Mountain Vision
April 19, 2012
Mountain Vision


"The budget should be balanced, the Treasury should be refilled, public debt should be reduced, the arrogance of officialdom should be tempered and controlled, and the assistance to foreign lands should be curtailed lest Rome become bankrupt. People must again learn to work, instead of living on public assistance."
~ Marcus Tullius Cicero

Dear Mountaineers,

Over the past two weeks, our Investment Committee and extended Advisory Board have been focused on our Big Picture Review, working hard at formulating our outlook and its investment implications for the coming months and years.

As many of our Mountaineers and clients know by now, we conduct a thorough Big Picture Review three times a year, approximately every four months. Generally, the central deliverable of that process is a concise overview of the most probable Big Picture scenarios as well as specific allocation recommendation in the event of each scenario. This time, and for the first time ever, we have endeavored to prepare a detailed and extensive research paper for the clients of BFI Wealth Management.

In today´s Update, I will share an excerpt of our scenario analysis and the key investment conclusions for your perusal, hopeful that it may provide some guidance for some of the potential challenges ahead, and that you will be able to better formulate and implement your wealth planning and investment strategy as a result.

Special Big Picture Review Report - limited number available to Mountaineers

We are witnessing an economic and political period that is best characterized as highly unstable and uncertain. In particular, the risks and implications of the ongoing debt crisis in some of the major economic regions are severe and imminent enough to be given our serious attention. Meanwhile, the picture painted by official data and the mainstream media is, in general, a very positive one. This creates a convoluted mix of information that is confusing at best, treacherous at worst.

In this context, and based on the Big Picture Review conducted by BFI Wealth Management, we have just completed a detailed research paper that discusses our main considerations and conclusions, including our strategic asset allocation recommendations for the coming months and years. This special report will go out to most of our clients by post next week. Furthermore, we will be handing out a limited number at the Casey Research Recovery Reality Check Summit in Weston, Florida, where I have been invited to speak next week.

If you too would like a copy of the report, please send us a short request at the link provided below. We´ll keep your inquiries and send out any residual copies available to our Mountain Vision subscribers on a first-come-first-serve basis.

>> Order a free copy of the BFI Big Picture Review Report

The first quarter of 2012 has been one characterized by a substantial rally in financial markets. Around the world, stock markets have moved up considerably. Japan´s Nikkei led the pack of OECD nations with a rise of 20.7%, followed closely by the German DAX at 18.7%. With few exceptions, a double digit rise in stocks has improved the overall sentiments of investors.

Promising economic indicators have been reported by the US economy. Improving unemployment numbers and less negative - albeit still very moderate - growth rates have put a silver lining on the horizon of global investors. Investor sentiment was further improved by the perception that European politicians and central bankers have taken appropriate measures to stabilize the European debt crisis.

Consequently, after the high volatility experienced in 2011, financial markets became relatively ‘calm´ during the last few months. However, it is important to remember that, fundamentally, nothing has changed. The core issues of excessive debt and deficits are still the dominant themes and key drivers today.

I can scarcely contemplate a greater calamity that could befall this country, than be loaded with a debt exceeding their ability ever to discharge. If this be a just remark, it is unwise and improvident to vest in the general government a power to borrow at discretion, without any limitation or restriction. ~ Brutus

In planning your wealth management strategy, from both a structural as well an asset allocation point of view, you must first and foremost consider the following questions:

(1) What can be done to reduce public debt levels?
(2) What is the likelihood of those measures being employed by politicians and central bankers?
(3) How probable is the successful deployment of such measures? In other words, is a meaningful and sustainable debt reduction possible?
(4) What are the critical implications for your wealth planning and asset allocation decisions? Which investments and asset classes should you have? Which should you avoid?
These are the questions we have addressed and discussed intensively over the past few days and weeks. These discussions have flown into the aforementioned special report, which is in final editing and headed for printing at the end of the week.

Truthfully, the more you learn and analyze, the more you are frequently humbled by the monstrosity of your ignorance. Yet, as investors -- and as investment managers in particular -- we must ultimately formulate an actionable plan. This will, ultimately, be possible only with a certain level of simplification and generalization. Being well aware of this, we regularly endeavor to formulate and adjust our big picture scenarios.

The following figure summarizes the results of our latest Big Picture Review, and the Big Picture Scenarios we employing for our top down investment allocation decisions as of April 2012.

Figure 1: Big Picture Scenarios

Source: BFI Wealth Management; BFI MAPTM Big Picture Review April 2012

1.3.1 Scenario 1: Financial Market Stabilization
Scenario 1 has been largely represented by the developments during the first quarter of 2012. Internationally concerted fiscal and monetary measures have succeeded at stabilizing the debt crisis and financial markets to some degree. Investor sentiment has improved and, as discussed above, stock markets have rallied substantially.

