Mountain Vision
Dec 22, 2011
Mountain Vision
BIG PICTURE SCENARIOS FOR 2012; MOST PROBABLY, A "DEFLATIONARY DEBT TRAP"

The four most expensive words in the English language are, "This time it´s different."

~ Sir John Templeton

Dear Mountaineers,
Sir John knew what he was talking about. Every excessive boom in financial markets, whether it´s an entire asset class or an individual stock, appears to share this common and historically repetitive characteristic. People know of imbalances. They know that under the given circumstances people will get burned. Yet they get caught up in the belief that this time things will be different, that a recovery is right around the corner, that governments will be able to turn things around, and that the good times will be back soon.

Unfortunately, this time will NOT be different. As the year 2011 is rapidly and irresistibly nearing its end, despite all the volatility, turmoil and challenges the year held in store for us, I feel urged to look forward and share a summary outlook of what might be headed in our direction in 2012.

As to not keep you from joining your families for the more important matters of Christmas and the holidays, I will try to make it very short and provide you with an overview of our current ‘Big Picture Scenarios´, which we define on a regular basis as part of our four-monthly BFI MAPTM Big Picture Review. This review, and the scenario analysis that goes with it, is a key ingredient to our portfolio management´s top-down asset allocation process.

In today´s commentary, I´ll provide you with an overview and brief description of how we employ these scenarios in our allocation model. These scenarios and their implications will be a core topic at our upcoming BFI Inner Circle Briefing in the Bahamas. In particular, Dirk Steinhoff, BFI´s Chief Investment Officer, will be honing in on this in his presentation titled ‘Structuring your portfolio for the challenges of 2012 and beyond´.

I´m hopeful that this summary overview will give you some food for thought as we head into 2012. And, I look forward to discussing more of it as we enter into the New Year. I do think it is paramount that you not be fooled by the mainstream media ‘sedation chimes´. This time will NOT be different. In fact, it may well be a lot worse.

BFI MAPTM Big Picture Scenarios
The following image provides you with a summary overview of our Big Picture Scenarios developed as part of our latest Big Picture Review in November, 2011. This is a summary of the scenarios and a reflection of our expectations on the possible economic, financial and geo-political developments over the next 3 to 24 months.

This summary overview does not purvey our more differentiated conclusions and considerations with regard to the various global regions (US, Europe, BRICS, etc.). That would go beyond the scope and scale of this Update. Although those differences are important to consider, we are also of the opinion that the global economy has become sufficiently inter-linked to work with global scenarios that summarize our expectations of the core themes and developments, which will ultimately affect all regions. That said, I do admit that the scenarios, based on the continued (albeit retracting) economic dominant influence of Western economies, are focused on Europe and America, particular in terms of the scenarios titles we have selected.

BFI MAPTM Big Picture Scenarios (Big Picture Review November, 2011):


The scenarios we have defined are the scenarios that we consider most possible in consideration of all the factors and trends we are aware of. Obviously, no single scenario will be completely accurate and reflect the global economy entirely. They do, however, provide us with a structure to ‘play around´ with different hypotheses and, based on our time horizon and probability expectations (see below), develop BFI´s asset allocation models and investment strategies.

Scenario Probabilities and Suitable Asset Classes (Big Picture Review November, 2011):


Source: BFI Wealth Management Inc.; Big Picture Review November 2011

Most Probable Scenario: The Deflationary "Debt Trap"
As you will have recognized above, we consider Scenario 2 as the most probable outlook over the next 3 to 12 months. This Deflationary "Debt Trap" could be best described as a roller-coaster ride of hope-and-disillusion. Governments around the world, at times in sync, at times in controversy, can be expected to protect and defend the status quo of our global fiat-currency and banking system. In order to do that, true to the monetary QE template of the US Federal Reserve, Europe too can be expected to open up the money sluices and bank credit lines.

