“Dodge the Government’s Secret 65% Retirement Tax” Taipan

By Travis Johnson, Stock Gumshoe, January 10, 2009

Today I thought we’d also take a look at a recent teaser from Taipan …

Here’s how this delightful little ad begins:

“Urgent Post-Bailout Wealth Protection Alert: How to Dodge the Government’s Secret ‘65% Retirement Tax’

“This safe, easy and 100% LEGAL way to shield your retirement savings from Washington’s ‘hidden tax’ is available now, but only to the select few receiving this letter…”

Since it’s a new year, I should probably dispense with the traditional Stock Gumshoe sarcasm that would force me to mention that the “select few” reading the ad includes the select group of every single email address that Taipan could get their hands on.

And I’ll just mention off the top here, as well, that there is of course some truth to this hyperbole … even if they have to put “retirement tax” in quotes for good reason.

So what’s the reality? Let’s dig in a bit …

The copywriters get us all hot and bothered about the fact that we’re going to lose what little money remains in our retirement accounts …

“… this is a completely hidden – and yet legal – drain on your retirement savings, mandated by the U.S. Government.

“And the worst part is that for the last five years, without fail, this “tax” has increased.

“In fact, at the current rate, over the next five years, you could be in line to shell out as much as 65% of your total retirement portfolio!”

Well, that should have everybody worried just a bit, no? It is a sad sign of the times that so many ads now have to rely on fear — the last six months have taught us how cruelly a portfolio can be treated when you’ve got greed in your heart, so I guess it’s no surprise that they’ve gone to the flip side in marketing their services.

Over the years it has mostly been the promise of wealth that has spurred investors to subscribe to newsletters for great insight or advantage — it seemed for all the world like a base part of human nature, and, to some degree, a reassuring optimism that lies in our hearts.

Is that dead forever? Will greed no longer turn your head and give you the urge to subscribe to a newsletter to find the next breakout idea for great wealth? I wouldn’t count on it — I imagine a few months of licking our wounds, and we’ll be right back in there, looking for great gains … perhaps that’s even part of the reason for the bounceback of the last month or so, a bounce that has coincided with still more bad news, including yesterday’s depressing unemployment report.

But now, apparently, the marketers think that many of us are more worried about protecting what little wealth we may still have. Which is a long way of saying that right now, they’re hoping that fear sells.

So what are they selling?

Well, first they have to get you mad, in case you’re not there already — so they tell you that yes, you’re already paying too much in taxes. And that “Washington” is nefariously keeping this secret tax hidden from you …

“It’s criminal really, and you’ve got every right to be outraged. I know I was when I discovered how much I was losing.

“But here’s the thing: if you do manage to uncover the government’s secret “retirement tax” before it’s too late, you’re STILL not getting the whole story.

“See, they’ll actually lie to you and tell you the tax rate on your retirement account is much less than it truly is!”

OK — so the perspicacious among you might have already guessed what it is we’re talking about here. And even if you haven’t guessed what this “hidden tax” is, you certainly know about it and feel it every day.

The “hidden tax” is simply inflation — the decrease in the value of a dollar as the cost of living increases and the money supply grows. Deflation (which is, of course, the opposite) is what is causing greater panic now, but the chorus of prognosticators who believe that inflation will rampage in the years to come is growing louder every day (and this includes the various fans of investing in gold, some of whom we talked about on Friday).

Are you getting our free Daily Update
"reveal" emails? If not,
just click here...

The argument for inflation is fairly basic: the government and the Federal Reserve are trying with all their might to fight deflation and to prop up a flailing economy. That “trying” comes in the form of money, new money that they’re trying to flood into the marketplace, in the hopes that if there is more money available people will start to actually use it instead of stuffing it into coffee cans in their backyard, or using it to prop up pitiful bank balance sheets.

Why would the government fight deflation so fiercely? Because mild inflation is good for the economy, but even mild deflation can cause nightmares. Most central banks would love to see inflation between one and three percent, and many of them would rather risk high future inflation than get stuck in a deflationary spiral.

