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GOVERNMENTS SURVIVING THIS DECADE BY DESTROYING THE NEXT -- PUBLIC DEBT IS YOUR NUMBER ONE ENEMY!
"I place the economy among the first and most important virtues and public debt as the great danger to be feared. To preserve your independence, we must not let our leaders load us with perpetual debt. We must make our choice between economy and liberty or profusion and servitude."
~ Thomas Jefferson
Dear Mountaineers,
We just got back from our Inner Circle Briefing in the Bahamas, which was followed by the FreedomFest World Economic Summit (WES). It was, once again, a memorable and most interesting experience. The above quote from Thomas Jefferson could not better reflect the core sentiment, theme and focus of the discussions I had the privilege of participating in at the Atlantis, on Paradise Island.
In next week´s Update, we will be reviewing a number of the topics discussed in the Bahamas in more depth. In today´s commentary, let me start by merely summing up, in one word, the essence of the concerns and considerations of both attendees and speakers: DEBT!
Growing debt and empty coffers are the greatest enemies to wealth preservation and asset protection today.
It is easy to get lost in the enormous complexity and the number of variables that ultimately affect your investments. You may be confused by the details and jibberish of financial discussions. At times, that happened in the Bahamas too, both at our Briefing and at the WES. You may find yourself stuck in conversations over the weaknesses of President Obama and his administration. You can question and argue whether, at this point, having a Republican in the White House would make a difference. You can hand-pick great companies and consider buying their stocks. Or, you might question the benefits of value-investing during a bear market.
Ultimately, all of these discussions are beside the point. They focus on the trees and not the forest. If you step back and look at the big picture, it all comes down to one issue: PUBLIC DEBT.
While governments, especially those in the so-called ‘advanced economies´, continue in their vain efforts to protect too-big-to-fail companies (and nations) from default, to fight the bear market trend in equity markets, and to first and foremost make it over their respective terms, it becomes very clear who will ultimately be paying the bill.
Public Debt as a percentage of GDP
Advanced economies, emerging and developing economies, and the world average
Source: IMF
Are you ready ?!?!
It is becoming increasingly clear that most advanced-economy governments, irrespective of any of their lip service to ‘tightening belts´ and ‘real change´, will continue to adhere to their first and only principle: GOVERN NOW, PAY LATER.
This very simple and central reality has broad implications on any and all considerations and decisions we make as investors, taxpayers or wealth managers from here on forward. It will be reflected in the monetary, fiscal, regulatory and geo-political developments in the coming months and years. The big question is the following: ARE YOU READY?!?!
You can follow the gibberish on CNBC as much as you´d like, but do not miss the fact that today, more than ever during the past 4 generations, your wealth is exposed to the whims of your government. Yes, you can continue to listen to the typical stock broker nonsense: "Stocks fell on the fear that stocks would fall today...Oh yeah, and it started raining due to the probability of clouds covering the sky".
Safety first!
First and foremost, your objective in wealth planning today should be SAFETY, both jurisdictional and institutional safety. Yes, an optimal weath management strategy will incorporate, as much as possible, the elements of privacy, investment flexibility, long-term solidity, tax efficiency, and compliance. However, the number one objective is SAFETY!
As an example, one of the matters that was discussed thoroughly during our Briefing was regarding the safety of retirement funds. Governments will -- and they already are looking to -- find ways to finance the next round of debt creation. They are in a financing frenzy, looking desperately for hidden pockets of funding that they can easily dip into. In the UK and the US, the pocket they are going for next is retirement and pension funds.
As both governments are finding it increasingly difficult to place their government debt papers in the markets, they need to find, or better yet CREATE, additional pools of buyers. In other words, the DEBT TRAP is producing a RETIREMENT TRAP. Recently, Ron Holland wrote a report on this very topic. Shortly after Ron´s ‘Trap Report´ was published, the Obama Administration lauched a proposal for ‘Mandatory IRA´s´!
The message is clear: "To prevent a Treasury market collapse, we will force YOU to buy Treasuries in your retirement accounts". As public debt rises exponentially and there´s nobody left to buy treasury paper to fund the debt, retirement funds will have to come to the rescue, like it or not.
Of course, if you will, you might trust in President Obama´s good intentions and capabilities. In his recent speech he has made yet some more ‘strong´ promises of change. While he plans to spend US$ 3.8 Trillion (!?!?) in the fiscal year of 2011, he also cautions the American people: "We simply cannot continue to spend as if the deficits do not have any consequences...as if the tax dollars of American people can be treated as Monopoly money."
To those aware of real fiscal policies in American - and in most other nations - this kind of double-talk is actually just a little nauseating!
Asset protection and wealth preservation is achieved elsewhere!
The question, therefore, becomes how to protect yourself from your government´s feeding frenzy without creating any unnecessary risks. How can you best protect your assets onshore and off?
As far as I am concerned, if you live in a country such as America, Germany, France or Italy, a country with rapidly growing debt and increasingly less freedom, where the rule of law is no longer respected by your government, then the only way you can protect yourself is by setting up something offshore. As Doug Casey recently pointedly stated:
"If everything you own is held in your own name and / or your own country, then you are not merely exposed, you are absolutely vulnerable to whatever surprise your government and potential predators produce!"
