WALKING ON THIN ICE - WELCOME TO THE FINAL STAGES OF MONETARY AND FISCAL PROFLIGACY

Socialism is the same as Communism, only better English.
~ George Bernard Shaw

Dear Mountaineers,

It is the nature of government in most political systems, and most certainly the socialistic kind, to buy - with the taxpayers´ money - as much time as possible in order to push the effects of self-made problems as far into the future as their paper money allows. At this point, it looks very much like that future is straight ahead, and that the ‘possible´ is coming to an end quickly.

Credits ratings are downgraded left and right, maliciously or not. The PIIGS debt crisis is spreading to Eastern Europe. It won´t stop there. Everywhere the concerns over sovereign default, and the subsequent consequences to bank solvency, are making it into the headlines. Meanwhile, the ‘recovery story´ has hit a wall. The widespread perception (or hope) that things are improving fundamentally and sustainably is being dismantled by reality, by the economic and financial facts that are pushing through to the surface.

The trillions spent on keeping the recovery fiction alive are quickly turning into what we knew they were from the beginning: paper money and debt, wasted to create a false image of safety and improvement, to buy an expensive scheme of smoke and mirrors. The masses will of course be disappointed. Their governments are not in control after all. The forces of the market are stronger. Surely non-government scapegoats will be sought and found - or created - to divert the attention and to retain the status quo, for as long as possible.

Europe is expected to SPEND, or else...!!!

As discussed in January, I expected an UP-DOWN pattern for 2010. Therefore, the potential of things turning sour does not come as a great surprise. However, personally, with everything at stake, I did expect the power elite and their government cronies to succeed at keeping up the recovery story a little longer, and I expected stock markets to rally a little further. At this point, I have serious doubts.

Frankly, what surprised me was the recent sequence of events in the context of the downgrades by rating agencies and the resultant acceleration of monetary and fiscal imbalances.

I´ve written about the ominous role the US rating agencies have played in the debt crisis and the related currency devaluations over the past few months. It has now (finally) come to the attention of most European politicians and the mainstream press that, in all consideration, the actions of US rating agencies are more than questionable, far from neutrally objective and, most of all, possibly malicious.

The latest rating shenanigans were aimed straight at the heart of Euroland. At the end of last week, Standard & Poor´s downgraded the credit rating of the municipality of Brussels! Financial markets reacted promptly. Admittedly, just like the fiscal health of most other European and American municipalities, Brussels too has lived beyond its means. Too much debt exists there too. However, rest assured that the balance sheet of Brussels and its economic strength is far above the EU average. In fact, the Brussels balance sheet might be considered top-notch compared to most local or regional European and American governments.

Why would S&P downgrade Brussels then?

Two things of importance happened last week: First of all, the EU proposed plans to keep Standard & Poor´s, Moody´s and Fitch on a ‘shorter leash´. The ratings provided by these institutions was to be monitored and audited by a new - and yet another - EU office in Brussels. Fines of up to 20% of an agency´s revenues could be levied in cases where their ratings differed drastically from an objective valuation. It appears, then, from the downgrade last week, that rating agencies were determined to defend their ‘independence´.

Secondly, Germany announced that it would implement serious and prolonged spending cuts. This, of course, runs contrary to what President Obama or Mr. Geithner expected of Europe. On May 7th, President Obama was quoted as follows: "It is of utmost importance that the members of the European Union take resolute steps to rebuild confidence in the markets."

This statement comes from a devoted Keynesian socialist obviously and clearly implies that America´s President expects Europe to do as America does: SPEND MORE, DEVALUE MORE - SAVE TODAY AT THE COST OF TOMORROW!

Record drop in inflation-adjusted M3

The following chart adds a further concern that things are running out of control. Courtesy of John Williams´ Shadow Statistics, the chart displays the continued contraction of M3, the broadest of the US money supply measures. The year-to-year change sank to a post-World War II record contraction of roughly 5.9%, following a 5.0% contraction in April.

Furthermore, while nominal M2 is still growing at 1.7% year-to-year, real annual M2 growth has turned negative when measured in reference to the official consumer price index (CPI).



