Is the world financial system at breaking point? If so, what should you do as a normal person???

I am interested to see that views that were held by odd individuals such as myself have now become mainstream.  For example, Bill Gross of Pimco argues, in a piece at http://www.pimco.com/EN/Insights/Pages/Wall-Street-Food-Chain.aspx, that:

1.  The global monetary system may have reached a point at which it can no longer operate efficiently.
2.  Soaring debt/GDP ratios in previously sacrosanct AAA countries have made low cost funding increasingly a function of central banks as opposed to private market investors.
3.  Both the lower quality and lower yields of such previously sacrosanct debt represent a potential breaking point in our now 40-year-old global monetary system.
4.  Bond investors should favor quality and “clean dirty shirt” sovereigns (U.S., Mexico and Brazil), for example, as well as emphasize intermediate maturities that gradually shorten over the next few years. Equity investors should likewise favor stable cash flow global companies and ones exposed to high growth markets.

My comments are:

A.  Don't even think about Mexican and Brazilian bonds - if you want that kind of risk, why would you be in those bonds and not in equities?  For bonds, focus on US and Swiss bonds only.

B.   "Stable cash flow" companies are good, but avoid so-called "high-growth" markets (at present, there are no such markets in reality though there are such in theory).

C.  The global financial system is indeed rickety (and I have pointing out at least some of these rickety-nesses since at least the late 1900s).  However, the global system is NOT about to break down.  The Euro is in the midst of a game of chicken between, on the one hand, the Eurozone authorities and heavyweights, and, on the other hand, the euro-fringe countries such as Greece, Italy and Spain.  The latter are bound to give in to the former, but the process of their actually being willing to do so is almost impossibly painful because the Eurozone authorities and heavyweights have IMMORALLY not done anything about insisting on punishment for those individuals/ companies/ organisations which have brought these countries to this sorry pass, and because the consequences for the Eurozone countries are economically as well as positionally dire (the populations of these countries will suffer quite a lot, in addition to giving up even more of their sovereignty).  Expect continuing shenanigans (as I have said earlier) but expect the Euro to survive and for the global financial system to further strengthen the position of America and weaken the position of all economies that are exposed to commodity-price rises and falls (ahead are further price falls).  India will continue to fare RELATIVELY well among developing countries, assuming there is no internal political problem or General Election - the latest possible date for which is 2014.  America will have a few weeks of blue funk immediately preceding its General Elections in November.  Meanwhile, I continue to fear that China will collapse - if it does, the consequences will be dire for everone, and all bets are off - so continue to PRAY (because supernatural factora are all that can work) that China doesn't collapse.

D.  What else can you invest in apart from US and Swiss bonds, and "stable cash flow" equities?  As always, I urge you to prioritise small and medium-sized companies that you know personally.  Commodities will be great to invest in once the prices come down to a realistic level.  Property is a doubtful investment in general at present, though there are always bright spots in every industry. Gold is a perennially good option, but it is probably still too expensive given that industrial demand for it is falling and will fall further - however, you need to take a view on whether or not personal and corporate "hedging" demand will grow....

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Should we give control of the Internet to the UN?

Later today, US lawmakers will debate the USA's position on whether to hand control of the Internet to the United Nations.

The debate is being organised by a House Energy and Commerce subcommittee as part of the preparations for the World Conference on International Telecommunications (WCIT) which will be held in Dubai in December.

Involving delegations from 193 countries, the WCIT has on its agenda the renegotiation of a UN treaty.  The debate is basically over whether to give more or less complete control of the Internet to the UN's International Telecommunications Union (ITU).

At present, the Internet is organised on the basis of technical rules (e.g. what featues should characterise telecoms equipment or what should enable a particular technology to be labelled "4G") set by oranisations such as the Internet Engineering Task Force, the Internet Corporation for Assigned Names and Numbers and the World Wide Web Consortium.

However, political control lies with the different national governments.

Those of us who are interested in internet freedom need to cotinue arguing and working for Internet structure, management and control that is decentralized..

The ITU is an excellent body for setting global telecommunications standards but (a), in principle, no single foreign country or no assemblage of countries should be able to censor what is allowed to appear or to not appear, for example in India; and (b) the ITU has shown no evidence of being able to be a good implementer or regulator - indeed the UN as a whole has been great at developing codes and declarations, but has shown no evidence of being good at implementation of those codes and declarations.

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Re: Wealthy Americans Queue to Give Up Their Passports

A relative of mine sends me the following article for comment:

http://epaper.timesofindia.com/Default/Scripting/ArticleWin.asp?From=Archive&Source=Page&Skin=ETNEW&BaseHref=ETD%2F2012%2F05%2F14&ViewMode=GIF&PageLabel=20&EntityId=Ar02005&AppName=1

I responded: 

"Dear ..

