yen and the euro have crashed in value. And the U.S. dollar is currently just the healthiest horse on its way to the glue factory.
These are gigantic losses for major currencies. After all, we’re not talking about small volatile stocks. We’re talking about the value of money in peoples’ bank accounts. These moves show we’re in the early stages of a currency crisis.
At this point, it’s a lock cinch that the world’s premier paper currency – the U.S. dollar – will lose nearly all its value. I just don’t see any realistic way around it. Since the financial crisis began eight years ago, the U.S. government has created 3.5 trillion new dollars. In that same eight years, the U.S. government has borrowed $9 trillion – as much as it has borrowed in the previous 232-year history of the United States.
Though politicians would like us to believe otherwise, actions have consequences. You simply cannot quadruple the money supply and double the national debt in eight years without catastrophic results.
As this unfolds, your biggest risk isn’t the crashing stock market or the crashing bond market. Your biggest problem, and also the one most people just don’t see, is political. Your government is by far the most serious threat to your money and wellbeing.
Why do I say that? Like any organism, the prime directive of a government is to survive. When faced with a threat to its survival, a broke government will do anything it can to stay alive. President Roosevelt confiscated Americans’ gold in 1933. And in just the last few years, we’ve seen broke governments raid private pensions and confiscate cash directly from people’s bank accounts.
As we head into a currency crisis for the record books, I think currency controls are a lock. Governments have used currency controls since the days of the Roman Empire. A country debases its currency, raises taxes beyond a certain level, and makes regulations too onerous. Naturally, productive people react by getting their capital, and then themselves, out of Dodge.
But the government can’t have that, so it puts on currency controls that prevent people from moving assets outside the country. In effect, currency controls force people to stay with a sinking ship.
I’ll be genuinely surprised if some form of currency controls isn’t instituted within two years. If you don’t get significant assets out of your home country now, you may soon find it costly and very difficult to do so.
I’ve written many times about the importance of internationalizing your assets, your mode of living, and your way of thinking. I suspect most readers have treated those articles as a travelogue to some distant and exotic land: interesting fodder for cocktail party chatter but basically academic and of little immediate personal relevance.
I hope this book will shake you out of that mindset. There’s a very real risk that if you don’t act soon, you may find yourself penned like a sheep and your options extremely limited.
This book will teach you how to move some of your money and investments outside the reach of your home government. You’ll learn how to open a foreign bank account… the best ways to store gold for maximum safety… what you need to know before buying foreign real estate, and much, much more.
We’ve done most of the legwork for you. But it’s up to you to act.
The next few years are going to be quite catastrophic. Hundreds of millions of people will slip into poverty when the currency crisis destroys their savings.
The good news? If you take the steps outlined in this book, you won’t be one of them.
If you’re interested in obtaining this book, you can obtain a hard copy in the mail. Click here for more details or to download the PDF now.

Wednesday, March 30, 2016

EES: Test Results from Penny Splitter EA


EES is releasing the Penny Splitter EA on the Meta Trader Marketplace, and doing extensive testing and code inspection on the EA.  Penny Splitter strategy comes free with any purchase of the book Splitting Pennies - Understanding Forex - available now on Amazon.

Some sample test results:

Strategy Tester 1  Strategy Tester 2  Strategy Tester 3  Strategy Tester 4  Strategy Tester EU



