Investment Strategy Newsletter

Switzerland has signed – or is about to sign – various treaties to convert untaxed deposits of foreigners to legitimate, fully taxed funds. Initially, there will be a capital deduction of roughly 20 to 40 % (depending on amount, length of deposit and past frequency of transactions) and subsequently a  capital gains tax of 25 to 35% plus the usual dividend and interest witholding taxes.

In addition, and this is a real shocker, anybody who transfers his Swiss deposits to a third country will be named to the depositor’s home authorities. This looks like a veritable trap for funds domiciled in Switzerland.

Unless one values the safety of Switzerland as such or the superior skills of Swiss investment managers very highly, there are not many reasons to keep one’s fortune in that fortress of old. Presently there are still boltholes in the Carribean or Asia where one’s money could be parked without undue harassment, but the doors to those are only open to very high net worth individuals and they might be closing too.

Time to think and act, it seems.

Many people in Europe believe it to be a good idea to accumulate real estate in order to escape the inflation they see in the future. What they don’t take into account sufficiently is the probability that essentially broke governments will turn to “rich” property investors in a desperate act to avoid or delay bankruptcy and to appease angry masses about to riot in the streets. Europe is deeply divided: while Germany, which is supposed to bail out the Mediterranian rim, has only 2 seats out of 23 on the ECB’s Governing Council, a majority is voting for bail-outs and easy money. Since the underlying problems of the EU’s euro circle are structural, any degree of monetary easing will only postpone the final reckoning.

And the bill for that is rising every day until a big, bloated bag of sh#t will hit the fan. Until that happens, we’ll have our ups and downs in equity markets, a trader’s playground. And because money will be allocated at negative real interest rates to the bigger players, there won’t be a lack of chips in the casino.

Within the investment universe, we think that energy and gold are still good choices for the more conservative part of the portfolio and banks can be used to jump in and out of the rollercoaster, if one has the nerve and stomach for it.

The question on many people’s mind must be: how much juice is left in the batteries which have just driven the markets up to four-year highs?

The momentum and the money is still there. The speed of the upward push in some tech stocks carries echoes of 1999 and ultra-cheap money won’t be a feature forever. But for the time being we think Jackson Browne’s desire to “stay, just a little bit longer” might be fulfilled.

Let’s follow the money: the trillions of dollars and euros which have been created recently have been handed over to the much-hated bankers. Potential catastrophic events have thus been averted and as soon as the determination of the ECB became undisputably clear bank stocks rallied accordingly. This could well continue for a little bit longer, considering their still low valuations. We prefer US banks compared to others because they’ve had more time to clear up their mess and are better positioned for today’s realities.

To make life more interesting nothing much has been done to solve the real underlying problems.

No stakes have been driven through the hearts of the vampires and therefore they will visit us again and again. Perhaps we’ve learned to live with them; after all, the Greek saga is in it’s third season. Spain and Portugal are also hardly surprises any longer. But whether they cause occasional setbacks on our upward march or a veritable crash remains to be seen.

The greatest danger to this bull market is probably the end of easy money or a strong perception that the end is near. Right now the justification for raising rates is not there and it might still be months, if not years away. But sensors should be sharpened toward such a turn in interest rates. In our opinion it won’t come before the november elections in the US. After that we’ll see.

So, enjoy the ride, just a liitle bit longer.

During the 1980s, banks in Japan lent crazy amounts of money against real estate. Of course, they couldn’t get it back. To save the lunatics, interest rates were kept at basically zero for the next 20 years.

During the early years of the new millennium, US banks lent crazy amounts of money against real estate that people couldn’t afford in the first place. Of course, they couldn’t get it back. Interest rates dropped to zero to save the dumb (or criminal) bankers.

During the last forty years, European banks lent crazy amounts of money to their governments to help them getting reelected. Of course, they can not get it back. Interest rates have dropped to naught to save the lenders.

It goes to show that banking’s rule number one “Lend out money only to those who can pay it back from their cash flow” has been violated practically everywhere (some dumbo banks not only lent to bankrupts, but did it in foreign currencies, just to show that ignorance obviously has no limits).  The culprits in all cases, deranged imbeciles masquerading as bankers, have not been punished, but instead rescued and rewarded.

It’s now an extended, grinding process to let technically broke banks recover again. It’s also confusing: folks have been taught for generations that saving has merit. Now they are being told to go to hell. They’re not needed when central banks unleash avalanches of money. A trillion here, a trillion there, happy times are back again. The ECB alone has given half a trillion in 3-year money at just 1% to its banks. A similar amount is being readied for release in a few weeks time.

What about inflation? As we have said here before, there is no imminent danger of it. The newly printed money is not yet being injected into the real economy. It’s sloshing around in the tubular interbank system, channelled back to the ECB and farted into the casino which the markets have become. It is thus pushing up some asset prices, stocks and, to a lesser degree, commodities.