 

the article is basically correct, but misses the point that the Indian government also taxes global income (of course we are not yet in OECD) 

 

further, the article missed the real reasons the rate of Americans giving up their passports is higher in Switzerland; that is:

 

(a) because American citizens are being discriminated against in Switzerland (for example, all major banks have told ANYONE resident in the US, including NON-US citizens, that their accounts are not wanted and closed the accounts, because no one knows when and how American rules may change (the real reason why Americans ran into trouble in Switzerland) and 

 

(b) because most Americans in Switzerland are already Swiss citizens too (US and CH have have both allowed double citizenship for ages) so, unlike many countries where Americans do not have dual citizenship and therefore cannot renounce their American one, those who are dual citizens with CH have no basic problem if they give up American citizenship

 

what the article also does NOT say is that the number of Swiss seeeking US citizenship is still at least 3 times higher than the number of Americans giving up Swiss citizenship"

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Before I shoot of on my travels tomorrow, my state of the world report

This is a good time to buy gold. 

I was pretty confident of the US till last week, when President Obama made that highly unwise statement about gay marriage (I am not a crusader against it, and I don't think it is that significant a matter in itself, but economics will always be trumped by politics, and politics will always be trumped by morality - so the gay marriage debate is a straw in the wind).  The next Presidency is now wide open, so expect the US to go into a period of lower growth starting next month - till the question of the Presidency is resolved.  Then expect a quick boost to the economy at least till the time that the realities of whatever policies of whoever is President sink in.

The Euro is in doldrums and that will continue for some years - though I still do not anticipate any country exiting from the Eurozone.  The EU is trying to stay the course towards an orderly if slow and difficult withdrawal from the sorts of attitudes and policies that led to the 2007 crisis (which is what continues to make for the global slowdown combined with volatility and vulnerability). So: no great shakes in the Eurozone but probably the most stable part of the world for the foreseeable future.

China continues on its course towards collapsing (certainly as a growth story, and probably politically) this year. 

India will stagger on at the present sort of (not bad) level till 2014, barring any unforeseen disaster - just as the US has thrown away the opportunity of a lifetime, I see India doing the same (unless a government of national unity can be brought in during the next several months). 

Russia's economy will do relatively well (though not as well as the last term) under Putin in his "new" role - though there will be greater social and political unrest, which will probably result in greater loss of freedoms for the population at least as long as Putin is in charge.

Brazil and Latin America I still follow least, so won't make any comment about that at present.

Africa is a continent to watch and seems to be under sensible governments for a change - specially in Rwanda, East Africa and a few other countries.  However, the future of FDI there (and therefore the economic future of the continent) will depend at least partly on the future of South Sudan, and developments in North Africa and the Horn of Africa - which mayat some point skew perceptions of the stability and growth potential of the continent.  Till then, Africa is not a bad bet, though other commodity-based economies will have an increasingly difficult time.

You may have noticed the phrase "not bad" cropping up a few times above.  That's because it is hard to see many good bets in global/ national/ macroeconomic terms. The best bets continue to be in small and medium-sized companies all over the world where you know that the management is trustworthy and where you can "smell" what is going on yourself. 

I do NOT trust any of the big companies at present, certainly not the listed ones, in spite of the fact that some of them are sitting on mountains of cash (or I should say I don't trust them particularly for that reason - too much cash on hand tempts management to unwise decisions).

As always, I take a middle- to long-term view.

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Is the US economy still sick?

Last Fall, I was the only person (to my knowledge) who forecast that the US economy would revive.   

My hopes were fulfilled by the results of the last quarter of 2011. 

However, the most recent figures (last Friday) show that the economy grew at only 2.2 percent in the first quarter of this year, down from 3 percent the previous quarter.   

Of course, 2.2% is not bad compared to MINUS 8.9% which the US economy hit in the middle of 2008, or the 0.4% it hit in the middle of 2011.

That is why some people doubt that the economy is still sick. Consensus expectations for the first quarter of this year were 3% or higher, those were based on the common approach of “take the figures that suit you most and project them forward”.  Those consensus forecasts were disappointed.  I did not make any forecasts in terms of figures for this quarter, because my sights are set a little more long term.

So, long term, will the economy continue to be sick?

