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POTPOURRI OF VOLCANIC ASH, GOLDMAN CONCERNS, CHINESE CURRENCY MANIPULATION AND MORE...
Any real change is resisted because bureaucrats have a vested interest in the chaos in which they exist.
~ Richard M. Nixon
Dear Mountaineers,
We truly live in a convoluted and strangely chaotic world. This last week alone has been a mix of all kinds of ‘Update´-worthy matters to discuss, one interlinked with the other. Where should I start??? Goldman Sachs? Eyjafjallajökull (the ominous volcano in Iceland)? US-Chinese trade battles? International currency wars?
Well, I´m not in the mood for narrow choices today. Therefore, I´ve picked a few to deal with in today´s commentary and will continue with a few others next week - a bit of a potpourri of topics so to speak.
Goldman and volcano "hiccups"
At the end of last week, global stock markets retreated considerably. Commodity prices retreated as well. The correction was primarily described as a result of the ‘Goldman Sachs effect´ - the concerns over the bank´s legal problems. It didn´t take long before hearing wide-spread concerns that this could lead into a bigger correction, possibly similar to the one in the fall of 2008. Interestingly, this action in and of itself against Goldman Sachs deserves a closer look because Goldman Sachs was considered to be well-networked into the political area and therefore immune against such allegations.
Meanwhile in Europe, air traffic disruptions caused by the volcanic eruptions in Iceland led to huge costs for the European and international airline industries. Estimates put the costs at $300 million-a-day lost in revenue alone; higher than the costs to airlines resulting from 9/11. Nevertheless, while a few stocks -- for instance, that of Lufthansa or Air Berlin -- corrected starkly, financial markets overall were not phased too badly by Iceland´s latest greetings.
Unsurprisingly, European carriers are now seeking state aid as a result of the closure of the region´s airspace. This is becoming standard procedure these days...
"European airlines have asked the EU and national governments for financial compensation," British Airways Chief Executive Officer, Willie Walsh, said in a statement. "There is a precedent for this as compensation was paid after the closure of U.S. airspace following the terrorist events of 9/11, and clearly the impact of the current situation is more considerable."
The effects of Eyjafjallajökull, however, went beyond the airline and travel business. International transportation of goods temporarily all but stalled. Retailers across Europe are still reporting shortages of goods. In the U.K., Waitrose has encountered difficulty stocking shelves, for example, with fresh fruit from Africa. We even felt it in Zurich as we celebrated a local and centuries-old tradition called ‘Sechseläuten´ on Monday. For the first time in its history, the event lacked the number of flowers used as it had in past celebrations.
Perhaps the potential ramifications and effects of both the Goldman Sachs concerns and the volcano in Iceland are underestimated. Both matters certainly need to be monitored further.
What is interesting for investors to observe is the fact that, despite all, stock markets globally have pushed through these ‘hiccups´ with fervor. They do indeed look more stable than I would have expected. Certainly, the lack of flowers in Zurich did not faze anyone in the markets!?!?
In conclusion, the "Up-Down" scenario we predicted for 2010 still seems fully intact.
Are the Chinese guilty of unfair currency manipulation?
The US media is riding a wave of comments concerning the Chinese and their maintaining an artificially ‘undervalued´ yuan. US Senator Charles Schumer (D-NY) has been at the forefront of those who would like to retaliate against China for what they claim is a policy of manipulating the Chinese currency to gain an "unfair" trade advantage against the US.
He argues that the Chinese central bank had been buying US dollars and selling its yuan to prevent the yuan from strengthening against the US dollar. On March 29, Mr. Schumer announced that he and 15 of his Senate colleagues were sponsoring what he calls the "Currency Exchange Rate Oversight Reform Act of 2010". The act would let the US Treasury identify a nation as a "currency manipulator" without having to show that the manipulation was "intentional". Having done that, the Treasury could then initiate sanctions becoming progressively severe over time. Finally, the US Commerce Department could use "anti-dumping" laws and impose tariffs of their choosing to counter the currency "manipulation".
Senator Schumer assures us that "nothing is more important than jobs in America!" "You might get the Chinese mad. You know what I say to that...too bad", added Mr Schumer. I´m sure this goes down real well with his electorate.
