Ah summer vacation!  A great American tradition for sure.  

My family decided that we would spend our hard earned vacation at one of the East Coast’s most popular beach destinations.  So dear old Dad saluted and made the requisite arrangements.  We rented a condo at the beach, packed the kids into the van and drove south.  

We had a great time playing in the surf, eating seafood and just hanging around each other.  

One day as my wife went to give the baby a nap, I was tasked with standing on the shore and watching my other kids playing in the surf and boogie boarding.  As I called out surfing advice to them, I took a look around the beach.  

Rich golden sand spread out from the water’s edge and extended to the right and the left as far as the eyes could see.  Carpeting this summer playground were all kinds of people.  

The most impressive to watch were the young adults.  In the full bloom of youth they strutted down the beach.  These were young men and women, with very limited amounts of fat, seemingly consumed with themselves and what they considered “big problems.”  Being discussed were such Gordian quandaries as: 

“I’m not getting out of work until 10!  “I mean like, how am I supposed to meet him at the marina at 10:30?” 

Nonetheless, it does make one happy to be around such young people and I even silently cheered them on, hoping they were enjoying every last minute of this time in their lives.  

Turning toward the kids playing in the surf my eyes were drawn upwards towards the horizon.  

The Deep Blue Ocean.   

Immense, unfathomable and permanent it was there before anyone on the beach existed and it will continue to draw the attention of onlookers long after everyone on the beach has turned to dust.  

The ocean is really two things.  Those playing in surf think they understand the ocean, but their experience is a simulacrum of the real thing.  For although the surf seems like a part of the ocean, its behavior and characteristics are quite different. 

The surf mainly consists of the waves swelling up and crashing ashore with much fanfare.  It’s quite impressive to watch, as the white water froths and bubbles as it races toward the shore.  Then quite suddenly the water recedes leaving nothing but bare sand in its wake.  

I contrasted this with the much calmer waters of the Deep Blue Ocean.  To the casual observer the Ocean is dull and boring as the surf is where all the action seems to be.  Scientifically; however, we know that the deep ocean is a self sustaining and complex environment that contains much of the maritime life.  Indeed, we are told that life itself began in the deep ocean. 

My thoughts were briefly interrupted by someone passing in front of me who mistakenly believed they were still in the “full bloom of youth” when clearly they were not.  

“Poor choice of beach apparel”, I thought.  I also wondered if public eyesore ordinances were still in effect.  

Anyway, being on vacation with the family at such an idyllic place, and watching others on the beach interacting with one another, made one thing crystal clear to me.  

Contrary to what we are lead to believe every day back in the “working world” it is not the possession of “things”, or the attainment of organizational power, or even fame that brings contentment in life.  

No my friends, it’s the bond that we have with each other, with other human beings, that brings true contentment and happiness.  In fact, to the extent those bonds are deep, wide and permanent, determines the degree of happiness.  

For some, relationships are like the surf, quickly formed with much hoopla and then instantly dissolved and retracted, while others prefer relationships more like the Deep Blue Ocean, solid, understated and not easily moved.    

It is often said that our dear business of consulting is a “relationship business” and we must admit that this is true.  Consultants generally do business with those clients that they have established some degree of rapport.  

Not to criticize our compatriots, but we find that many in the business specialize in building the kind of relationships that are akin to the surf.  They show up at the client’s office with loads of cheap kitschy promotional items and while showering the clients with the pens, calendars and stress balls, they layer on syrupy sweet platitudes about their “commitment.”  

And when the chips are down? 

Receding quicker than the surf, most will sell out the client’s interest like a cheap beach souvenir in favor of siding with a regulatory agency or chasing the latest industry fad.  

A choice few of us; however, remain as the Deep Blue Ocean.  Unflappable in the face of those challenging the client and unimpressed with industry fads.  For a true relationship with the client is not built upon logo items and endless business lunches, but rather an understanding by all that the consultant may not always be right, but will always act in the client’s best interests.  

As the kids came roaring ashore with the surf chasing them, I suddenly found the other half of the family next to me.  Back from the nap my wife and the baby settling next to me we began chatting about where tonight’s dinner festivities were to be held.  