The real contraction in money supply depicted above is occurring despite the explosive growth in - and continued high levels of - the monetary base as depicted in the following chart of the St. Louis Fed Adjusted Monetary Base.



This may be counter-intuitive. Why is M3 contracting while you have the Fed pumping tremendous liquidity into the markets? The response is provided well in Mr. Williams´ recent Shadow Government Statistics report:

"As to why M3 is in decline, the answer lies in declining lending by banks. Instead of lending their massive excess reserve into the regular flow of commerce, banks are leaving them on deposit with the Fed. Where the Fed has become something like a commercial lender, in terms of fostering purported stability in the mortgage and commercial paper markets, any funds that have gotten into the system are reflected in the usual money supply components.

"Updated credit numbers (including today´s - June 7th - release of April consumer credit) continue to show lending in contraction, as indicated by declining levels of short-term credit in the graphs that follow. In terms of year-to-year change, consumer credit (April) is down by 3.2%, commercial and industrial loans (May) are down by 17.6%, and commercial paper outstanding (May) is down by 17.0%."





Implications for the global economy and financial markets

The implications are ugly. The recent bear market rally is coming to an end, as more and more investors are realizing that the crisis is returning, or even just swinging into full motion. The official view may ultimately be one of a double-dip recession. In my view, the recession has never ended. Whatever you want to call it, the fact is that we are headed for a sequence of more bank failures and sovereign defaults.

Yes, this development has been accelerated by the rating agencies. That, in and of itself, raises all kinds of questions. But, in the end, it is not the trigger that brings the house of cards down that is relevant. You simply need to realize what lies ahead. I would not have expected this. Not this quick. Not so soon. I assumed a more extended, concerted and coordinated international approach to saving the status quo for as long as possible. Instead, an international currency war and competitive devaluations have ensued sooner and more harshly than foreseen.

In my opinion, the sequence of events ahead could look something like this:

More sovereign debt and more sovereign defaults - followed by more loss of confidence in governments and sovereign credit - followed by a continued contraction of bank lending and M3 - followed by corporate losses, less confidence in the financial and fiat currency system overall - followed by deleveraging and a deflationary phase in the price of global assets - followed by high monetary inflation which leads over time also to high price inflation - followed and accompanied by growing social unrest and the potential for war as a opportune (and historically preferred) measure of diversion...

The timing and sequence, as always, is extremely difficult to predict. From what I am observing, it looks and smells like things are approaching with velocity. Sorry to spoil your breakfast. However, I urge you to take action and protect yourself from this sequence of developments.

What to do?

Reduce your equity exposure, particularly in the broad stock indices. Invest primarily in real goods, hard assets and the fundamentally strongest currencies. Buy physical gold and silver.

Stay liquid for now. In a deflationary bout, cash is (temporarily) king. But be prepared to switch into inflation mode quickly. For the next few weeks and possibly months, we will tactically retain or possibly increase our US dollar versus other currencies. But, we will closely monitor developments and will be prepared to switch to the Swissy, the Canadian dollar, the Norwegian kroner and to commodities, more precious metals and real estate, once de-leveraging ebbs off.

We are witnessing a phase during which existing structures, institutions and systems are being questioned. They may be dismantled. This kind of time is not to be tinkered with. Be bold in your decisions and think SAFETY, WEALTH PRESERVATION, and ASSET PROTECTION FIRST!

Sincerely,

Your "Swiss Mountain Guide"

Frank R. Suess

NEWS BRIEFS

Swiss Lower House Rejects the "UBS Pact"

Switzerland and the US are back on a collision course over tax evasion after, on Tuesday, the lower house of the Swiss parliament rejected the (illegal) bank secrecy deal hammered out between the two countries last year.

The question comes down to this: What is considered as more important / relevant by Swiss politicians - the fundamental rule of law or the possible economic sanctions of a foreign country, in this case the US? Whether in fact the US would aggressively pursue UBS and ‘kill´ the bank is highly questionable. The bank does create some 30,000 jobs in America too. And, if UBS goes down, the markets will react harshly. And not only UBS will be impacted.