Fear and weakness are so strong right now that this flood of money is not inflating the cost of living because it’s not being used — or, more specifically, because it’s not being lent and circulated quickly, which multiplies the effect of new money and is really what increases the money supply and can lead to inflation. But the fear is that the tide may turn sometime soon, and that the huge bailout efforts could lead to more severe inflation.

And of course, the other part of the argument is that, whether or not we see inflation impact the consumer price index like a stiff helium breeze, the government is “lying” about inflation. This is also an old argument, that the regular rejiggering of the Consumer Price Index has led to it significantly underestimating “real” inflation.

I’m not an economist, and I don’t know which side of the argument is right on this one — clearly, the CPI should be adjusted as consumption habits change, so using the “old” CPI formulas from the 1970s or 1980s wouldn’t necessarily tell us anything more “real” than the current formula, but I do hear a lot of respected people who say that the CPI underestimates real inflation by a couple percentage points, on average.

That’s an academic debate that I can’t add to, but the other part of inflation obfuscation that most investors are familiar with is the “core” versus “real” inflation debate, with the argument being that the tendency of the government to use “core” inflation numbers that exclude food and energy prices fails to take into account the real-life importance of those products to every consumer. This is a nice common-sense argument, since any pundit can get on TV and yell at the economists that “Hey, when was the last time you spent a day without driving or eating!” — but of course, the fact that it sounds silly to look at “core” numbers doesn’t mean that it is.

And the argument that the government is using “core” inflation numbers to hide the massive impact of food and fuel inflation is taking a bit of a haircut itself, lately. Early this year, when grain and energy prices were shooting through the roof, along with most commodities, the “core” CPI that excluded food and energy, and that is usually used by the Fed for their calculations, was indeed much lower than the “real” CPI that included gasoline and food.

Now, of course, with deflation hitting energy prices very hard, the “core” CPI is actually higher than the “real” CPI. Not that it necessarily matters to people who are most paranoid about inflation, since the actual CPI, including everything that the Bureau of Labor Statistics thinks urban consumers buy, is what is used for every official government program, like Social Security cost of living adjustments, or Treasury Inflation Protected Securities (TIPS).

If Taipan is right about their estimates, they’ll tell you that inflation might add up to that 65% rise over five years, which would be almost as bad as five years of the worst inflation we’ve had in the last hundred years. The CPI, if you’re willing to accept that historical benchmark, has been kept since the early 1900s, and only twice has it recorded consecutive years with double-digit inflation (1917-1920, and 1979-1981). That’s not to say there haven’t been other eras or years with inflation that’s high enough to be damaging, or that the coming years couldn’t be highly inflationary, but 65% over five years would be close to as bad as it’s ever been.

So anyway … head spinning yet? What does Taipan urge us to do about this under-reported inflation problem that they believe will eat up the buying power of your retirement savings in the years ahead?

I thought you’d never ask! They want you to subscribe to their newsletter first, of course, and then to invest in their top inflation-fighting ideas. We’ve heard inflation fighting stock picks in the past, of course, everything from fertilizer to high dividends to TIPS to gold to growth stocks … what does Taipan have for us?

I’ll have to throw myself on the mercy of the Gumshoe faithful to see if anyone has some better ideas for these, since the clues are thin, but here’s what they tease:

“Defense Shield Action #1: This low-debt natural gas company is one of the primary LNG producers in the Rockies and Gulf Coast regions. They hold the rights to vast supplies of untapped reserves. With the value of these reserves increasing quickly, their value is set to appreciate at the same time.”

I’m not sure quite what to think of this one — you wouldn’t usually consider a gas producer in the Gulf Coast or in the Rockies to be an “LNG producer”, since LNG is typically used for shipping gas overseas (or, in our case, importing gas from overseas, since there’s only one authorized LNG export terminal in the US). On the other hand, there are also very few major natural gas producers that could be described as “low debt” — not all of them have the crippling debt load of an El Paso, to be sure, but the big players like Chesapeake, XTO, etc all carry what I would consider to be a heavy debt burden.