While this, at first sight, might conjure images of rapidly rising inflation, we consider the current deflationary pressures and patterns of de-leveraging as strong enough to, at least in the West, keep inflation relatively low, despite the accelerated monetary expansion and low to negative interest rates. A core theme and objective for governments will be to save the banks and avoid a financial system collapse, one that would be much larger in scope and scale than what we experienced in 2008.

All this will result, at best, in a sideways-up-and-down movement of financial markets, and to an economic environment in the West that is very comparable to what Japan has experienced for many years now.

Obviously, the governments, banks, stock markets and indeed most market commentators continue to be hopeful that this kind of government intervention may somehow get us back into a more positive economic landscape, one reflected in Scenario 1, a "Reflationary Stabilization". However, we expect that scenario to be a short-term and temporary scenario at best.

To the contrary, we are concerned that a multitude of events and potentially aggregated factors, ranging from war in the Middle East, to social unrest in China, to an accelerated bank meltdown in Europe, may instead abruptly push us into Scenario 3, "The Greater Depression".

The Trillion Dollar question is this: How long can central banks and governments postpone the arrival of Scenario 3? Or, may they even be able to avoid it? As you see from our expectations, we think the days are numbered and NO, they won´t be able to avoid it.

Scenario 3 is currently not our most probable scenario for 2012, because we believe that both Europe and America still have considerable monetary ‘firing power´ left. Also, those European politicians and central bankers that have been pushing for a path of austerity to fix Europe´s problems are losing ground. And, globally, the willingness for concerted intervention is still dominant.

We have also included Scenario 4, a "Hyperinflationary Collapse" in our considerations. Although we currently, over the next 24 months, consider this scenario as largely improbable, history teaches us that inflationary bouts can enter the scene harshly and suddenly. By the time high inflation becomes visible it is generally too late for moderate measures, and the gap toward super- or even hyper-inflation tends to be short and narrow, very difficult to ‘manage´.

How to structure your portfolio and why gold continues to be crucial
As you´ve now seen in the included images, as part of our scenario analysis, we also determine the most suitable asset classes for each scenario. This is the starting point for our portfolio management team´s strategic and tactical asset allocations and investment decisions.

What you will notice is that gold appears as a suitable asset class across all scenarios. I continue to hold a lot of gold, personally. And, we continue to hold an allocation of approximately 20% to 25% of gold in our core strategy, the BFI ProtectorTM. Regularly, I am asked why we consider gold a good investment even though we expect a largely deflationary environment. The answer is a question: What was the environment we´ve been in over the past decade? And how has gold performed during that decade? You know the answer to both questions...I rest my case.

Gold needs to be part of your portfolio. It´s not a mere investment though. It´s a hedge against the monetary and fiscal madness that will, most probably, be with us for a long time. We don´t expect this to change anytime soon. Consequently, we don´t expect gold to lose its protective and profitable character anytime soon.

What needs to be said here, and as a disclaimer for all Mountaineers, is that the process of asset management in this environment is one that needs to be active and alert. While a long-term perspective and top-down foundation is important, you should not construe that to suggest a passive buy-and-hold management approach. As part of our management, we very actively include a variety of risk management techniques and do adjust our allocations and exposures continuously.

All that said, you may ask yourself whether this works for us and our clients. Below, I´m sharing the net performance track record for our core strategy, the BFI ProtectorTM. You can decide for yourself.

BFI ProtectorTM (USD) as per November 30th 2011


Merry Christmas and Happy New Year!
Contrary to my initial intention, and as so often, my commentary has turned out quite long. I will AGAIN and RELENTLESSLY try to work on that vice in 2012. Now, however, I will shut up and, in the name of the BFI and Mountain Vision Team, simply wish you a blessed and cozy Christmas Season with your loved ones.

We´ve spent all this year talking about economics, geo-politics and investments. I would like to leave you with a quote by Henry David Thoreau: Goodness is the only investment that never fails.