So far, the Swiss Parliament has done the only right thing. But, the pressure is on and this is not over yet. We are concerned the Swiss Parliament will ultimately cave in. We shall see in the next few weeks.

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One Government That´s Doing A Lot of Things Right

At a time when other governments are keen to pillaging and plundering their citizens and private industries through increased taxes, Switzerland is actually cutting taxes in order to attract businesses.

They´re able to do this because of the way the system in Switzerland is designed- flat, simple, and as efficient as possible. Real political power and decision making in Switzerland occurs at the local level because each of the 26 cantons (like provinces or states) are effectively sovereign and autonomous.

As we watch the developments around us, in Europe and America in particular, Switzerland appears to be the only political system left that really holds its government accountable and provides for a nation that indeed deserves to be called a democracy.

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US Economy Adds 431,000 Jobs - Good News, If Only...

America adds 431´000 jobs. That is great news, if it were only the private sector - the productive kind of jobs - that were being added.

A wave of census hiring lifted payrolls by 431,000 in May, but job creation by private companies grew at the slowest pace since the start of the year. Virtually all the job creation in May came from the hiring of 411,000 census workers. Such hiring peaked in May and will begin tailing off in June.

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Warren Buffett is Dumping Muni Bonds

Warren Buffett, whose Berkshire Hathaway Inc. has been trimming its investment in municipal debt, predicted a "terrible problem" for the bonds in coming years.

"There will be a terrible problem and then the question becomes will the federal government help," Buffett, 79, said today at a hearing of the U.S. Financial Crisis Inquiry Commission in New York. "I don´t know how I would rate them myself. It´s a bet on how the federal government will act over time."

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Why Governments Hate Gold

This past week, several emerging and ongoing crises took attention away from the ongoing sovereign debt problems in Greece.

According to Dr. Ron Paul, as stated in his comments published this week in the Daily Bell, the bailouts are merely kicking the can down the road and making things worse for taxpaying citizens, in the US and abroad. Greece is unfortunately not unique in its irresponsible spending habits. Greek-style debt explosions are quickly spreading to other nations one by one, and yes, the United States is one of the dominoes on down the line.

                  

Dr. Paul´s conclusion is the same as ours: gold is the key ingredient to protecting your wealth. It has characteristics that make it special, different, and despised by governments.

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The Gold Bull Market is Not Even Close to Being Over

We started advising clients to allocate at least 10% to 15% of their assets in gold around 2001. Ever since, the price of gold has more than quadrupled in reference to all fiat-currencies. We have heard again and again that gold is not attractive because it does pay an income, that it has reached a top, or that it only appreciates in value in times of high inflation.

Despite all these expert opinions and warnings, gold has outperformed pretty much every index and investment out there. You can be assured that our clients who got in at USD 250 per troy ounce don´t care one bit whether gold has paid an income or not.

Today, still, despite the big picture that clearly leads every shrewd investor to allocate part of his assets into physical gold, some bankers and analysts are down talking the valor of gold as an investment, and advise against investing in gold because it is ´too expensive´.

The following chart courtesy of Ritzholtz.com undermines this nonsense. In our opinion, the sooner you get in and buy the better.



Getting Out of the US and Getting Rid of a US Passport: En Vogue, but Not the Solution for Everyone

We are starting to hear from a growing number of Americans these days who ask for support at getting out of America and rid of the US taxation system. There are ways to doing this legally and efficiently. However, it is not easy, it is not quick, and it is not for everyone. In fact, it is not for most.

Nevertheless, in our opinion, it is worth considering and learning more about for all. Understanding the possibilities and implications may open up your mind to improvements and opportunities that could be highly beneficial, if not critical, to your wealth planning.

Take a look at this interesting excerpt from the free, 29-page American Expatriation Guide, which may provide some basic and very subjective ideas (not more!!). It is written by a former U.S. citizen who chose to remain anonymous, published courtesy of Casey Research.

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Big Brother in Charge - and a Little More With Each Crisis...