However, it is worth reviewing Mr. Schumer´s political perspective and constituency-driven fervor a little closer. Personally, I think Mr Schumer could afford to calm down, assuming of course that he is indeed interested in America´s fortunes and jobs. His assumptions and allegations need to be put in a bigger perspective.
First of all, we live in a world of fiat paper currencies. In such a world, EVERY nation ‘manipulates´ its currency to some degree or another. Economic interests our fought out continuously in the arena of international currency battles.
Secondly, the question of how many jobs (especially government jobs) would be left in America if China had not mopped up the TRILLIONS of US debt paper should be considered. There are really two very distinct sides to ‘this coin´.
Thirdly, let´s assume that the yuan would indeed appreciate 10%, 20% or 30% against the US dollar and other international currencies. What would the effect really be? Would this create jobs in America or Europe? I doubt it. The current cost advantage of Chinese production is of such magnitude that even a strong appreciation of the Chinese yuan over the US dollar wouldn´t make US (or European) products significantly more competitive over Chinese produced goods. Therefore, the effect this would have on US employment is highly questionable.
However, what is much more certain is the effect it could have on inflation. If imports from China would increase by 30% in price, it would INSTANTLY translate into higher inflation - and higher interest rates (we´re at the border-line already, as discussed last week).
Furthermore, while the impact of a higher yuan would hardly help America´s exports, it would strengthen the position of other Asian contenders, such as Vietnam or Bangladesh. The appreciation of the yuan against the dollar would certainly weaken the Chinese position in relation to their strong competition from other Asian nations and currencies (some of which are pegged to the dollar as well).
Let´s look back in history a little. The Chinese central bank tightened the ‘peg´ between the yuan and the dollar in July 2008 -- less than two years ago. In the three years before, the yuan had appreciated by 22 percent against the US dollar. So, the Chinese reacted and installed the peg. They complained too, but not too vociferously.
Then, at the end of 2008, the US dollar (surprisingly for most) appreciated rapidly in the context of the global financial crisis and the huge deleveraging that came with it. The Dollar Index rallied from 72.00 in July 2008 to 89.20 by early March 2009, roughly a 24 percent appreciation versus the index basket of other world currencies. The Chinese, kindly enough, kept the yuan/US dollar exchange rate flat during this phase, thereby locking in the 23 percent ‘gain´ made against the dollar over the previous three years. During the same period and contrary to the yuan, other currencies plummeted strongly versus the dollar.
Since then, i.e. after ‘part one of the GFC´ (Global Financial Crisis), the dollar has pretty much gone back into its long-term depreciation mode. And, the American administration has been crying wolf, demanding sanctions. If it weren´t so pathetic, it might be considered amusing.
What appears to be the problem is that China has been given the global task of recycling their trade surpluses back into US dollars by buying Treasury debt paper. This was the role of Europe in the 1960´s and 70´s, and that of Japan in the 1980´s to mid 00´s. Since then, the Chinese have come to the forefront in this practice and thus have apparently become the scapegoats for the unwillingness of the US Treasury and US government to return to a responsible monetary, fiscal and economic policy.
America has been exporting its ‘inflation´ (the creation of ever more US dollars) for over half a century. But never have they been as dependent on one nation for their consumer goods as they have been on China for most of the past decade. The result has been a huge pile of US dollar ‘reserves´ in the Chinese central bank with the consequence of a huge - and possibly artificial - ‘boom´ in the Chinese economy.
History is repeating itself. As was the case for the German mark and after it the Japanese yen, the Chinese yuan appears to be the latest scapegoat. Japan has been suffering from its role as the major US ‘trading partner´ ever since its markets toppled two decades ago. One major contributor to this problem was the simple fact that the Japanese yen soared from 360 to 80 against the Greenback in the decade between 1985 and1995.
The Japanese did what the Chinese are refusing to do: let their currency appreciate massively against the dollar. Apparently, the Chinese are not interested in paying the same price themselves.