Sincerely,

Your "Swiss Mountain Guide"
Frank R. Suess



TWO "BACK DOOR" WAYS TO A SWISS BANK ACCOUNT

Can Americans still open Swiss bank accounts? Of course. Based on BFI´s status as a registered investment advisor and Swiss portfolio manager, we are able to help our US clients to a variety of first-class private banking services. It is in this context that we are including the following article by Kevin Brekke, one of our good friends at International Man, an online publication that has its roots in the book of the same name first published in 1978 by best-selling author, speculator and renowned world-traveler, Doug Casey.

In his article, Kevin points out that Switzerland is still a solid jurisdiction in which to store assets overseas (despite UBS and, to a lesser degree, Credit Suisse´s best efforts to tarnish this reputation.) However, it is also true that things are changing... Swiss privacy, while not dead, is definitely on life support. And indeed, the new irresponsible and ill-conceived FATCA regulations slated to take effect in 2014 will have long-lasting effects on how the country´s banks do business with US citizens (and how foreigners invest in the US for that matter).

It is those regulations that have made it virtually impossible for US passport holders to set up an account in Switzerland... but virtually impossible does not mean completely impossible.

Kevin points out two ways in which Americans CAN still access the wealth of knowledge, talent, security and stability that is the Swiss financial system...

Two "Back Door" Ways to a Swiss Bank Account
By Kevin Brekke

It is likely very clear to members of International Man that most Western Nations are in a dire financial situation and desperately reaching for tax revenue. Nowhere is this more visible than in the European Union - where the end game of socialism is playing out - and the United States, where the bill for entitlement promises of past administrations has now come due.

The urgency to ensure that a country´s residents are paying their tribute to the government has extended beyond squeezing the citizens that earn their income and hold their wealth inside a country´s borders. The electronic ease with which money can be transferred and the availability of international investment options has attracted a large (and growing) group of investors to seek offshore locales to hold assets.

This makes those bloated high-tax bureaucracies of the West nervous, none more so than the United States, which is waging war on the so-called "havens" - with unfortunate consequences for those wisely looking to move their assets overseas.

And there is no bigger haven than Switzerland
In fact, it´s Switzerland that has borne the (some would say coordinated) brunt of the developed nations hunt for those most dastardly of degenerates - tax evaders.

In 2009, the rift between the US tax authorities and Swiss bank secrecy laws slipped into full-metal jacket conflict. The ensuing quake has permanently re-shaped the banking landscape in Switzerland.

To quickly review events, the IRS and US Treasury accused the Swiss banking giant UBS of assisting thousands of its American clients in evading taxes. The US Justice Dept followed by lodging a criminal case against the bank that was closed in November 2010. Regrettably, the reaction from Swiss banks was the industry´s refusal to accept US persons as clients. That is almost universally the situation today.

Access to Swiss Banking For Americans
However, access to Swiss banking is still possible if US persons are willing to jump through a few extra hoops. It entails using a financial intermediary known as an Independent Financial Management Company (IFMC) or Independent Asset Manager (IAM). The procedure is straightforward: The US client would establish an account with an IFMC/IAM, who would then open a banking relation in the name of the client.

As you would expect, there are advantages and drawbacks to using this structure.

One big plus is that the client, through the IFMC/IAM, would have access to a wide range of financial and investment products not available from a bank, as well as professional investment advice tailored to the client´s goals and risk tolerance.

The drawback - and it´s a big one - is that most IFMCs and IAMs have high investment minimums, typically in the US$ 500,000 range. But the high minimum makes sense. Trading, account, and administration fees in Switzerland are well above those charged in the US. As a consequence, small account holders would get stung with high client fees when figured as a percentage of assets under management.

But, for the right investor, this is a fairly straightforward way to benefit from more than 300 years of what we know as Swiss banking.

Another option for US investors to consider when seeking access to Swiss banking is an annuity. Typically, one can gain access to an annuity for as low as a $50,000 minimum investment (such as one of our preferred suppliers, BFI Capital, is able to provide to American clients).