As my wife was saying something about shrimp, the kids came rushing in and cut into our conversation to tell us about a wave that had just crashed ashore.  We took this opportunity to ask them about dinner.  They both looked at us as if we had asked them about Calculus and they quickly made it clear they were amicable with whatever we decided.  

As they turned and ran back toward the beach, my son stopped halfway, turned around and with a very serious look said, “Thanks Dad.” 

Have a great week, 

Michael Bechara, CPA

Managing Director

Granite Consulting Group Inc.

mbechara@consultgranite.com

www.consultgranite.com

Please enjoy another guest post from our friend out West ….Karla Dennis!

 Ronald Reagan once stated that the nine most terrifying words a taxpayer can hear are: “I’m from the government and I’m here to help.”

There are certain government buzz words that always make the hair on the back of your neck stand up. Here is the lead paragraph from the latest IRS letter: “As part of a continuing effort to improve global tax administration efforts, Internal Revenue Service officials announced today the realignment of the Large and Mid-Size Business division to create a more centralized organization dedicated to improving international tax compliance.”

It is now going to be called the Large Business and International division (LB&I).

“Executing our international strategy is a top priority, and our work continues to intensify in this area,” said IRS Commissioner Doug Shulman. “Every day, we are moving forward in our international compliance efforts. Bringing together our top international personnel in this new group will help us advance our global tax administration efforts and ensure focus and fairness in a critical area for our nation.”

The existing division had 600 agents.  The new and improved division will add an additional  875  agents in order to “enhance” the program. Hmmm…that’s more taxpayer dollars. Any idea how the cost will be paid? (Good Guess)

 The realignment will bolster the IRS is gathering international taxes from individuals and corporations in several ways, including (in their words):

• Identifying emerging international compliance issues more quickly.
• Removing geographic barriers, allowing for the dedication of IRS experts to the most pressing international issues.
• Increasing international specialization among IRS staff by creating economies of scale and improving IRS international coordination.
• Ensuring the right compliance resources are allocated to the right cases.
• Consolidating oversight of international information reporting and implementing new programs, such as the Foreign Account Tax Compliance Act (FATCA).
• Coordinating the Competent Authority more closely with field staff that originate cases, especially those dealing with transfer pricing.
• Otherwise centralizing and enhancing the IRS’s focus on transfer pricing.

The new international unit will include a transfer pricing director, who will continue piloting the new transfer pricing practice, and a chief economist, who will oversee the IRS’s economic positions pertaining to transfer pricing.

Today’s announcement marks the latest in a number of efforts the IRS has made to increase international tax compliance. The IRS has taken major steps to address offshore tax evasion, including the investigation of the misuse of undisclosed offshore accounts by U.S. taxpayers. Last fall, the IRS created a unit to better monitor tax compliance by individuals and their related enterprises.

LB&I is also charged with overseeing the implementation of the recently enacted Foreign Account Tax Compliance Act (FATCA). Signed into law in March, FATCA will substantially improve international information reporting, increasing international transparency and compliance.

The bottom line is the IRS seeks to make it more difficult for taxpayers to evade taxes by crossing international borders. I advise my clients that tax evasion is never an option when tax strategy is truly the answer.

You saw the new buzz word, transfer prices, highlighted in a number of places. Transfer prices are significant for taxpayers because it allows tax administrations to determine in large part the income and expenses, and therefore taxable profits, of associated enterprises in different tax jurisdictions.

So, even if you are in a foreign land, the IRS is coming for you.  It is a Global Tax Storm.

Contact a qualified tax strategist now so that you can weather the storm. 

To Your Success…

Karla Dennis – America’s Tax Diva

Cohesive.

If our world was a bar scene it might look something like this: 

The politicians and their economists would be at the center of room on the dance floor.  Fancying themselves the life of the party, they see the whole world revolving around them.  They gyrate back and forth on the dance floor, handing out printed money and customized laws to those who wink and nod at them.  

Ringing the dance floor are the wanna bees and hangers on, ogling those in power and just waiting to be asked out on the dance floor for their turn at running the festivities.  