First, let us recall where we are since the current crisis started in 2007:  US taxpayer money and government policies have been mostly focused on rescuing the largest banks and financial institutions, as well as the poorest of US citizens.  But the creation of a competitive US economy has been paid practically no attention.The assumption seems to have been that if the biggest disasters were averted, and the poorest helped, then the economy would revive, provided consumers could be helped to spend.  And the government’s stimulus policies since the crisis have been designed primarily to encourage Americans to spend (though there have been a few investments – e.g. in infrastructure – most of these will be found, on examination, to have been wasteful or less than optimal from the perspective of encouraging sustainable growth).  

Consumers have indeed done their best - and better than they should sensibly have done:  the savings rate was nearly zero immediately before the financial crisis, but hit nearly 6% at the end of 2008, then declined to 4.5% in 2010 and to 3.9% in 2011 (that was against a savings rate of more than 8% from the 1960s through the mid-1980s). 

Second, let us revisit why I had foreseen the rise of the US economy in the Fall of last year? Primarily because of the decline of BRIC and other emerging markets in view of risk aversion, and the return of capital to the US.  That is a long term trend which will continue, in spite of short-term dips and reversals, unless something fundamentally new comes up - and all the substantial surprises that I can foresee are only likely to make the move of capital to the US stronger.

So why is the US still languishing?  The US is still languishing because of the actions of the US government as well as of rich US citizens.

What actions of the US government?  Simply put, the US government has launched no substantial policy designed to revive growth in the US. What kinds of policies could the US have put in place (and what can it still put in place)?  John Mumford, in his book, BROKE, published last year, suggested a very credible plan for creating 10 million jobs by selective policy support for small and medium sized businesses, which are the only engine that can drive US growth. Instead, the government has continued to focus on large companies, because they are the ones with a strong lobby in the US, while small and medium sized companies, which seem to have no real lobby at all, continue to languish. President Obama would be well advised to focus on re-igniting the growth of small and medium sized businesses, as they are the only engine which can make him re-electable.

And what has been the contribution of American citizens to preventing the growth of the US economy?  Well, in view of self-interested propaganda regarding the decline of the dollar (and even the collapse of the dollar), while foreigners have continued to buy into the US because they have feared a collapse in their own countries even more, Americans have continued to seek safety and tax efficiency by putting their capital into special purpose vehicles abroad, particularly but not exclusively in the Caribbean. Now that faith in God and loyalty to nation have been replaced by the worship of money, gone are the days when an appeal to American patriotism could encourage rich Americans to bring capital back home. Now incentives and legislation must force or encourage them to do so. Since any force, to be effective, would be draconian (and probably counter-productive), it is tax policies and incentives that must be provided for Americans to keep American capital in America. 

Such a move is complicated by the perception that the US will not be able to produce as high a growth rate as other countries.  And there is some validity to the perception, because China and India, for example, at present, produce growth rates three to four times as high as the US - fair compensation to the risk of a sudden political, fiscal or monetary debacle, particularly in "black box" (non-transparent) countries, such as China..   

However, that differential in growth rates will continue to bedevil the US as long as the US government continues to tilt the scales against the US by subscribing to free trade treaties which provide foreign manufacturers with unfair advantages.

For example, it is clear that few factories are going to be built in the US as long as it is cheaper to build such factories in China.  Equally clearly, it is going to be cheaper to build factories in such countreis as long as its salaries don't rise too fast while these countreis pay hardly any attention to environmental and human considerations.  

To understand the competitive advantage of countries such as India and China, American and European investors focus attention on how hard people work in such countries, but ignore why people work so hard, whether in poor countries or among the poor in the US itself.  Because it is not the hard-working Chinese who provide the competitive edge to China, it is China’s flouting of minimum standards of environmental care, as well as of health and safety standards, that enables it to do so.

All that the US has to do to regain the advantage for its small and middle sized companies is to revoke the “most favored nation” status for Chinese and other manufactures till such countries provides minimum standards of human and environmental responsibility.  

Any move to do so will provoke, specifically, a furious Chinese response, and threats of withdrawal of Chinese money from the US.  That is, however, a cost worth paying for the revival of the US economy.  

What will prevent such a move from being merely a new kind protectionism, is if that is the start of a journey towards a new globalisation.  

The existing kind of globalisation focuses on mere growth, while leaving it to chance or a few individuals to address the human and environmental challenges of our time.  The new globalisation must focus more and more creativity and energy on addressing competitively the challenges of our time: genuinely sustainable growth - growth that is environmentally responsible and tackles real needs such as illiteracy, disease, poverty, suffering and lack of freedom around the world.

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The State of the World Report - a haiku

Few leaves, many machines
Few humans, many screens
Fugu a-hosting.

(c) Prabhu Guptara, 1st of May 2012

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