Tuesday, June 7, 2011



After observing our elected officials this past session, one can confirm that people should stop being taxpayers in Hawaii. A good example of "kicking the can down the road" for future government officials to solve.


At any social gathering, you're sure to find someone who is receiving a State or County Retirement System pension and obtaining free Part B medical reimbursement as well as Part D benefits. Ask them what they think the solution to the state's insolvency problem is. In my experience, every one of those who were asked the question went into a tirade about how they were underpaid and took government jobs because these benefits were a part of the package promised.

When asked how, since the pension fund and the medical fund are both bankrupt, do they think the government will come up with the money, the reply is always to tax the rich and the businesses. Therefore, if your replies are the same as mine, then they plan to go after your money if you invest it here in Hawaii. They will further get your money if you remain a Hawaii taxpayer.

Hawaii's excise tax is unique in that it taxes an investor's or business' cash flow. It is not a tax on profits. So if you lose money in your investment or business, but have cash flow, you still must pay this tax. If you have rental property in Hawaii, then you must pay excise taxes on the gross rental income.

We have examined the different types of investments that people would consider and if real estate is your choice because you want to hedge against inflation, then you ought to invest in property outside of Hawaii because the excise tax will drive your investment into insolvency. Better yet, you may want to buy into a Real Estate Investment Trust, which is a mutual fund that invests in real estate. The fund itself pays excise taxes if they're dumb enough to invest in Hawaii property, but in general, you would be free of the excise tax.

If you owned the out-of-state rental properties directly and lived in Hawaii, the Hawaii tax collectors will still go after you for this excise tax. They get you if the property is located in Hawaii and if it's not, they will tax you on the cash flow if you're a Hawaii taxpayer.

The U.S. is in the second phase of printing vast amounts of currency. It's called QE2. For those of you who went to private school, the following link explains everything.



If you believe that your currency will go down in value, then you could invest in energy mutual funds. Or, perhaps into International Funds that invest in companies operating in foreign countries. When doing so, you're investing in both the profitability of the company and the movement of the U.S. currency.

Kupunas need to be more conservative because they're past their productive life. Most invest their funds in investment grade 10 year bonds. When interest rates go down, bond prices go up. Similarly, when interest rates go up, bond prices come down. If inflation looms, then the government has to raise interest rates to stifle inflation. Well, inflation is here, but the government has chosen to redefined what is taken into account when they calculate the inflation rate. Thus, they've determined that we have no inflation even though food, housing and consumer prices keep going up and they're able to do it by simply redefining what inflation is. Their reason is that if interest rates go up, they too, must pay higher interests to those who bought government bonds. On $14 trillion of debt, the interest costs will exceed the operating cost of the government.

For the short term, those who own intermediate term bond funds can cover themselves by buying more shares with each monthly interest payment when bond prices go down. When bond prices rise, they'll buy fewer shares, but, they can sell the shares at a higher price.

Each summer, stock prices generally go down until after Labor Day. Most investors take the summer off. It's generally a good opportunity to reallocate one's portfolio at this time because if one plans to buy more stocks, you'll do so when prices are low.

Too complicated? O.K. For those who went to Punahou or Iolani, here's a simple way to lower your risks and increase your returns. If you have a mortgage where the interest rate is at 5% and you have a bank account where they pay you 1/4 of 1%, you would increase your returns by 2000% by paying down your mortgage. So if you put $500 a month into your bank account, use that money to pay an extra $500 towards your mortgage instead, and you'll be saving the 5% interest on that $500.

I've had lots of people upset with me for recommending that investors take their investments out of Hawaii. Words like "traitor" are used frequently when I go further and suggest that investors think about investments in foreign companies.

We all agree, though, that taking investment money out of Hawaii will further spiral the State into insolvency. But if investing in Hawaii is a losing proposition, then unless your goal is to lose your investment capital, then you'd better invest elsewhere.

We cannot control what our government does. We know that they are not truthful. What we can control is how we react to them and their policies.

My money loves Hawaii and this country. Hawaii and the country doesn't love my money.

Uh, oh! I stole that somewhere.

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