Monday, March 28, 2016

Why Currency Headwinds Are Going To Define Earnings In 2016

Summary

Companies seeking to optimize their profits with FX risk will seek to hedge.
Only about half of public companies currently hedge their FX risk.
Investors should consider FX for companies with significant international business.
Companies that do business outside of the USA have substantial forex exposure. This exposure can be an asset, if properly managed - but often it is a liability. Recently, the trend in corporate accounting has been to blame "currency headwinds" which can be a good excuse for up to $10 billion in losses. Did these executives ever hear about hedging?
Toys "R" Us Inc. said revenue slipped 2.6% in the latest quarter as the retailer faced currency headwinds over the holiday period. The foreign exchange volatility was partially offset by the rise of same store sales of 2.3% in the fourth quarter. Currency woes, however, had a negative $169 million impact. For the year, the toy store's same store sales increased a modest 0.9%.
Let's examine how this $169 million loss could be a potential profit. Companies who do business overseas know roughly how much foreign currency they will have coming in. In the case of retail operations, such as Toys R Us or the best forex example McDonald's (NYSE:MCD), they know what their foreign sales are going to be, within a very small margin of error; retail stores operate in these thin margins of 2%, 5%, 8%, etc. Let's use the McDonald's example.
1. There are 517 McDonald's restaurants in Russia, 73 of which were opened in 2014. The company's total revenue for 2014 in Russia was 65.8 billion rubles ($930 million).
McDonald's has 517 locations in Russia, which generate about $930 million USD in income. But when they receive this income, it's in rubles, mostly in cash (the Russian economy is not 'electronic' as most of western Europe is). Even if store sales slip, they know they should have at least about $900 million USD worth of rubles per year, or about $225 Million per quarter, to convert from rubles to USD. McDonald's is an American company, and the US dollar is its functional currency for accounting purposes. Knowing that they are naturally long RUB/USD for about $225 million per quarter, they can sell covered forex options or Forwards against this transaction. This would be pure profit for McDonald's because they already have the underlying waiting to be delivered. If delivery is not taken - even better. They get free money.
USD/RUB is quoted usually as USD/RUB, not RUB/USD. If you are long EUR/USD you are long the euro and short the USD. But for hedging purposes, forex pairs can be quoted in the inverse, especially in non USD jurisdictions where forex is active such as Japan, where it's common to see JPY/USD, JPY/EUR and so on.
Forex options are not so much different than options on stocks; they are just not so widely utilized. Options trading for stocks has become popular in recent years, and for good reason.
Some companies know this; in fact - some companies profit greatly from it. But according to insider research from CFO.com, only about half of public companies hedge:
Forty-eight percent of nonfinancial companies listed on U.S. stock exchanges remained exposed to volatility in foreign exchange rates, commodity prices and interest rates in 2012 because they did not hedge them, according to a new study by Chatham Financial.
The interest-rate and currency risk adviser studied a sample of 1,075 companies ranging from $500 million to $20 billion in revenue. The nearly half that did not use financial instruments to hedge their exposures demurred despite the threat the risks posed to both the balance sheets and reported earnings (see chart at bottom). "That was surprising, knowing the pressure senior management teams and treasury feel around identifying ways to reduce risk to factors within their control so business can focus on other areas," Amol Dhargalkar, managing director for corporate advisory at Chatham, says.
Fifty-two percent of firms with exposure to global currency fluctuations hedged FX risk, the firm found. Data released in September by the Bank for International Settlements showed a continuing decline in forex transactions for nonfinancial customers. Transaction dollar volume fell to $465 billion in 2013 from $532 billion in 2010.
When times are tough, companies will pinch pennies, shed staff, and cut costs. But many public companies are already "mean and lean" - operating at near optimum capacity. But there's one obvious spot left to explore, to increase earnings - and that's forex hedging. Forex Hedging can provide protection from risks and even profit. Yes, it's a slippery slope of discussion - because we must always say that forex is risky and you will lose all your deposit, and it will cause poor health and ruin your business. But let's be practical; if a company is reporting a multi-million dollar loss because of "currency headwinds," it's already suffering these things without participating in forex. If regulators don't like such arguments, why don't they provide US companies with tools and methods to protect themselves from such headwinds.
So unless public companies quickly start learning and educating themselves about currency hedging, 2016 looks like a year of forex - a year defined by "currency headwinds" as far as earnings are concerned.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

http://seekingalpha.com/article/3961171-currency-headwinds-going-define-earnings-2016

Saturday, March 26, 2016

Deutsche Bank's Dire Warning On Global Trade: "The Currency War Is Futile"