Currently, the debt crisis in Europe is referred to in past tense. Hopes of recovery are growing, supported by reports of positive economic indicators and statistics.

In this Scenario, assuming it was to continue, government measures will be implemented without leading to rising inflation. Consequently, governments will be able to keep interests rates at low (if not negative) to moderate levels in most countries. This again, will further support recovery expectations.

Obviously, this Scenario is the most optimistic of the four Scenarios presented. Ideally, the recovery story will be kept alive, becoming a self-fulfilling prophecy resulting in improved economic growth and prosperity in OECD countries, irrespective of debt and deficit related issues, for an extended period.

1.3.2 Scenario 2: Reflationary Debt Trap
In our view, the world is currently slipping into the mode of Scenario 2. Thus, the hopes fostered in Scenario 1 are thus disappointed by the fact that OECD debt reduction measures do not lead to a sustained stabilization. To the contrary, public debts and deficits remain a problem in Europe, the US, the UK and Japan; financing costs weigh heavy and lead to economic stagnation - this slows down emerging economies too.

The lack of economic growth in Western economies acts as a contagion in emerging markets. While a number of smaller economies may default with the result of temporary bouts of financial market volatility, reflationary measures repeatedly avoid a severe crash in financial markets. US-style monetary policies such as quantitative easing and debt monetization, combined with financial repression and, at least in Europe, attempts of austerity, result in an uncertain mix of deflationary and inflationary pressures.

It is important to note here that stocks can be a good investment in times of rising inflation. But history shows that stocks tend to perform well in times of low to moderate inflation - inflation rates below 4% - and again in times of hyperinflation. If the inflation rate is between moderate inflation and hyperinflation, however, the discount rate for future earnings starts to increase faster than earnings can grow and stocks tend to show negative returns in such an environment.

There is no means of avoiding the fiscal collapse of a boom brought about by credit (debt) expansion. The alternative is only whether the crisis should come sooner as the result of a voluntary abandonment or further credit (debt) expansion, or later as a final and total catastrophe of the currency system involved. ~ Ludwig von Mises

Ultimately, the result is a muddle-through economy in OECD economies, characterized by an extended sequence of rolling recessions and quasi-recoveries. Globally, weak to moderate growth entices governments to keep interest rates low and stimulate growth with liquidity. However, rising price inflation creates a policy dilemma - a debt trap.

In the context of this debt trap (Scenario 2), the danger and primary concern for investors is that a quick transition into a deflationary recession (Scenario 3) and/or an inflationary collapse (Scenario 4) may occur at any time.

1.3.3 Scenario 3: Deflationary Recession
A transition into the deflationary recession of Scenario 3 could be triggered by a host of developments originating in Scenario 2. Historically, it has become clear that the interventions of central banks and governments are not as precise and calculable as they want to make us believe.

A sudden rise in inflation rates may entice governments to raise interest rates too quickly. Or, a sequence of sovereign defaults may destroy the trust in government´s ability to achieve a soft landing in the aftermath of the debt crisis. Whatever triggers a transition into Scenario 3, it will lead to an escalation of sovereign debt issues and result in a global economic and financial recession or even depression.

Governments and central bank can be expected to resort to aggressive intervention measures. However, the deflationary forces dominate and result in a period of low to negative growth rates, price deflation and accelerated de-leveraging.

Overall, the events to be expected in Scenario 3 would be comparable to the period of 2007 to 2009: a severe bank and credit crisis pushes financial markets into ‘crash mode´; the current global banking and fiat-currency system is on trial. System-relevant sovereign and corporate defaults will lead to further contraction in OECD economies and seriously slow down growth in emerging economies. Bailouts of banks, corporations and sovereign debtors are realized via measures of severe financial repression and stark inflation.

1.3.4 Scenario 4: Inflationary Collapse
Scenario 4 may be triggered from the constellation of Scenario 2, the Reflationary Debt Trap, as well as Scenario 3, the Deflationary Recession, depending on how things unfold.

As discussed in our expectations of most likely government measures, we expect inflation, next to financial repression, to be the primary policy of choice. Price inflation is well known for its potential of springing up suddenly. At some point, controlling inflation may become difficult. As governments are torn between fighting the prospect of rising inflation versus the danger of negative growth and deflation, they may inflate too aggressively.

As a result, the mix of expansionary money supply, artificially low interest rates and excessive bailout measures, at some point may transform into visible price inflation, thus raising inflation expectations. This will lead to abrupt bouts of high price inflation and possibly even hyper-inflation in some countries.

The lack of money velocity is compensated via increasingly aggressive money supply growth. In this scenario, consequently, global banking and fiat currency systems fail. Capital and financial markets experience disorder. Leading world currencies of primary debtor nations (US dollar, Euro, Japanese Yen, UK Sterling) are candidates for rapid and stark depreciation or collapse.