The Euro is still relatively strong
In the wake of the Greek debt crisis, numerous experts and commentators decreed the euro a "dead duck". In the not too distant future, the euro was widely considered the main contender for the spot next to -- or even above -- the US dollar as the number one world reserve currency. Now, the big question is whether the Euro land will be able to retain its own currency for much longer.
Personally, I am not a fan of the EU construct. As a Swiss, I treasure our independence and am solidly against EU membership for Switzerland. The European Union has considerable structural weaknesses and is, by nature, an increasingly centralistic and socialistic system. However, the euro doom of late is exaggerated. In the big scheme of things, the euro has remained relatively stable.
Since its beginnings as a cash currency in January of 2002, the euro has risen continuously versus the Greenback with the very normal gyrations of any currency. The following chart should clarify the point that the recent retreat in the context of Greece, and in the big scheme of things, does not qualify as a death sentence quite yet.
I expect the euro to continue playing a leading role in currencies and I expect it to at least match the dollar´s position. Whether that, in the very end, means much in the context of fiat currencies in general, is another topic - which will bring us to a few brief comments on gold that we´ll discuss in next week´s Update.
Until then, I hope you watch and decipher the chaos out there with as much interest (and confusion) as I do.
Sincerely,
Your "Swiss Mountain Guide"
Frank R. Suess
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RON´S PANORAMA - SAFE GOLD STORAGE AND PROPER HEALTH CARE, MADE IN SWITZERLAND
Do You Know Where Your Gold Is???
Like the ice cream truck in summer, it just keeps coming around. I refer to the story about which there has been a spate of articles in the last few weeks: that the gold supposedly in the storage vaults just isn´t there. Long waits for investors who want to take delivery of their gold are often cited as evidence that something is seriously amiss and a sign of conspiracy and manipulation. If you enjoy hearing the story, check out Canada´s Only Bullion Bank Gold Vault Is Practically Empty.
Perhaps there is a major player in the bullion market that isn´t playing straight. It would be trustfulness to a fault to dismiss the possibility. But there is a real conspiracy that deserves your attention first. It is the conspiracy of governments and central banks against your ownership of gold and silver bullion.
Politicians and governments hate gold because it is the only real competition to their collapsing fiat currencies, which are backed by nothing but a prayer and a promise. They hate gold and silver because bullion is a secure alternative to Wall Street and the financial establishment. They hate it because the long-term rise in the price of gold shames them.
Every investor should have a core holding in gold and silver, and some of it should be stored close at hand. But Americans face the risk of another gold confiscation (which could be triggered by a worsening economic crisis or by a military or geopolitical misadventure that sets off a run on the dollar). So, American investors are wise to store most of their gold in another country.
Global Gold, a Swiss-based precious metals storage facility in Zurich, is my recommendation for storing precious metals securely and safely. With Global Gold, your gold will be beyond the easy reach of petty politicians and vengeful government agencies whose only real purpose is to take what is yours.
Why Mandatory Health Insurance Works in Switzerland & Will Fail in the U.S.
Every resident of Switzerland is required to buy health insurance. If they don´t, they pay stiff penalties. Companies have no role. Health care plans are chosen at the kitchen table, not through employee benefit departments.
~ Silvia Morara
Most of my Swiss friends are perplexed by the giant fuss over health care in the United States. "What is the big deal?" they ask. "Why shouldn´t health insurance be mandatory as it is here in Switzerland?" They don´t see mandatory health insurance as a commie plot or rampant socialism, as it has been characterized by its critics in the U.S.
And this puzzlement is coming from market-respecting Switzerland.
As a matter of fact, the Swiss healthcare system works quite well, as do other government-regulated institutions in Switzerland.
Government regulation and ownership are not seen in such a negative light in Switzerland as in the U.S. because Swiss government institutions generally match the standards of private institutions. In America, Amtrak, the Post Office and Homeland Security are stereotypes of inefficiency, mismanagement and low corruption -- unionized projects where people pretend to work but really do get paid and really do provide voting blocks for big government.
(For readers who resist my somewhat negative characterization of Homeland Security, let me quote Representative Jimmy Duncan (TN), who describes the government´s Air Marshals Service as "probably the most needless, useless agency in the entire Federal Government." Read here - how the war on smoking in plane restrooms costs the American public $200 million per arrest.