“It’s almost like the timing belt on the global growth engine is a bit off or the cylinders are not firing as they should.”
That’s from WTO chief economist Robert Koopman, and it’s a quote we’ve used on a number of occasions. Koopman is referring to the fact that for several years in a row, the rate of growth in global trade has lagged GDP growth. That’s a problem for two reasons: 1) GDP growth is hardly robust as it is, and 2) before the recent downturn, the last time trade growth underperformed the rate of economic expansion was two decades ago.
As WSJ noted last autumn, trade growth has averaged just 3% per year. That’s half of the 1983-2008 average.
“It’s fairly obvious that we reached peak trade in 2007,” Scott Miller, trade expert at the Center for Strategic and International Studies, a Washington, D.C., think tank told the Journal.
Since then, the evidence has continued to pile up that global trade has flatlined. Freight volume in the US fell for the first time in three years in November, while monumental declines for Class 8 truck sales vividly demonstrate the extent to which commerce is simply grinding to a halt across the US economy. As for global trade, well, the Baltic Dry speaks for itself.
It is worse than in 2008. The oil price [is low] and freight rates are lower. The external conditions are much worse,” Maersk CEO Nils Andersen said, just last month. Maersk Line - the company's golden goose and the world's largest container operator - racked up $182 million in red ink last quarter alone.
In this environment the “answer” has been competitive devaluation - i.e. a currency war. Although this is, in the end anyway, a zero sum game, until recently there was still some hope that key EMs could rely on devlaued currencies to help cushion their current accounts from the slowdown and restore some semblance of balance and competitiveness.
However, it would appear that, as outlined above, the link between output and trade growth might have been severed sometime in the post-crisis world. If that's the case, the FX wars may be largely futile and what looks like an undervalued currency might have much, much further to fall - or could simply decline in virtual perpetuity. That's a rather disconcerting proposition to say the least. Especially for EM.
Below, find excerpts from a new note out of Deutsche Bank where FX strategist Gautam Kalani believes the fundamental relationships officials all take for granted and use to justify the whole "devalue our way to propsperity" line may no longer hold. 
*  *  *
From Deutsche Bank
1) Is the currency war futile? It looks increasingly so.
The fundamental currency-current account relationship is as follows: large currency undervaluation current account improvement currency appreciation. The first link describes the ‘currency war’ argument, whereby a weaker currency leads to an exports pickup and thus a boost to growth. The second link underlines how current account improvement in response to a large undervaluation is an important channel through which large undervaluations can trigger FX appreciation.
There is a concern that this competitive devaluations channel (the first link) may have broken down (to a large extent) because of the collapse in global trade. Global growth today is generating much less trade growth than in the past (chart below). As a result, currency adjustment is not enough to spur growth significantly because global trade is increasingly less important to the overall makeup of GDP. This raises the possibility that the currency war is largely futile, as currency depreciation does not give much of a boost to exports/growth, and certainly much less impetus than in the past.
2) What is the implication of a futile currency war for EM FX? Beware of going long currencies purely on the basis of fundamental undervaluation.
Focusing on EM, lingering growth concerns further increase the perceived need for currency depreciation. However, since currency depreciation does not translate easily into exports improvement, more currency adjustment is probably required than in the past to obtain the same growth/current account impetus; currencies must be more undervalued before substantially improving the current account. In sum, a significant undervaluation of an EM currency may not be sufficient to drive appreciation via the current account channel; rather, even more currency adjustment may be required for some undervalued currencies.
Current accounts, especially in LatAm but also in high-yielding EMEA, still reflect excessive domestic absorption. Improvements have been limited despite large scale FX depreciation. Further, what current account improvement has taken place has been mainly on account of import compression rather than exports – perhaps FX weakness has played some role in this as imports become more expensive with a weaker currency, but a majority of it reflects demand slowdown in EM. Therefore, for currencies running large current account deficits, more FX adjustment may be on the cards before undervaluations start providing material support.
3) Which currencies to be wary of going long purely on the basis of fundamental undervaluation? In EMEA, ZAR stands out as an example.
If global trade growth has collapsed and the currency war is futile, a currency that is heavily undervalued on a fundamental model like BEER or PPP could easily become more undervalued. In this context, the FEER model, which estimates misalignments based purely on the distance of the cyclically- adjusted current account balance from its long-term average, could provide an appropriate warning signal. That is, one should be wary about long a currency on the basis of BEER undervaluation if it is also showing FEER overvaluation, as FEER overvaluation signals that the current account balance is still below its long-term average and therefore has not adjusted by ‘enough’.
*   *   *
We've said it before and we'll say it again: central banks better figure out how to print trade, and fast.

Friday, March 25, 2016

EES: Elite E Services Forex Newsletter

Forex traders, investors, interested parties - Register for the EES Newsletter to get free stuff!

Forex analysis, breaking news, strategies, and more!