On the bright side, this scenario may in fact pave the way for real and meaningful system adjustments. Policy changes and improvements toward sound money and government accountability may become an option. The return to a gold-backed currency system may be forced upon governments by voters who are no longer willing to entrust the state with the complete power of money.

In order to employ these scenarios for the purpose of our investment decisions, we estimate how probable they are on a time line of 3 to 24 months. The following figure summarizes our estimate in this regard.

Currently, we are concerned that the world economy is at the brink of slipping into the territory of Scenario 2. We do not think that the recovery story of Scenario 1 will hold up much longer. In fact, over the next 12 months, we consider Scenario 2 as the most probable. Depending on how things evolve, we currently give a higher probability of slipping into a deflationary recession (Scenario 3) within 24 months.

However, in the longer-term, i.e. 24 months or more, the danger of a high inflation, or even hyper-inflation in some economies, exists. We give that scenario a moderate probability in about two years. Currently, we are not concerned about high inflation quite yet, since strong deflationary pressures still exist.

Figure 2: Scenario probabilities and time horizons

Source: BFI Wealth Management; BFI MAPTM Big Picture Review April 2012

Depending on which scenario materializes, the most suitable asset classes and investments will differ. As summarized in the following figure, certain asset classes will do better than others in some Scenarios. Some will perform well in only one or two of the Scenarios. Others again will do well or even excel in all of the Scenarios. In our view, those asset classes include gold, silver and commodities.

Figure 3: Suitable asset classes and preferable allocations

Source: BFI Wealth Management; BFI MAPTM Big Picture Review April 2012

As you will surely appreciate, every summary will bear the flaw of being incomplete and inaccurate. I am well aware of that. Nevertheless, as we know from Leonardo Da Vinci, "Simplicity is the ultimate sophistication".

With this in mind, I hope that we have provided you with some guidance. If you have questions or would like to have a more complete discussion on the above, please feel free to get in touch with us at our offices in Switzerland.

Your "Swiss Mountain Guide"

Frank R. Suess


September 20th to 23rd, 2012, Vancouver: the first-ever International Wealth & Health Management Symposium

For the first time, BFI and the Mountain Vision team will be partnering up with a number of friends and experts to hold an extended conference taking place in Vancouver, Canada, covering timely and important topics related to both wealth and health.

More detailed information will be forthcoming in the next few weeks on this unique event, tentatively titled the International Wealth & Health Management Symposium, but you should definitely save the dates. We´ll get the details to you as soon as we can.

The practical aspects of international wealth management, including guidance on the latest immigration, asset protection and jurisdictional diversification strategies, will certainly be shared. The Symposium will provide a great opportunity for you to meet not only the BFI team in person, but also with a wider range of speakers...more than we have ever included in one of our events before.

We´ve chosen Vancouver for this event as it´s easy to get to from North America, yet still has plenty of direct flights from Europe and Asia. Vancouver is beautiful in the fall, so you might want to add on a couple of extra days for a well-deserved break of your own.

Be sure to review our upcoming Updates and Alerts closely for further details. Drop a note via the link at the end of this section and we will be sure to put you on the ‘interested-parties´ list.

September 10th to September 19th, 2012: Inner Circle Briefings in the US West Coast

For Mountaineers, clients and friends of BFI that are interested in a somewhat more intimate setting to meet with the BFI Team, we´ll be holding a series of half-day Inner Circle Briefings from September 10th to September 19th.

In this context, the BFI Wealth Management Team, including Frank Suess and Dirk Steinhoff, plus a variety of special guests and keynote speakers will be traveling through Texas and the west coast with stops in Austin, TX, on September 10th, Santa Barbara, CA, on September 15th, and San Francisco on September 18th. The possibility remains that one more city could be added.

These Briefings will be half-day events, with coffee breaks, a cocktail reception, and handouts/copies of the presentations included. Attendance to these Briefings will be limited and a registration fee of a flat $149 per person will apply for attendance to the program.

If you have questions regarding the Briefings or the Symposium, please contact Scott Schamber at, or drop a note via the link provided here.

>> Request details on Vancouver conference and / or BFI Inner Circle Road Show, Sep. 2012

Swiss Can´t Offer Any More to the US or Germany
Resistance is finally starting to build up in Switzerland. The people, and an increasing number of politicians, appear fed up with the treatment afforded by large bankrupt countries.

"Switzerland cannot make further concessions to Germany and the United States in a dispute over untaxed funds in secret bank accounts", Swiss Finance Minister Eveline Widmer-Schlumpf was quoted as saying in a newspaper interview last Friday. Widmer-Schlumpf also said France and Italy were likely to be watching developments between Bern and Berlin before themselves seeking agreements to claw back taxes.