But that´s not Switzerland, where you´d have trouble finding any difference between a private rail system and a public system. In Switzerland, the post office is professional, and the minimal border security required for a nation with no foreign enemies is handled by educated, polite and professional career employees.
This is why American concerns about a mandatory healthcare system don´t register with the Swiss. But they certainly do register with me. The U.S. isn´t Switzerland. Medical care prices are far higher because doctors and hospitals are working in a happy hunting ground for lawsuits. Behind every tree is a lawyer listening for the sound of an ambulance and dreaming of more arguments that when the lame don´t walk and the dead don´t rise - it´s the doctor´s fault. This leads to astounding premiums for liability insurance and the expensive practice of ordering every diagnostic test that any lawyer might possibly one day claim was obviously needed. That doesn´t happen in Switzerland.
Obamacare is really more of a revenue generator for the federal government and a bailout for unions and eventually state and local government plans than a program to ease the cost of patient-meeting-doctor. Contrary to the politicians´ promises, costs will continue to rise, and the standard of care for sick Americans will continue to decline. But for the profits of insurance companies that play along and for the coffers of the government, things are lookin´ up.
It´s just the first step toward nationalization, when insurance premiums will flow from citizens and employers to the government under a "public option" that allows no real alternatives.
In Switzerland, health insurance premiums are paid by the individual or family, not by anyone´s employer, so people shop around and determine whether minimal coverage is enough or whether they want to spend more for richer coverage. This is the Swiss way; they want employers and government to stay out of private matters.
Swiss health insurance premiums are about 30% lower than in the U.S., and what people get is substantially better. A Swiss has the right to see any doctor in his canton, and waiting times are short compared to the U.S. If you´re a Swiss doctor, your paperwork burden is far less than what a physician in the United States carries on his back.
Unlike in the US, the Swiss health insurance companies are required to offer a low-cost basic health care plan priced without regard to risk, and they are prohibited from making profits on the basic coverage. They get their profits from supplemental benefit plans. Local cantons (not the central government) subsidize premiums for the working poor based on income and family need.
Comparing the two systems by the numbers (per 1 million in population) is an interesting exercise. For example, in Switzerland there are 3,600 physicians and 10,700 nurses compared to the US with only 2,300 physicians and 7,900 nurses. Switzerland has available 3,900 hospital beds while the US struggles to provide 2,800. And the stats go on and on in a similar fashion. (SOURCE: Organization for Economic Cooperation and Development)
The American healthcare system is broken, but the Obama healthcare law is not the solution. It is a payoff for vested interests and a government revenue generator. A winning solution for the American people would be to imitate Switzerland´s superior approach. But don´t hold your breath waiting for that to happen. It might be bad for your health.
Ron´s Panorama is contributed by Ron Holland and offers economic, financial and social considerations for Americans, from an American - with a somewhat Swiss perspective. Ron is a retirement expert and consultant, who works out of Zurich and is a contributing editor to the Mountain Vision Newslette |
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NEWS BRIEFS
Amidst Legal Charges, Goldman Reports Solid Profits
International markets at the end of last week corrected starkly in reaction to the fraud charges against Goldman Sachs by the U.S. Securities and Exchange Commission. Goldman is accused of improper structuring and marketing of a debt product tied to subprime mortgages.
Clearly, as portrayed in a video on Reuters, Wallstreet has a serious trust issue that has already had and will have more implications for international markets and financial regulations.
Irrespective, markets still reacted positively and ran the other way when, four days after the firm was accused of fraud, Goldman´s net income rose to $3.29 billion, or $5.59 per share, from $1.66 billion, or $3.39 per share, a year earlier.
Go to Story
Rogers: Goldman May Fuel 20 Percent Market Tumble
Billionaire investor Jim Rogers says the SEC allegations against Goldman Sachs could act as the catalyst to send markets downward regardless of the outcome of the charges.
"Markets are overdue for a correction," says Rogers, chairman of Rogers Holdings.
Go to Story
Banks Seek to Exploit New Rules
Nothing has changed. Bankers are back to playing their "games".