Only Half of Companies Hedging Currency and Other Risks

Forty-eight percent of nonfinancial companies listed on U.S. stock exchanges remained exposed to volatility in foreign exchange rates, commodity prices and interest rates in 2012 because they did not hedge them, according to a new study by Chatham Financial.
The interest-rate and currency risk adviser studied a sample of 1,075 companies ranging from $500 million to $20 billion in revenue. The nearly half that did not use financial instruments to hedge their exposures demurred despite the threat the risks posed to both the balance sheets and reported earnings (see chart at bottom). “That was surprising, knowing the pressure senior management teams and treasury feel around identifying ways to reduce risk to factors within their control so business can focus on other areas,”Amol Dhargalkar, managing director for corporate advisory at Chatham, says.
Fifty-two percent of firms with exposure to global currency fluctuations hedged FX risk, the firm found. Data released in September by the Bank for International Settlements showed a continuing decline in forex transactions for nonfinancial customers. Transaction dollar volume fell to $465 billion in 2013 from $532 billion in 2010.
The failure to hedge commodity price fluctuations could be driven by many factors. Fifty-three percent of the 1,075 randomly selected companies had exposure to commodity price risk, but less than half (43%) are hedging it using financial contracts. While commodity price swings can dent earnings even more than currency volatility, companies may seem underhedged on commodities because commodity risk management is often owned by the procurement department, says Dhargalkar. Also, though, hedging commodity prices is more complex than hedging FX or interest-rate risk.Companies sometimes have seemingly logical reasons to reduce or drop hedging programs. Currencies of the major developed economies have traded in a relatively tight range much of the past two years, reducing the use of currency hedges like forward contracts, for example. But that might not last. Finance departments may become more attuned to currency fluctuations the rest of 2013 and 2014 due to currency devaluations in Japan and Latin America and high volatility in emerging-market currencies like the Indian rupee and the Russian ruble.
Most CFOs and treasurers feel comfortable with interest-rate and currency derivatives but the commodities market is much more nuanced, points out Dhargalkar. “For example,” he says, “with fuel it matters where in the country you are filling up and what kind of fuel you are using.” In the case of product production costs, if a company’s input costs are partially driven by the price of copper, gold or silver, “how do you strip out the impact of other factors from the impact of underlying commodity prices?” Dhargalkar asks.
Only 41 percent of the sample companies hedged interest-rate risk. In 2012, Chatham explained in its report, companies expected interest rates to stay consistent over a long period, and rates on bond issuances were breaking through all-time lows. Both factors gave companies less motivation to change the fixed to floating mix of their existing debt portfolios, according to Chatham, which is usually the aim of interest-rate hedges.
A “gating factor” for all hedging is hedge accounting, which can prevent a less-sophisticated finance department from hedging FX and commodity risks at all, says Dhargalkar.
“If a business doesn’t apply hedge accounting, it actually can introduce more volatility into earnings,” says Dhargalkar. “The business might enter into the right set of hedges that reduce cash-flow risk but actually increase its earnings at risk, because of the volatility of the derivative showing up in earnings per share.” That could lead to the CFO having to provide a lengthy explanation on an earnings conference call.
Chatham’s study excluded sectors of the financial services industry and used information from companies’ latest form 10-Ks.
Hedging-Lags-Exposures-fx-commodity-interest rate

