Europe's economy is at a standstill. This summer was full of critical developments in the Eurozone: In June, the European Central Bank (ECB) decided to move into the territory of negative real interest rates! The deposit rate, which already was at 0%, was cut to minus 0.10%. Additionally, its refinancing rate was cut from 0.25% to 0.15%, and its marginal lending facility dropped to 0.4%. This was one of a package of measures the ECB said it was considering to combat disinflation in the Eurozone and give the economy a push. Due to the continued dim outlook of the economy, the ECB further reduced the deposit rate to minus 0.20% and the refinancing rate to 0.05% in early September.
In our first Outlook back in December 2012 we discussed measures of financial repression in our financial markets. The first one we listed was that of negative real interest rates and we expressed our concern of it continuing for some time. That the ECB resorts to this option comes as no surprise, the economy has been close to a standstill in the past two years and European debt levels remain alarmingly high. What better way to reduce the cost of debt? And as a bonus, banks are charged to pay the central banks for their deposits. Of course, these costs will shift to deposit holders who, as we stressed before, will not only lose money in real terms, but potentially in nominal terms as well.
Asset-backed securities... again?
To further encourage credit supply in the continent, the ECB also mentioned it will launch its targeted longer-term refinancing operations (TLTROs), an enhanced and improved bank lending mechanism (excluding mortgage lending). Auctions are scheduled for September and December this year. An initial USD400 billion will be up for grabs! But the biggest revelation was that the ECB would start a US-style bond-buying facility by purchasing asset-backed securities (ABS) from banks. ECB President Mario Draghi is daring banks to test the controversial ABS buying program. Recently, the ECB revealed that it settled for BlackRock Inc. to advise on developing this ABS program. Asset-backed securities are financial instruments, which essentially are a repackaging of loans whether mortgages, auto credit, credit card debt, receivables among others. These are then sold on to investors. Ideally, this securitization reduces credit risk because ABS are spread across several underlying loans (diversification). But lest we forget what happened in 2008! Yes, BlackRock is no stranger to this field - it was one of four hired by the Fed to manage the Federal Reserve program in the midst of the crisis back in 2008. Now, BlackRock has more than USD4 trillion assets under management and is one of the largest investors in European ABS. But the fact that it has come to this option indicates that the monetary system in Europe is in shambles! The names of this program change over time, but in essence the outcome is the same: injecting more money into the system.
No recovery in sight!
Europe and the world are holding on to the small recovery indicators, such as those released by the European Commission expecting the EU's real GDP to go up by 1.6% in 2014 and 2% in 2015. Is this what we call a recovery? With these low figures along with close to zero inflation, Europe is in a battle for growth. 2Q2014 growth numbers were most certainly not reassuring: Germany, the largest EU economy, contracted by 0.2%, France was at a standstill, with small exceptions such as Spain, the Netherlands and Portugal reporting meager growth of less than 1%. The crisis in Ukraine played a significant factor no doubt as it affected production and the real economy. Demand for German industrials, particularly to Russia, has dropped significantly - Germany is Russia's biggest trading partner in Europe. The EU had imposed sanctions on Russia last June for supporting separatists in Ukraine. And so the impact will still reflect in next quarter's numbers. But the crisis is escalating with fears of possible Russian military intervention and Europe meeting to discuss a new set of sanctions. These developments will not fare well for the European economy, and certainly not for Germany, making the target growth of the year rather optimistic.
Safeguarding property rights is key to protect your wealth!
The news flow has only supported my opinion that I explained earlier this summer: With the West accumulating more and more debt, along with real production and the real economy going nowhere, there is no reason for optimism. We don't know how the future will look like and when the final shutdown of the system will actually occur. But what can be said is that all the problems, which led to the crisis in 2008, are still the same and haven't been resolved. On the contrary, more money has been printed out of thin air and trillions of dollars of new debt has been directed into asset bubbles such as stocks and real estate. At the same time, it is obvious that the paper assets system is being used to destroy civil liberties in most countries and as Prof. Dr. Stahel describes in his article, this money is also being used to finance foreign intervention and wars. This brings me to the important topic of international diversification. One should never put all eggs in one basket. Holding part of one's wealth outside the jurisdiction one resides in and outside the banking system is of paramount importance. In this regard, we are convinced that the jurisdiction of the "Confederation Helvetica", or better known as Switzerland, offers the best protection in terms of safeguarding private property rights. We should never forget why Switzerland became a safe haven in the first place. We have been and still are a little country with a small domestic market and no natural resources. This was the starting point of a culture based on trading property rights and self-determination enjoying minimum government interference. Switzerland, contrary to most of the world, has the understanding that the nation states are not ultimate "gods", which the people have to serve or even sacrifice their lives for. The basis for such a concept, or better said, tradition has been and still remains, mutual respect, deep belief in private property rights, self-responsibility, neutrality, or rather, anti-interventionist principles, hard work, and the adherence to mutually agreed upon contracts. The Swiss confederation is the last remaining direct democracy based on the principles of decentralization. These values have been instilled over Switzerland's 700-year history and remain part of our cultural DNA today. Due to these values we are convinced that we will continue to see Switzerland as a leader in offering the best protection for private wealth.
We can see the signs ... the system is shutting down!
As we said, we find that there is no reason to believe that the uncertainties in our system have been resolved. Instead, it is our understanding that we have more uncertainties today than a few years ago. This is also the reason why we believe that the global economy will not see a positive development in the years ahead. Understanding the fallacies of our system is essential to finding a prudent investment strategy to protect one's wealth. We have seen political and military events directly affect the economy and its growth path - that is why we need to hold on to physical gold outside the banking system as our "insurance policy". What we believe and are sure of is that holding parts of one's wealth in physical gold and silver, stored outside the banking system, never made more sense. Monetary instruments are a convenient measure not to deal with the real problem, but rather to delay it. What we hear about recovery is pure fiction, an illusion, and we can now confirm that the signs of our system's failure are drawing close.