Sitting at the bar you might find some foreign creditors who financed this garish bacchanal.  Balling their hands into fists and cracking their knuckles with visible disdain, they watch the action on the dance floor and wait for their chance to put an uncomfortable end to the action.  

Finally in the back of the bar, in a dark forgotten corner, sit a group of people that survey the entire room and try to make sense of what is happening.  These are the asset managers and businessmen that must forecast the future in order to allocate their resources correctly in the present.  

We, for better or worse, are part of this group in the corner.  With our circle of friends and confidants around us we whisper and murmur to one another our observations.  

“Music is getting louder, maybe we’re in for another round of stimulus” 

“Looks like the foreign creditors are getting antsy” 

“Boy that conduit where all the energy comes into the building is mighty narrow” 

Anyway, among this crowd a certain book has gained cult like status.  Heck, even the media is now talking about it.  Recon readers will recall some time ago we talked about a book written by Adam Fergusson in 1975 called, “When Money Dies.”  See this post: 

Blood on the Highway 

The book details the hyperinflation of Germany’s Weimar Republic in the 1920s and is highly sought after today.  Indeed, copies are being sold on Amazon for $1,000 a pop.  Your dear author was fortunate enough to obtain a copy of this coveted tome through some very deep connections.  

A central character in the book is Reichsbank (German Central Bank) President, Rudolf von Havenstein.  

Havenstein and his subordinates completely misdiagnosed the disease of hyperinflation.  Havenstein saw the problem as not enough money in circulation for people to conduct business.  

Prices were rising so quickly that people did not have either enough paper banknotes, or banknotes with a high enough denomination, to pay for goods and services.  This was seen by Havenstein as the central problem to be solved.  

He did not realize, or did not want to realize, that the dearth of banknotes was but a symptom of the disease and not the disease itself.  

Accordingly the Reichsbank, under the direction of Havenstein, put enormous resources into printing as much money as possible.  Indeed, in a stunning excerpt from the book, Havenstein not only refused to listen to critics of the mad policy, but bragged about it (emphasis added): 

In an atmosphere of gathering fury and frustration, and with attacks on the Reichsbank’s policy being launched from all sides, Dr Havenstein plunged on. Day and night 30 paper mills, 150 printing firms and 2,000 printing presses toiled away adding perpetually to the blizzard of banknotes under which the country’s economy had already disappeared. Havenstein spoke of the efficiency — the Leistungsfahigkeit — of his printing system, and saw the greatest inflationary danger in the private state banks who were permitted to issue up to 15,000 milliard marks not daily, as the Reichsbank was doing every day of the week except Sundays, but as a once-and-for-all legal limit, and who were demanding the right to print more. This, he said, proclaiming once more his mission to relieve Germany of its dearth of currency, would ‘render nugatory the whole credit policy of the Reich and of the Reichsbank’. 

Amazing.  

The fiction that underlies of this insanity is best expressed by the German phrase:Mark gleich Mark.  Translated this means that a Mark is a Mark, whether a gold mark or a paper Mark.  Even the most causal observer knows this cannot be true, for the more paper currency that is printed the less the currency is worth.  

Ah ..my friends welcome to Dollar gleich Dollar.  

Our Federal Reserve is preparing for QE2 or Quantitative Easing Part 2.  This is a fancy name for printing money.  See this article followed by an excerpt: 

RBS tells clients to prepare for ‘monster’ money-printing by the Federal Reserve

“The US government has a technology, called a printing press, that allows it to produce as many US dollars as it wishes at essentially no cost.” 

Its mind boggling to see that the Fed believes they can print as much money as they want with no consequences.  The other scary note here is that unlike the hapless Von Havenstein, our Federal Reserve does not even have to worry about obtaining the use of paper mills, printing presses, etc.  In our modern world, money can be created with computers, it is a mere collection of pixels on a screen.  

So what’s going to happen?  Where will we end up? 

The madness in Germany continued until at the “bottom of the abyss” as the book puts it, Dr. Schacht was appointed Commissioner for National Currency.  Schacht put an end to the madness by introducing a new currency the Rentenmark, which was backed by land.  Once the new currency took hold the country then endured the inevitable deflationary collapse.   