Offshore wealth preservation and asset protection is LEGAL. In all of the aforementioned countries, it is (at least for now) still possible to legally diversify your assets overseas. Ignore all of the scare tactics and panic reflected in the media. It is all really another form of implicit exchange control. Instead, contact advisors that will help you establish a plan that protects you in full compliance with the rules of your country.
Offshore wealth planning and wealth management is not about hiding funds. It is not about tax evasion. It is not about being unpatriotic. It is about RISK MANAGEMENT. It is about building a bridge to safety while you still can. By taking the right steps and planning NOW, your goals should be:
• Setting up a solid personal financial system before it‘s too late
• Trusted international contacts - advisors, facilitators, institutions
• International asset and currency diversification - dollar protection
• Protection from currency exchange controls
• Protection from confiscatory regulations, e.g. confiscation of precious metals or your pension / IRA funds
• Achieving a lower profile as a lawsuit target
• Ensuring ready access to international investments and asset classes that might not be available at home
• Practical preparedness to move additional assets rapidly
• Psychological readiness to think, move, and act internationally if and when
required
• Having the option to leave - you can always follow your wallet, but your wallet might be able to follow you. Historically, this has been one of the greatest causes for the rapid destruction of family wealth
In terms of both your personal asset protection strategy as well as your investment allocation, what needs to come first is safety and risk management. An essential part of that risk management is jurisdictional, structural and international asset diversification. Proper offshore planning does not preclude anything. Risk management is about planning for the worst and hoping for the best.
If things turn out better than expected, no harm has been done. You can always, at any time, bring your funds back home.
Are you prepared? You should be. Don´t procrastinate.
Sincerely,
Your "Swiss Mountain Guide"
Frank R. Suess |
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WHY GREECE? WHY NOW?
At first sight -- even though it had an immediate and solid impact on international equity and currency markets, was well-covered in the media and was hardly missed by anyone -- the Greek debt crisis might not be particularly unique or complex. The Greek government spent too much and now they are broke... simple enough. However, what we find peculiar is the somewhat arbitrary role that rating agencies have played and how little that aspect has been questioned by the press.
After rating agencies played a critical role in the 2008 subprime crisis, one would think that their work would be reviewed and analyzed more critically. One would think that any and all ratings -- any up or downgrades -- would be scrutinized more thoroughly particularly when we are dealing with the rating of a sovereign.
Surely the Greek government has run their Keynesian printing press at full throttle. However, as far as we can tell, their monetary and fiscal policies, as well as their debt levels are not so very different from those found in several other nations. The public debt-to-GDP levels in Italy and Japan, for instance, are higher than in Greece. If you consider both public and private debt levels, countries such as the US, UK, Spain and Ireland look MUCH worse.
Most nations in Europe and elsewhere are on similar paths toward growing debt and unfunded liabilities. Accounting practices in Greece are similar to those of other nations. Similar to President Obama, in his State of the Union speech on January 27th, the Greek President Papandreou has vowed that his government would support the economy with fiscal stimulus only until it was safe to stop. Contrary to America, of course, Greece cannot print their own money. As a Euro member, they are dependent on the European Central Bank to handle their monetary affairs. However, that applies to Spain, Italy, Portugal or Ireland as well; all nations that are fiscally out of balance.
So, what actually plunged Greece into this recent turmoil? A ratings downgrade by the US agencies! Such a downgrade created an instant rise in the cost of borrowing and financing. Within days, the credit default spread went from around 50 to over 400 basis points. In our opinion, it was this arbritrary and questionable downgrade which put the Greek government in such a difficult spot. The same would happen with ANY government around the world.
So, as a result, Greece will have to take drastic measures if it should stand any chance of getting their deficits under control. Equally, it has resulted in widespread concerns over the future viability of the European Union, its economic recovery, and its currency. The Greece downgrade caused havoc in markets and sent the Euro into an eight-month low against the US Dollar.
In our opinion, this raises all kinds of questions. Let there be no doubt that the US rating agencies were well aware of this outcome in advance. For the moment, the Euro is no longer a threat to the US Dollar. Currently, Treasury papers are finding buyers in the financial markets more easily again...at least for a while. |
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DOW SLIDES BELOW 10000
Which way the markets will go next is difficult to say. In our opinion, global equity markets are in a BIG bear market. They turned bearish toward the end of 2007. And, while we expect emerging markets to outperform advanced economies in the coming years, we think that the US markets and international markets are connected at the hip. De-coupling is taking place as the internal markets of China, India and Brazil are maturing. However, a single sniffle in the US, at this point, still results in sneezing everywhere else.
The Dow is currently barely above 10000 after dropping like a rock since its 15-month high on January 17th. It slipped below 10000 a couple of times over the past few trading sessions but in each case stayed just above the milestone before the closing bell. The 10000 mark carries psychological significance. It will be interesting, whether the 10´000 mark will hold. Currently, it´s not looking good.
Generally, the media explains this recent correction on the basis of "the slump in financial stocks, worries over Europe, Greek default risks, and concerns over the global economy and U.S. interest-rate policy" (see link to Washington Post story below).