We could deplore this state of affairs here, but our mission doesn’t include saving the world; we’re just trying to help with investment decisions. Therefore: since all the money is flowing towards the banks, stick to them. January was very good for banking shares, and this could continue for a few more weeks. No important bank is allowed to go bust, and the margins are ok: get money at 1% or less and lend it out anywhere between 4 and 24% (credit card and overdraft charges, in case you wonder). There are hardly any geniuses in banking (except at Goldman, of course) but luckily, with this kind of support, you don’t need to be a genius to make it.

Enough of this! Let’s instead look at mobile communications and such. The clear winners so far are of course Apple, Samsung, Amazon as well as Qualcomm and Arm Holdings. Unfortunately their prices are (too?) high, but whenever there’s a 10% pullback, one should consider to buy some. The previous leader in this field, Nokia, has been left for dead, but it just came out with its new Windows series, the Lumia 710 and Lumis 800. The reviews and market reception so far have been good. If Nokia succeeds, the stock, now trading near its all time low of 4 € (5 $ for the ADR), could be a stunner (Disclosure: I’m long NOK). Hardware providers, which build the infrastructure for the net, have pulled back considerably. Look at companies like Juniper, Riverbed Technology, Alcatel Lucent, Ericsson, Cisco and even Siemens for possible entry points. Storage is a universe onto itself (the Cloud!). EMC Corp. is a prime name in this field.

Finally: the euro will not go away soon. It’s been a relative success, even though some profligate countries couldn’t handle it, initially. Even if Greece and Portugal drop out, the rest of Europe will keep it.

The world needs an alternative to the dollar, not least because the USA is misusing it as a political nuclear weapon. Whenever Washington threatens to cut somebody off, like just now anybody who deals with Iranian banks, all must cave in and follow Washington’s dictate, like a herd of “sheepletons”. Europe and the ascending superpower China can stop that, but only if they have a credible, strong reserve currency.

After a disappointing and difficult 2011, we found some joy in the first trading days of 2012. Hopefully, it will last. I want to share my thoughts for the immediate future with you here:

The most important support for the market is the scaffolding of extremely low interest rates which is not going to be removed soon. Secondly, companies are doing generally well; they are cashed up and prepared to navigate through potentially difficult terrain.

China will not implode as expected by many pundits. The US economy will continue to grow moderately, usually a good condition for the stock market. The euro will not turn into confetti, banks in Europe will not collapse and any state or other body too big to fail will not do so. The opinion leaders in Europe and especially its successful businesspeople are fiercly backing the euro. That matters more than the guided opinions of large parts of the population which remain angry and confused.

I expect continuing tensions in the Middle East, perhaps a war between Israel and the US vs. Iran. The same interests which promoted the phony war in Iraq are aligned to do it again. Eisenhower’s “military-industrial complex” needs a new war to justify and guarantee its trillion dollar allocation. If it happens, the dollar and gold will go up, along shares of Lockheed Martin, General Dynamics etc. The rest of the market will wobble, but eventually recover. Oil will explode, at least for a few days or weeks.

I’m not as optimistic about gold as I have been over the last few years. Even if base money increases due to “money printing”, it’s only about a tenth of overall money supply and won’t matter much in the short to medium term (just look at Japan, if you doubt that). More importantly, banks are deleveraging and cutting balance sheets, states are switching to austerity mode and consumers are tight. The velocity of money, the speed it’s moving through the system, is low.

Take all that and inflation is not the imminent danger. Down the road, in 3-5 years, that might change. If there’s little danger from inflation and even the euro disaster of the second half of last year didn’t push gold up markedly, why expect a bull market now? I keep my gold but I won’t buy more – for the time being.

Finally, I stick with energy stocks (often recommended here) and add a few bucks into speculative counters such as banks, which have been totally bombed out.

Folks are upset when they hear that banks are being rescued while ordinary guys are discarded without hesitation.

The anger is justified, but it can’t be helped. You see, the big banks all over the world are like segments of a giant roller coaster. If only one of those segments collapses, the whole coaster would become off limits, especially when nobody knows which part of the ride would fall off. One could improve safety by changing the design of the machine, but that takes time, especially when it has to continue running during the upgrade.

Central banks of the world are also connected at the hip and are the responsible guardians of the system, the roller coaster. They cannot allow the track to become unsafe, they have to stand behind the whole juggernaut. And because that is as it is, I expect no big bank to fail.

That makes for an interesting trading proposition:

Every other day some bad news or rumors are spreading, and the market tanks, most of all the financials.

Time to buy.

Unsurprisingly, the sky is not falling, central banks are easing, bank shares are rallying.

Time to sell.