Have a great weekend,

Michael Bechara, CPA

Managing Director

Granite Consulting Group Inc.

mbechara@consultgranite.com

www.consultgranite.com

We are finishing up some client work and clearing the decks for some time off…..Please enjoy another guest post from our friend on other coast; Karla Dennis from Cohesive Tax. 

Without naming names, the gentle reader will certainly recall a well known former governor who was roundly condemned for claiming the new Health Care Law created “Death Panels” where nameless bureaucrats would decide life and death issues. Although this individual kept sticking to her word, the criticism mounted.

That was months ago. With relative quiet on Health Care for the moment and most attention turned to the Gulf Oil Spill,  the President’s economist Paul Krugman said on national TV that “advisory panels” would save money by denying people healthcare. No, he did not endorse Death Panels, but what he did say is just as scary. He admitted that government bureaucrats – not doctors and patients – will decide what treatment is appropriate. And that this will “save quite a lot of money”.

So, if you are in need of treatment, and you and your doctors agree on a course of action, a government bureaucrat can intervene and say “nope, sorry, too expensive”. And this is coming from a high level official who supports the plan, not a critic. 

This should send shivers down your spine.

Now even the vaunted the New York Times has gone on to say that denying people healthcare is the key feature of the new Health Care Law.  For months, media outlets like the New York Times scolded those concerned about rationed medical care.  The Health Care bill wound up containing language enabling “comparative effectiveness” boards as guiding lights for medical care decisions. 

Our taxes will mount up, not to provide health care, but to simply fund new agencies that will be forever hounded by accusations of rationing, and Medicare’s long-term budget deficit will grow, even as taxes increase and services are cut. The federal government is now starting to build the institutions that will try to reduce the soaring growth of health care costs. There will be a group to compare the effectiveness of different treatments, a so-called Medicare innovation center and a Medicare oversight board that can set payment rates.

But all these groups will face the same basic problem. Deep down, Americans tend to believe that more care is better care. We recoil from efforts to restrict care. …

David Leonhardt, the Times economics journalist goes on to praise the Health Care Law as the start of saying “no” to people who want more health care.  That’s an interesting tack for the Times to take, especially after its screeching over the use of “death panels” by critics, which meant exactly the same thing.  Now they admit that the “most important task” of the people running the Health Care reform is to deny people medical care — under circumstances where a group of elites decide it’s not worth it. 

This is why you have heard me repeatedly state in talks and webinars and in blogs and anywhere else I have a public forum, that the Health Care Law is actually a Tax Increase Law.  

The ancient general Hannibal once stated: “We will either find a way or we will make one.”  Good advice that still holds true for us today as we seek solutions to the Health Care Law. 

 To Your Success…

Karla Dennis – America’s Tax Diva

Cohesive

I enjoy living in the Northeast.  This part of the country has 4 full seasons and I thoroughly enjoy them all.  Each season is pleasant in its own right and they tend to set a certain rhythm to life.  

Philosophers have commented that the seasons can harmonize our lives.  The variation of the seasons satisfies our need to change and our need for familiarity simultaneously.  The seasons are very different from one another as they change from Spring to Summer to Autumn to Winter, yet at the same time, we have the identical four seasons every year and we know what to expect from each. 

Those who study history also know that nations and economies also pass through seasons.  The difference with historical seasons is that they tend to last much longer.  Each season lasts about a generation and a four season cycle lasts about 80 years.  

A primary reason why so many people have trouble when investing and understanding economics is that they cannot identify what season they are in.  We sympathize as this is extraordinarily difficult because a person is likely to go through only one of each season in their lifetimes…if they are lucky.  

The only way to understand where we are without waiting 80 years is to study history.  Any shrewd investor will tell you an understanding of history is essential.  So with this we present: 

The Four Economic Seasons.   

Spring – The Production Economy

This is the earliest phase of an economy and the most pure.  Everyone and everything is geared toward being productive.  

Imagine a maker of laundry soap.  He focuses on making the best soap he can that will perform its intended purpose outstandingly.  He experiments with different formulas trying to attain the best combination.  Will it remove grass? Red wine?  How about vomit? 