Swiss annuities have earned a reputation as being as solid as the rock of Gibraltar, and deservedly so: no Swiss insurance company has ever declared bankruptcy.

As well, Swiss insurance companies are not banks and most will currently accept Americans as clients.

Over the years, Swiss annuities have evolved into flexible investment vehicles that bear little resemblance to the product´s humble beginnings. Today, a variety of products are available that combine the services of private banking with the Swiss annuity concept, all part of the industry´s continuous innovation. This new wealth management offering is often referred to as "private banking insurance".

Yesterday´s traditional road to a Swiss bank account has changed, and will likely face further course corrections as planned US reporting requirements are introduced or implemented in the years ahead. For those delaying moving assets to Switzerland due to new roadblocks, I have covered two detours that should be considered. And with the uncertain future of access to international financial options, action must be taken sooner rather than later.

Kevin Brekke is an editor at Casey Research and contributing editor to International Man, a global network of freedom-seekers, investors, adventurers, speculators and expatriates who use asset, income, and/or personal diversification strategies to live an international lifestyle. To learn more, including how to gain free access to their 8 International Intelligence reports, simply visit http://www.internationalman.com/
NEWS BRIEFS

Little Hope for a Rally in 2012
The centrally-managed rally of March 2009 is over; reality is finally intruding on the manipulation and propaganda. If we step back from the latest shuck-and-jive data from the Ministry of Propaganda, a.k.a. the Status Quo managing perceptions, and take a longer view of the economy, money, credit and the stock market, we get an extremely troubling set of insights.

The linked article by Charles Hugh Smith discusses the factors and three charts that undermine the fantasy that central planning/intervention can "save the market" once again in 2012 and beyond.
go to story

Richard Russell: "The Bear Is Back!!"
In his "Latest Remarks", Richard Russell expresses his view on the markets - it´s not pretty:

"While fundamentalists scour the news for indications of bullish news, the internals of the stock market continue to deteriorate. Even the action of the stock market is bearish as the market rallies on dull volume but declines on higher volume. Furthermore, rising breadth is narrow on rallies while declining breadth is broad when the market heads down.

"I don´t know what more I can do or say to convinced subscribers that we are seeing the resumption of the bear market. This means that we should be OUT of all stocks. As for gold mining stocks, this is a personal choice. In due time, I expect gold to fully express itself with a huge upside blow-off. At that time I expect gold mining stocks to follow, but between now and then gold mining shares will probably be hit like everything else by the fury of the bear market.

"I should add that I am expecting this bear market to be far worse than most people expect or are prepared for. The fact is that I don´t believe that Americans expect anything more than a temporary spate of difficult times, an annoying patch that should be over in a year or so. This is not what I am expecting or predicting.

"Once the Dow breaks under 10,000, I believe that the analysts and the PUBLIC will become frightened and start to cut back on their buying. The newspapers will halt their bullish stance, and a great stillness will envelope that land. That stillness will be the result of shock as it dawns on Americans that they are seeing something far different than what they were expecting."
go to story

Americans should beware of Senate Bill 1867; will it allow U.S. military to detain and murder anti-government protesters?
In the United States´ Senate, on November 15th, 2011, Mr. Levin, from the Committee on Armed Services, reported the Bill 1867, which was read twice and placed on the Senate´s calendar.

The recent passage of the National Defense Authorization Act (Senate Bill 1867), otherwise known as the "Indefinite Detention Bill," should scare the heck out of anyone who loves the U.S. Constitution and the Bill of Rights. This bill effectively hands over control to the military to arrest, torture and even kill terrorists on American soil. It also allows the military to hold suspected terrorists indefinitely without a trial or due process.

This applies to both non-citizens and citizens of the United States! With this bill, you are not innocent until proven guilty. You are guilty until proven innocent, and you may never get a trial to defend yourself.