We think there is more to it. We have entered a ‘political economy´. As economist, historian, and savvy commentator, Eliot Janeway once stated, "When the White House is in trouble, the markets are in trouble!"
Financial markets are always a bit of mystery. However, what adds to the uncertainties of late is the extraordinarily high influence that political and regulatory decisions have on a market that is tip-toeing on a tight-rope. Financial markets are not willing to give up that liquidity and stimulus bottle. Any sign of fiscal and monetary tightening is instantly reflected in market uncertainty.
This became particularly clear just a few weeks ago, on January 19th, when three seemingly unrelated events appeared to trigger this recent correction in global stock markets.
First, President Obama announced his Volcker-advised proposal to reign in some of the activities of too-big-to-fail banks. Secondly, the Chinese government prohibited its major banks from lending any more money until the end of the month. And finally, a surprise vote in Massachusetts led to a small but relevant change in the balance of US politics. Instead of a Democrat, a largely unknown Republican won the 41st seat in the US Senate, thus making it just a little more difficult for Democrats to steamroll all of their decisions through Congress.
Go to Story
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NEWS BRIEFS
Yup, Keeping that AAA-rating is CRITICAL - Losing it is Catastrophic
The effects of a downgrade in a country´s credit rating were made evident by the example of Greece that we mentioned in the earlier story. Therefore, it is not surprising to find commentaries that will reject any and all ideas of this ever happening in a larger and more prominent economy such as the US or the UK.
According to Nobel laureate Joseph E. Stiglitz, the prospect of a default by the U.S. or the U.K. is an "absurd" notion constructed in the financial markets. According to Mr. Stiglitz, responding to questions after a recent speech in London, both nations "deserve to keep the AAA rating" and "the likelihood of a default is so small, particularly in the U.S., because all we do is print money to pay it back".
Meanwhile, Treasury Secretary Timothy F. Geithner said that demand for Treasury securities and the Dollar in times of crisis indicate "basic confidence" that will shield the U.S.´s AAA credit rating. While Moody´s Investors Service says the grade may face pressure without more action to cut the budget deficit, Stiglitz said the economy requires more stimulus right now.
"What we need now is a second round of stimulus," Stiglitz said, speaking at an event at the London School of Economics.
Go to Story
Europe Searches for Way Out of Debt Crisis
Financial markets are concerned that the debt crisis in Greece could pose a problem for the entire Eurozone in that it could spread to other countries there. And, the big question is whether or not EU leaders would embrace a Greek bailout.
Obviously, that kind of sovereign bailout would present the exact same kind of moral hazard as it would with corporations, only on a potentially even larger scale.
Go to Story
Euro Short Positions and the Retreat in Stock Markets Boost the Dollar
According to the Financial Times, traders and hedge funds have bet nearly US$8 billion against the Euro, amassing the biggest ever short position in the European single currency on fears of a possible Eurozone debt crisis.
It suggests investors might be losing confidence in the single currency´s ability to withstand any contagion from Greece´s budget problems to other European countries.
Go to Story
Despite All the Negative Hype, Swiss Banks are Still Safer than Most
In the context of the recent pressures from bankrupt nations such as Germany, Italy, France or the United States, there has been much talk over the impending decay of Swiss banking and financial services. This is complete nonsense.
The success of Swiss banking and financial services does not rest solely on banking secrecy laws. Most banks in Switzerland are fairing very well in the current market environment. Despite the tax collection schemes and public scare tactics of the aforementioned countries, funds are flowing into Switzerland unabated. In fact, they continue to flow in at an increasing rate. Individuals, families, and companies are taking domicile in Switzerland at a rate similar to the period of World War II.
It is not banking secrecy bringing this about. It is safety, social peace, political solidity, the rule of law, and the privilege of living and working in a country where things work, where tax revenues flow into a first-class infrastructure and good public services exist.
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The Use of Stolen Account Data vs. Rule of Law in Germany
Frankly, we are disturbed by the timid stance Swiss politicians are taking on this issue. Germany is buying stolen data from Swiss bankers in order to bring German tax evaders "to justice". Germany is doing this in the midst of negotiations with Switzerland, negotiations to define and establish the new double taxation treaty which is intended to conform to OECD standards.
Clearly, Germany prioritizes getting their hands on additional tax revenues over the rule of law. They prioritize theft over international partnership. This is not how neighbors should interact. We would recommend stopping any negoatiations with that country. Existing agreements with other countries that do not respect the law should be questioned as well.
Swiss politicians don´t have the charisma, and possibly the competencies, to deal with this situation adequately. We suspect the Swiss people will. Fortunately, contrary to any other country, the people in Switzerland still have the last word.
Go to Story
Increasing Tensions Between China and America
Sometimes, the real issues and topics worth consideration are those unmentioned. While many things were talked about at the World Economic Forum in Davos, the one topic that received relatively little direct commentary was the dramatically heightened tensions between the United States and China.
Go to Story
DEFICITS, DEBT, UNEMPLOYMENT, CRASH-BOUND...
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| © Copyright 2010, 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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