Customers may try the product to determine its effectiveness.  If it’s effective, they generally come back in droves.  The entire focus of the sales transaction is on the soap.  The Soap Maker uses plain packaging or his customers bring their own.  “Put it in a plastic bag ..or wait here’s a cardboard box..throw a few pounds in there.”  It doesn’t matter……people just want effective soap.  

This is the most masculine season of economic life.  Success in the marketplace is determined by the quality and effectiveness of the product or service.  The Soap Maker’s best friends are his scientists, engineers and production people.  

Summer – The Marketing Economy

During this stage of an economy, many people are selling the same kinds of soap.  “Having a homogenous product is not good for business”, determines our Soap Maker.  So he begins to build this thing called a “brand.”  

He invests money in fancy packaging, logos and slogans.  Ah yes, our soap is sold only in a sharp looking navy blue box with the signature yellow stripe across the top.  And every box is emblazoned with the company slogan, “The Soap That Mothers Choose Most.” 

People that buy the soap are proud to walk around with the fancy box and they want their friends and neighbors to see that they are buying the “name brand” soap.  “I just got a promotion, now we can start using the name brand stuff!”  or “Honey, all the people at the YMCA wash their clothes with this brand”, are the reactions our Soap Maker wants.  

This is the most feminine season of economic life.  Success in the marketplace is determined by our Soap Maker’s ability to make emotional connections with his customers through the branding process.  The Soap Maker’s best friends are his marketing and sales people.  

Autumn – The Financial Economy

Up until now our Soap Maker has maintained a focus on the product and the customer or basically a moral approach.  Now is where it starts to get shaky.  

During this stage of an economy, many people are selling the same kinds of soap and there are competing brands.  Our Soap Maker (now the Soap CEO) decides that to make more money he can buy out the weaker soap makers using stupendous amounts of debt.  He doesn’t plan or repaying the debt because that would prevent him from making more acquisitions.     

The simple strategy is to jack up revenues through acquisitions and just service the debt.  As long as debt stays cheap, this will allow the company to maintain all the right financial ratios, earn high profits…. and high compensation for our Soap CEO.  

This is the most “nerdy” season of economic life.  Success in the marketplace is determined by our Soap CEO’s ability to hit internally generated financial targets and present them to investors/bankers as evidence of his management prowess.  Hitting the financial targets allows him to borrow more money and acquire more companies and also causes the stock price to rise, thereby generating even more compensation for our CEO.    

The Soap CEO’s best friends during this season are his financial, accounting and investment gurus.  

Winter – The Political Economy

So our Soap CEO continues rapid growth and accumulation of debt until either debt becomes more expensive or, more likely, he has accumulated so much debt that even a slight slowdown in demand causes the company to go cash negative.  

So when the house of cards begins to crumble what does our Soap CEO do?  He looks around and sees how big the company has become and how many people they employ.  

Hmmmm…. 

So he tells the government, “Look if you don’t bail me out, there’s going to be a social collapse.  All these people are going to be unemployed, angry, with no soap and they will be looking for answers from you.” 

And so the results of the Soap CEO’s reckless management is borne by the common man.  

This, my friends, is the season where the sleazebags come out of woodwork and rise to the top.  At this stage any requirement of skill or merit has long been left behind.  Success in the marketplace is determined by your political connections.  “Who do you know and how much influence do you have over them?”, is the determining factor.  

The Soap CEO’s best friend during this season is his lobbyist.  

All in all, I think everyone can guess what economic season we are in based on current events.  I estimate the current economic “year” started with the Great Depression in the 1930s and went something like this:

1940s-1950s                         Production Economy

1960s-1970s                         Marketing Economy

1980s-1990s                         Financial Economy

2000-present                                   

How long with the current phase last?  What will bring it to a close? 

Of course we don’t know the answers to these questions.  History does tell us that the cycle typically ends with some type of cataclysmic event such as a depression or war or both.  

Perhaps the Boy Scout motto says it best, “Hope for the best and prepare for the worst.” 

Have a great weekend, 

Michael Bechara, CPA

Managing Director

Granite Consulting Group Inc.

mbechara@consultgranite.com

www.consultgranite.com