"With Germany we´re at a point at which we say, if the partner doesn´t want this agreement then the status quo is the better alternative for us than to negotiate still further," she told the Neue Zuercher Zeitung. "Also in the talks with the USA there´s a threshold beyond which we cannot go as a sovereign state."
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The US Tax Season Pushes More to Renounce Their US Citizenship than Ever Before
In light of the fact that many Americans needed to file their taxes this week, Reuters published this very apropos article on the record number of people that have renounced their US citizenship or given up their Green Cards this past year. Many have done so for tax reasons.

For those wishing to legally escape the filing requirements in the US, the only way is to formally renounce their U.S. citizenship. Last year, IRS records show that at least 1,788 people did, and that´s likely an underestimate.
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Obamacare Estimated to Add Substantially to US Deficit
Debt reduction should be high on all governments´ agendas. In Europe, a mix of austerity, financial repression and some inflation is the chosen mode. Meanwhile, in America the top choices are inflation and financial repression. Austerity is not on the agenda...not really:

President Obama´s landmark health-care initiative, long touted as a means to control costs, will actually add more than $340 billion to the nation´s budget woes over the next decade, according to a new study by a Republican member of the board that oversees Medicare financing.
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It´s Time to Get Out of Bonds, says Fuss
This is an important and frank message from Mr. Fuss, vice chairman of Loomis Sayles & Co. and manager of the $21.2 billion Loomis Sayles Bond Fund (LSBRX): "We´re in the foothills of a gradual rise in interest rates. Once they start to rise, you´re probably looking at a 20- or 30-year secular trend of rising interest rates. When interest rates go up, the value of existing bonds drops as new bonds are issued at the higher rates."

"The unemployment rate is going to be the main factor in when the Federal Reserve Bank starts to raise interest rates in earnest", Mr. Fuss said. "If the unemployment rate falls to between 6% and 7%, it´s likely that the Fed will stop buying up two-year Treasury notes and 30-year Treasury bonds, which has been keeping the interest rate on the 10-year Treasury bill artificially low. Once that happens, you need to get out of the market risk that´s in fixed-income..."
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Jimmy Rogers Getting Ready to Buy More Gold and Silver
Jimmy Rogers, chairman of Rogers Holdings, said that he is getting ready to buy more gold and silver: "I expect the price to decline and when that happens I will buy more."

We agree. The long-term bull market is fully intact. Those who don´t have any gold and silver yet should consider entering now. Economic fundamentals globally paint a clear picture: as governments use all kinds of debt reduction measures, ranging from monetary inflation to austerity, gold and silver will benefit in the medium to long term.
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The World´s Biggest Currency Rally
The Columbian peso has strengthened 9.2 percent this year to 1,775.5 per dollar, more than all 171 currencies tracked by Bloomberg and compared with a 1.3 percent gain for Brazil´s real.

Colombian Finance Minister Juan Carlos Echeverry said he is studying ways to stem a rally by the peso this year that has outstripped gains by every other currency. Colombia should use a "diverse set of instruments" to halt the gains, protect jobs and help bring the unemployment rate below 9.0 percent by the end of the year, he said, without specifying what steps the government may take.

"My first task is to maintain Colombian jobs," Echeverry said April 13th in an interview in Cartagena, where he was attending a meeting of business leaders at the Summit of the Americas. "If the exchange rate stays too strong for too long then definitely I´m worried. Definitely, I think we can do more."
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Senate Bill 1813 - Forget Travel If You Owe the IRS!
A tax law quietly proposed a few months ago raises concerns. Senate Bill 1813, if ratified, would give the IRS the power to revoke an American´s passport. An amendment was tacked onto a Federal highway construction bill. Senate Bill 1813, proposed by Democratic Senator Barbara Boxer, includes an amendment that would prevent any American citizen from leaving the country based upon a determination by the IRS that you owe the government back taxes.

If the United States passes this bill, it will join the ranks of countries like Cuba and North Korea, where citizens are provided with passports on a very restrictive basis, and where passports can be withdrawn at the state´s discretion at any time.

What is happening to the land of the free?!?! Even in Europe, where rules and regulations traditionally had been more restrictive in some respects, people are starting to wonder about the US. Clearly, America is not what it used to be. The ‘land of the free´ is but a washed up slogan from the past. We wonder: do Americans notice too?
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French-Style Debt Reduction Efforts...

© Copyright 2012, by BFI Capital Group AG, Bahnhofstrasse 29, 6300 Zug, Switzerland, website: The MOUNTAIN VISION UPDATE is published by BFI Capital Group (‘BFI’). Quotation is allowed if credit is given. Although every care has been taken in the preparation of Mountain Vision, BFI does not guarantee and cannot be held responsible for the accuracy of any statistic, statement or representation made. We recommend that you consult qualified professional advisors to determine the applicability of this information and opinion. The publisher is not a registered investment advisor. Readers should not view MOUNTAIN VISION as offering personalized legal or investment advice.
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