There is surprisingly little written in the mainstream media about this Senate bill that passed 93 to 7 at the end of November.
go to story

Dr. Ron Paul: Beware the Coming Bailouts of Europe!
The economic establishment in this country has come to the conclusion that it is not a matter of "if" the United States must intervene in the bailout of the euro, but simply a question of "when" and "how." Newspaper articles and editorials are full of assertions that the breakup of the euro would result in a worldwide depression, and that economic assistance to Europe is the only way to stave off this calamity. These assertions are yet again more scare-mongering, just as we witnessed during the depths of the 2008 financial crisis. After just a decade of the euro, people have forgotten that Europe functioned for centuries without a common currency.

The real cause of economic depression is loose monetary policy: the creation of money and credit out of thin air and the monetization of government debt by a central bank. This inflationary monetary policy is the cause of every boom and bust, yet it is precisely what political and economic elites both in Europe and the United States are prescribing as a resolution for the present crisis. The drastic next step being discussed is a multi-trillion dollar bailout of Europe by the European Central Bank, aided by the IMF and the Federal Reserve.
go to story

Spanish Bad Loans Rise to New Highs
Spanish banks reported more bad loans and lower lending and deposits in October, hurt by the fallout of the country´s property crash and the European sovereign debt crisis.

Bad Spanish loans as a percentage of total loans have reached their highest levels in years. This has happened on the back of a slowing economy and restraints from banks to put assets on sale in the market. We expect banks to continually mark these assets down in their books, which will again create more losses and more pressure on the bonds´ pricing.

As we move forward, you can expect a growing number of financial institutions to come under increasing pressure. A growing number will default. This problem will not be limited to Spain. We expect a development that will make European banking look similar to the US banking industry, where hundreds of banks have gone belly-up over the past 24 months.



go to story

BRIC Inflation on the Rise - and Not Just in Brazil...
Brazil´s inflation will exceed the upper limit of its target range in 2011 for the first time in eight years, a central bank survey showed. Consumer prices will increase 6.52 percent this year, breaching the 2.5 percent to 6.5 percent target, according to the median forecast in a Dec. 16 central bank survey of about 100 economists published this week. A week earlier, the forecast was 6.5 percent.
go to story

Learn Austrian Economics, by Thomas E. Woods Jr.
The past several years have seen a revival of interest in the Austrian School of Economics. Thomas E. Woods Jr. has assembled a resource list to help you embark on a program of self-education in the Austrian School. Many of the referenced books and audio books, in addition to all of the articles that appear on the list, are available to read or listen to online.
go to story

Bern and Washington "Close" to a Tax Agreement
After a year on the job, Swiss ambassador to the United States, Manuel Sager, talks to swissinfo.ch about issues ranging from Iran to post-UBS scandal tax negotiations.

Sager believes Switzerland and the administration of Barack Obama are "close" to an agreement on the tax front, but that unrelated political divisions between Democrats and Republicans in Congress are slowing down approval of a bilateral treaty.
go to story

US offers Swiss banks a deal, says newspaper
The United States authorities have offered to lift the threat of legal action against 11 Swiss banks in exchange for information, a Swiss paper reported on Sunday.

The SonntagsZeitung says it has discovered that Michael Ambühl, who heads the Swiss state secretariat for international financial matters, and who has been conducting negotiations with the US authorities for several months, presented representatives of the banks with the deal on Friday.
go to story

The Era of Bureaucrats, Politicians, and State-Controlled "Arbitrators" - Or, When Rating Agencies Rule the World of Finance
The banking system is hugely flawed and needs a serious "reboot". You know that for sure when US rating agencies, those glorious soothsayers who missed Enron, Lehman, subprime, et al, amazingly STILL have enormous power. Why do markets even listen?



 

© Copyright 2011, by BFI Capital Group AG, Bahnhofstrasse 29, 6300 Zug, Switzerland, website: www.bficapital.com. 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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