Thursday, March 24, 2016

The Forex Rigging Irony

While Forex banks, traders, and other institutions are being blamed for market rigging, the Swiss National Bank can publish reports about its own market rigging, but instead of being a scandal, it's economic data.  That's because the vast majority don't understand how the Forex markets work.  It's not insulting - it's a fact.  Currently there are hundreds of pending litigation cases against a plethora of Forex banks, traders, and other institutions - but none against a central bank.  Of course it would be ridiculous to sue a central bank for market rigging - because it's in their mandate to manipulate the market.  Of course they don't call it manipulation, they call it 'market operations' and the Fed, sometimes known as 'market intervention' or 'stabalization efforts.'  Anyhow, it seems strange that on the one hand, central banks manipulate their own currency via 'market operations' which mostly are done through commercial Forex banks, but it is the Forex banks that receive this printed money that are sued, not the central banks.
But look from the CB perspective - what's the point of printing money if you can't use it to intervene in the market and prop your own currency?  
The Swiss National Bank will probably stay on hold at its monetary policy meeting on March 17 as banks in the country are already facing pressure from negative interest rates, economists and strategists say in notes to clients.
The fact that the euro remained broadly stable against Swiss franc after the European Central Bank meeting lessens pressure on the SNB to act this week. SNB may intervene in the forex market to stem the franc’s appreciation.
The question in everyone's mind now - do these central banks really know what they are doing?  I mean, is there a coordinated international policy?  A conspiracy?  A conspiracy would imply intelligence.  Who knows.  
One perspective is to look at Forex markets from the perspective of those in power, the UHNWI, or 'them' - 'they' or 'The Elite.'  They have all the money they can possibly have - with this money they buy power, such as politicians, countries, people, etc.  They can't buy anything more.  So the only thing left is to ensure the status quo - or ensure as much as possible they maintain their position.  One way to do this which is more subtle, is to destroy the money supply.  By making currency worthless, or worth - less, any potential competition will be either wiped out or marginalized.  Would-be billionaires and up and coming entrepreneurs who are out there in the 'real world' making business, are contained.  It also affords them other opportunities, such as providing this fresh QE money to the private banks they actually own, allowing them to invest in HFT and other stat arb style investment strategies with virtually no risk, allowing them to grow their own portfolios at a level which is practically speaking, exponentially greater than the average investor.  And if their investments fail, they can always bail themselves out - or as the trend is, tax savers and bail themselves in.
Remember, our financial system is created by rules that are constantly changing.  Just as Central Bank are created they are destroyed.  Russia being one of the newest Central Bank in the game; about 30 years old:
The Central Bank of the Russian Federation (Bank of Russia) was established July 13, 1990 as a result of the transformation of the Russian Republican Bank of the State Bank of the USSR. It was accountable to theSupreme Soviet of the RSFSR. On December 2, 1990 the Supreme Soviet of the RSFSR passed the Law on the Central Bank of the Russian Federation (Bank of Russia), according to which the Bank of Russia has become a legal entity, the main bank of the RSFSR and was accountable to the Supreme Soviet of the RSFSR. In June 1991, the charter was adopted by the Bank of Russia. On December 20, 1991 the State Bank of the USSR was abolished and all its assets, liabilities and property in the RSFSR were transferred to the Central Bank of the Russian Federation (Bank of Russia), which was then renamed to the Central Bank of the Russian Federation (Bank of Russia). Since 1992, the Bank of Russia began to buy and sell foreign currency on the foreign exchange market created by it, establish and publish the official exchange rates of foreign currencies against the ruble.
If Russia can establish a new Central Bank, why can't the United States of America, Australia, Canada, Germany?  How close are we to a hyperinflationary trap, as happened during the 19th century?
Wildcat banking refers to the practices of banks chartered under state law during the periods of non-federally regulated state banking between 1816 and 1863 in the United States, also known as the Free Banking Era. This era, commonly described as an example of free banking, was not a period of true free banking, as banks were free of only federal regulation; banking was regulated by the states. The actual regulation of banking during this period varied from state to state.
According to some sources, the term came from a bank in Michigan that issued private paper currency with the image of a wildcat. After the bank failed, poorly backed bank notes became known as wildcat currency, and the banks that issued them as wildcat banks.[1]However, according to others, wildcat meant a rash speculator as early as 1812, and by 1838 had been extended to any risky business venture.[2] A common conception of the wildcat bank in Westerns and like stories was of a bank that left its safe somewhat ajar for depositors to see, in which the banker would display a barrel full of nails, grain or flour with a thin sprinkling of cash on top, thus fooling depositors into thinking it was a successful bank.  The traditional view of wildcat banks describes them as distributing nearly worthless currency backed by questionable security (such as mortgages and bonds). These actions ended when note circulation by state banks was stopped after the passage of the National Bank Act of 1863. Mark Twain, in his autobiography, refers to the use of such currency in 1853, "The firm paid my wages in wildcat money at its face value".
Certainly, our current system is better that which was used during the "Free Banking Era" because the fiat money today is NOT "worthless currency" - but Central Banks such as the SNB (Swiss National Bank) certainly are trying hard to make it such!
Forex isn't just a money market, it's the underpinning of all other markets (i.e. you sell your stocks for US Dollars).  Learn more about Forex with Splitting Pennies - Understanding Forex - the book.