This strategy is of course not suitable for everyone. One needs strong nerves, because the exact timing of tops and bottoms is impossible. There will be (temporary) losses, some entries and exits will happen too early. But, considering that bank shares have already been beaten down a lot, it could be worthwhile. It’s hard speculation, but nearly everything in life is, too. Whom we marry, what job we choose, if/when/where we build a home – we’ll only know years later, whether it was the right decision or not.

Even gold, the seemingly safest way to navigate the present circumstances is an essential gamble. We are, willingly or not, forced to choose, or gamble, and doing nothing is also a choice.

Finally, here is a famous statement of the US Fed boss, Ben Bernanke; he said “The U.S. government has a technology, called a printing press (or today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at no cost.” Congressman Ron Paul accused him of being engaged in a full time money counterfeiting operation. Be it as it may, money will definitely be created to save the banks (and governments).

It’s known that insurance companies pay out less than they take in. The beasts have to be maintained after all, and that costs.

The arrangement would perhaps be acceptable if the guys behind the marble columns were superior guardians of our money. Risk assessment is their daily bread, and investment management their calling. It turns out, however, that the insurance folks were trusting believers in long-running Ponzi schemes. They’ve placed large portions of their assets in government bonds which will never be paid. At least not in the same money which went into them.

It is unclear why experienced actuaries, statistics and maths wizards, ever assumed that states, which couldn’t balance their budgets for decades, were somehow good debtors. It must have been an extreme example of swarm intelligence gone bad. Now one insurer after another admits to losing hundreds of millions, or even billions, of dough. Bad luck for their clients and shareholders.

What happened in the insurance realm is nothing new in banking. Boom and bust are familiar cycles. The same mistakes which killed banks since they existed are being made again and again. Insane leverage, term and currency mismatches are the eternal poison pills for aggressive bankers. Astonishing gaps in risk control are the icing on the cake.

Our conclusion from this state of affairs has to be to either to avoid both sectors completely, or try extremely short-term speculative dips into them. The volatility is tempting, like a surfers’ paradise, with waves like giant barrels and plunging breakers.

We repeat our long-standing recommendation for solid blue chip stocks with good dividend yields. The precious metals position stays, too. Periodic profit taking after short surges is not a bad idea.

The Euro was the political price which the French President Mitterand demanded for Germany’s reunification 21 years ago. The two main actors, Mitterand and Kohl, agreed on a common currency without understanding the basics of it, let alone the disasters it would entail. Now we have landed in a holy mess and if we don’t find and accept the only feasible way out of it the Euro is doomed. Time is of the essence. Incompetent politicians have already wasted two years and we are moving ever more closely to a steep cliff and a hard fall.

The only way out of the terrible situation we find ourselves in is the monetization of a large part of European debt by the ECB. All of Europe is technically bankrupt because it is unable to meaningfully reduce its debt without placing the whole continent into a severe depression. Now, in order to deflect the two main arguments against monetization, moral hazard and inflation, here is our solution:

Instead of just forgiving a large part of Greece’s debt and later on also Portugal’s, Italy’s, Spain’s etc. we just forgive half of the debt of each and every Euro country. Nobody has to pay the debt of other countries, all benefit equally from debt forgiveness. Technically that will work through the purchase of about 3 trillion Euros of government-issued debt by the ECB. Immediate consequences of the announcement of such action should be: a gigantic rally in the debt, equity and commodity markets, a drop in long-term interest rates, especially for the weaker countries and a decline of the Euro exchange rate. The latter would definitely be welcome by European exporters.

In order to eliminate moral hazard all parties have to agree to follow a strict debt regime with severe and automatic sanctions in case of delinquency ( exclusion from the Euro zone ). This must be agreed before any monetization can take place.

As to the danger of inflation: While banks are shrinking balance sheets and consumers stay tight with their money there is no danger of inflation. Witness Japan and the USA which have printed tons of money without igniting inflation. Of course the danger of future inflation is real and the ECB shall be ready to act if that becomes necessary.

Our guess is that the above solution or variation of it will be chosen, but only after everything else has been tried and has failed.

That means the turmoil will continue for the time being. During such time the volatility is extreme, oscillating between hope and despair. It’s a potentially good time for traders as we see movements of 20% or more within a few weeks. It’s also very dangerous for inexperienced or overconfident folks. A quantity of them will be crushed and this itself will contribute to the chaos which only few can navigate successfully.

Life is relatively easy – when you are in possession of a limitless credit card. At least it seemed like one. Our welfare state was built on it. But suddenly a whistle has been blown, credit is being withdrawn, and the wheels are coming off our shiny car.

Economists were always laughing when some simpletons compared governments to households and said: you can’t run persistent deficits. Yes it’s true, nations can increase taxes or crank up the printing press, but those actions have consequences. And they are not pretty. There’s simply too much debt around nowadays, and there are only three choices before us:

• 1) Austerity and hard deflation.
• 2) Default.
• 3) Inflation.