So I’ll throw out a wild guess on this one: Chevron (CVX). They’re in the Rockies and in the Gulf, they produce a lot of gas (in addition to crude oil), and they’re a low-debt large integrated oil and gas company. I have no idea whether or not CVX is what Taipan wants to steer you toward, but you could do worse if you’re looking for a way to counteract the possible inflationary impact of higher energy prices in the future. Of course, if energy prices resume their free fall Chevron will probably not be an ideal investment … and the latest news on them is not all that promising, they just last week warned that their fourth quarter would be worse than expected.

Do they provide any actual clues for the next one?

“Defense Shield Action #2: With the recent election of Barack Obama to the White House, alternative energy companies are set to enter a boom period. This company provides materials, products and processes to this emerging sector and has seen its revenue grow by over 100% in the last three quarters.”

Hmmm … doesn’t anyone believe in providing juicy clues anymore? I’m starting to think they’re worried about the lil’ ‘ol Gumshoe.

It’s no fun to begin the year by throwing around guesses, but one possibility for this one is Energy Conversion Devices (ENER), which, depending on which quarter you started with for that clue, could have doubled its sales over three quarters (it has certainly done better than doubling them over the most recent fiscal years). Their two main business segments are photovoltaics and advanced batteries, so they could touch on most of the appealing alternative energy generation technologies, and they do use that catch-all phrase when they say of themselves that they supply “materials, products and processes” for alternative energy.

ENER’s popularity among investors stems from their “Ovonics” division that works on batteries, fuel cells, and almost anything else you could imagine for alternative energy research and development. That, and analysts think they’re going to grow their earnings mightily in the next couple years ($1.57 in the current year, which ends in June, and $2.82 the following year), which gives them a forward PE of 10 if you’re an optimist, and a very low PEG ratio (.37). Of course, those are estimates — the trailing PE, which is, of course, the only one that uses real numbers, is closer to 50. But the company has just recently become profitable, and it is growing quickly. I don’t know that this is closely tied to inflation fighting, but it may well benefit from alternative energy investment, and having a stock with fast earnings growth is always helpful in an inflationary environment.

Anyway, that’s enough wild guessing for one weekend — let’s open this up, these are the other “clues” they provide, and I haven’t yet come up with a definitive answer for any of them:

“Defense Shield Action #3: As the markets tank and layoffs abound, many Americans are looking for a second income. This company specializes in helping people start their own “second business” and you have the opportunity to own a piece of the next Amway or Quickstar by purchasing the stock. You’ll get to benefit directly from the cash flow they take in!”

This could be anything from from Avon Products (AVP) to Herbalife (HLF), and could possibly even include companies like Valueclick (VCLK) or Google (GOOG). I have no idea which one they might like, but my first guess would be HLF — that’s the sexy one in this bunch, though it’s certainly ridden a roller coaster in recent years.

“Defense Shield Action #5: With energy costs still back-breaking, consumers and communities are looking for alternative power sources. This company is ready to capitalize as one of the most respected sources of perhaps the most viable new energy option. Their long term potential is HUGE!”

Again, with a limited clue like that we could probably be dealing with dozens of companies — if we thought the “most respected” was geothermal, they might be teasing Raser Technologies (RZ) or Ormat (ORA); if Solar it might be SunPower (SPWR) or Suntech Power (STP) or First Solar (FSLR), in wind we’d probably be looking at FPL (FPL) or Vestas (VWDRY) or possibly a few others; if it’s something a little more off the beaten path it could be someone like Finavera Renewables in tidal/marine energy. All wild guesses.

So that’s enough wild guessing for one weekend … your turn!

If you thought that inflation would climb dramatically in the years ahead (real, fake, or hidden inflation, your choice), what would you do with your money today? Personally, I’m not so crazy about government bonds now, even TIPS — but off the top of my head, I might think about increasing my gold and silver holdings a bit, and holding a diversified portfolio of solid companies with growing businesses or pricing power … or perhaps shorting Treasury Bonds or other debt instruments (which can be awfully risky, even at these low prices).

Share your thoughts, if you’ve any to spare on a lovely weekend, with a comment below.

full disclosure: I do own shares of Google, and some physical gold and silver. I do not own any other investment mentioned above.