According to the Financial Times, investment bankers have begun to develop ways in which banks might be able to circumvent the most punitive of the new capital rules being drawn up by international regulators.
According to investment bankers and senior bank executives, new products are being developed that would allow banks to mitigate the shrinking of their capital bases under the new rules by using a new generation of financing structures.
The more entrepreneurial investment banks - traditionally the likes of Goldman Sachs, JPMorgan and Deutsche Bank in this kind of area - have spent recent weeks touting new product ideas to banks that will be hit by the new rules.
Go to Story
The Ethics of Tax Resistance
Governments hate it when you succeed at escaping their tyrannical reach and so we have been witnessing extensive efforts by the feds to curtail tax dodging and avoidance. This has led to some considerable pressure exerted on banks in Switzerland, Lichtenstein and other places with serious bank secrecy laws to release the names of those who bank there hoping to escape the IRS.
In this context, Dr. Tibor Machan, in his guest editorial in the Daily Bell, discusses the ethics of tax resistance. He concludes that "although there could be variations in how one ought to resist (dodge, avoid, legally contest, etc.) taxation, the answer to whether those subject to the institution are ethically justified in making the effort to resist it is in the affirmative."
Go to Story
Gold is Quietly Becoming the World´s Currency, while Faith in the Dollar is Waning
"Gold is quietly, at the edge, becoming the world´s second reservable currency, supplanting the euro and rivalling the dollar," money manager Dennis Gartman wrote in his Gartman Letter, obtained by Bloomberg. "The trend shall continue months, if not years, into the future."
Last year, amid the longest rally in bullion prices in at least nine decades, and little noticed by most, central banks around the world added the most gold to their reserves since 1964.
Combined holdings rose 425.4 metric tons to 30,116.9 tons, an increase worth $13.3 billion at last year´s average price, according to the data. India, Russia and China said last year that they added to reserves. The expansion was the first since 1988, data from the London-based council showed. Central banks, holding about 18 percent of all of the gold ever mined, are expanding their holdings for the first time in a generation as investors in exchange-traded funds amass bullion as an alternative to currencies. Holdings in the SPDR Gold Trust, the biggest ETF backed by the metal, are at 1,115.5 tons, more than the holdings of Switzerland.
Go to Story
Greek Yield Spread Widens to Record Level
We recommend not buying Greek bonds. Some countries are very reluctant, and certainly politically challenged, to help Greece with their own taxpayers´ money. The situation is very unclear and could derail further. The direct and indirect implications are considerable.
Greece´s bonds fell, pushing yields to the highest relative to German bunds since 1998, as debt-crisis talks with the ECB, European Commission and IMF were delayed.
The announced talks with the IMF had to be postponed due to closed air traffic in Europe. The IMF will lay out deeper spending cuts in conjunction with the Greek government. Labor unions have already threatened strikes if this should happen. The IMF´s budget plan for Greece is a necessary evil to pave the way for the arranged EUR 45 billion EU/IMF aid package (EUR 30 bn from the EU for 3 years). This should help attenuate the financing problems for 2010. In 2011 and 2012, Greece will have even bigger financing needs and the market probably wants to see how this will be settled.
Go to Story
Swiss Airspace Reopened After 5 Days of Chaos - But For How Long?
This volcano "terrorist attack" has produced the worst air travel chaos since the 9/11 attacks in the United States nine years ago. On Tuesday, Swiss airspace reopened after five days of travel chaos caused by the eruption of a volcano in Iceland. But for how long? The situation is fragile and uncertain.
The first plane took off from Zurich just after 8am, but only a handful of planes has since taken off and the airport said it would still take several days for services to return to normal.
The Federal Office for Civil Aviation announced its decision after the positive results of four test flights and research carried out on the cloud of ash that had been thrown into the air from the Eyjafjallajökull volcano.
Go to Story
Eyjafjallajökull - One EU Citizen They Can´t Control nor Regulate
In a time when everything and everyone is regulated, the chaos and damage created by a volcano in Iceland with a name only few can pronounce appears as a rare antidote for government control freaks. This one, you can´t regulate...!!
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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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