Looking at these choices, and also at various decisions being made by our politicians and central bankers, it seems obvious we’re headed towards choice number 3. Debts will be wiped out on one side of the balance sheet, assets and savings on the other. Before and while that happens, we’ll have to spend some time in austere purgatory, just to make sure that the misery is really thorough. ‘

As if that were not enough, our governments are introducing new taxes – while real incomes are stagnating or even dropping. And the common currency of over 300 million people in Europe is in danger of collapse.

Yes, the house is on fire and the exits are not clearly marked.

We at XAM Capital Ltd. have managed wealth successfully for over a decade, and we are well equipped to steer through the coming storms. Many people will lose a lot of money in this turmoil. A few will be able to sail through, preserve and even add something to their wealth. In these uncertain times, trust becomes a rare and precious commodity. Trust to be in safe hands, and in a safe haven.

At XAM Capital Ltd., we are offering a safe haven to some old and a few new friends. As anybody can see from our results over the last decade, we have done well, always emphasizing low risk and high liquidity – while avoiding various bubbles.

Due to our philosophy and the nature of our setup we can only accept a very limited number of new assignments. Should you wish to explore possibilities,  please contact us directly.

Do we have a situation here? And if so, can anything be done about it? In Italy, Cavaliere Cagliostro Berlusconi answers in the negative: Nothing much can be done, it’s a shitty country after all, which makes him sick. Lowering the bar a bit more, he gives his assessment of Dear Angela: an unmountable horseass. There’s some entertainment value in this opera buffa. Other than that, nothing much. To have money is better than having no money, and since we are now entering the age of less money, it’s going to be less pleasant; perhaps a lot less.

The emperor has no clothes, the treasuries are empty, the entitlements are hollow.

Mountains of debt have to be dealt with. The choices before us are all hard. It’s clear: somebody has to pay. But is it the taxpayers, the banks, the shareholders, the bondholders, the rich or, perhaps, us?

When chaos breaks out, gold shines. But beware of desperate governments, like F.D. Roosevelt’s, which confiscated all privately held gold in 1933 and threatened anybody who kept his gold with a 10-year prison term. Conclusion: Bullion and coins are safer than certificates, as long as they are kept in a safe place, far away from our government grifters.

How safe are the banks? Today we read that Siemens has withdrawn all cash it had deposited with French banks. That is remarkable.

Many banks are dependent on emergency cash windows at the ECB. The ECB itself depends on swap arrangements with the Fed to supply European banks with needed dollars. The most likely scenario is an extended period of muddling through with emergency meetings, last minute rescues and an insane up and down in the markets.

A few will make money, wealth preservation is the priority, but many must lose.

We, at XAM Capital Ltd., are privileged to reside in Asia, and are trying our best to keep assets in relative safety.

We are drifting through white water rapids, towards a waterfall. We don’t know its height yet, and neither the dangers that are lurking at its bottom. We always knew that dangerous currents lie ahead, and we have written many times about them, in this space. We’ve advocated gold for years. Now’s the time the ship is coming in.

There’s been a divide between bad debt, owed by the southern European countries, and good debt, issued by the likes of Germany and the US. This is clearly shown by the interest rate differential between the two. In our opinion, the so-called good debtors are as – or nearly as bad – as the presently punished, “bad” ones. Most countries in the western hemisphere plus Japan have spent year after year, decade after decade piling up debts. None of it will ever be paid back. Whoever lends money for 5, 10 or even 30 years to a bankrupt government at ridiculously low interest rates, is a fool. Nearly every insurance company and pension fund belongs in that category.

Now, as previously “safe” government debt has been found to be toxic, most banks are facing insolvency. Panic is the worst possible outcome. We don’t think it will come to that. The Federal Reserve in the US and the European Central Bank are in business to prevent such disasters. Pushed to the wall, they will run their printing presses day and night. Unlimited lines of credit can be extended to banks, and government bonds can be bought up at the flick of a button. The monetization of debt is likely, in our opinion. The manure will be spread around through fine nozzles in an Herculean effort to clean the Augean stables.

That means inflation is upon us. That’s nothing new. Most people already experience inflation at least twice as high as officially reported. We’ve mentioned the statisticians’ tricks a few times before. We expect gold to do well, still; however, the more parabolic its curve becomes, the more speculative it will be. There will be setbacks, trading opportunities for alert investors. Because of the steep falls in equity markets, we feel that good investment opportunities will evolve soon.

There’s an old saying “Don’t try to catch a falling knife”, and there is some truth in it. Nevertheless, reward will only come to the bold (and prudent) man; that means to push the ‘buy’ button at certain times. Look at the overall strength of a company, its dividend yield, the desirability of its products as a guideline.

As said above, there is no panic – yet. If it ever occurs, all short-term bets are off (except gold, of course). But a river usually runs through a quiet stretch after passing mighty falls.