Randolph Buss

We all now belong to a Banana Union.

Two common traits of a „Banana Republic“ are : The lack in Rule of Law regarding regulatory issues. And, the second, the blaming of “others” for our current state.

Firstly, as in all politics, the rabble rousing public will be greeted by a Chancellor, or quasi King or Queen, or Il Duce himself, waving and shaking hands and firing up public sentiment. It is still so and will always be so. For that is politics.

Merkel, the Chancellor, has now come out in an iron-fisted fashion to the joy of many, and the chagrin of others. “ We will get those tax evaders!” If only those damn statutes and laws were not in the way which make it a slippery road at best.

The entire basis, or reason d’etre, for the Rule of Law – the following of the law – is that democratic States do not become dictatorships or, to coin a phrase, Banana Republics.

But how often do we repeatedly see the twisting of words, or the outright lying by governments to get what they want? Invasions of countries based upon dubious evidence, the torturing of prisoners, and countless other examples of State Power to justify their means.

It is not that I am for or against tax evasion by citizens. That is not the relevant point. Winston Churchill once said : “Make 10,000 laws and one begins to lose all respect for the law”. The point is : a State based on Rule of Law and democratic principles must adhere to its own laws, no matter how uneasy.

By cooperating with stolen goods, the German government is making itself an accessory to blatant criminal activity, namely, that of illegally copied data from Swiss banks. Yes, Merkel makes for good headlines by stating to “go after tax evaders”, but think about the consequences.

Pandora’s Box is now opened for more and more cases of the State justifying whatever legal or illegal methods it wants to use in order to chase a certain activity. This is a slippery slope to the Rule of Whatever-The-Crowds-Want. And it is dangerous. Yet, who are we as purely private citizens with limited financial means to actually go up against the State in such legal matters ? No, I say, by going down this road, the German government is no better than a Banana Republic making up the rules as it sees fit for any particular purpose. Germany should know better.

As for Greece, and the Euro fiasco, the Greece government has systematically lied to the European bureaucrats as to its fiscal situation. Billions have been hidden off balance sheet. The state of Greece’s financial situation is another blow to the European Union.

By systematically turning a blind eye to Greece’s situation, the EU has done us all a serious disfavour.

Greece recently stated that it may be speculators who are hurting Greece’s finances and the Euro. Oh really? By implying such, the Mr Papandreou statement is a ruse at best and an outright affront to any fairly intelligent person. The trick he is invoking, is that such a claim serves a useful legal function because it may allow Greece to invoke Article 122 of the Lisbon Treaty, which clears the way for EU help to any member "in trouble for reasons outside its own control." So, will Greece be bailed out by rest of the European Union, mainly Germany with its large yearly transfers to the ECB ?

We don’t yet know how this Greek Tragedy will be finished.

But for a State which has systematically lied and put out disinformation about its fiscal health, a serious dose of “Trust is Good, Control is Better” might be necessary for the Euro to garner strength and trust.

Because, at the end of the day, financial markets are all about TRUST. Just remember, trillions of taxpayer euros, dollars, pounds, have been spent by governments to bail out banks which acted illegally and irresponsibly … and then go on to cash in billion dollar bonuses and the lawmakers just look on … and take no recourse whatsoever. In fact, it was the State itself, which pushed for a taxpayer bailout. Trillions of your money. Trillions.

And the Ministry of Finance is worried about some tax evaders ? It is not a nice thing to say, but the envisioned $100 million in back taxes which might only possibly be recovered is like a drop of water in the ocean compared to the trillions in bank bailouts, all done at the behest of the German government.

All in all, democratic states rely on solid morals and principles and Rule of Law. Once these are given up for populist “witch mongering”, the door is open for anything to be interpreted any way. For right or wrong, good or bad.

The joke going around the table goes like this : "We went out of recession, when??" and all the economists start rolling on the floor in laughter.

Dear readers, let's get some perspective : The "PIGS" are still a major problem for the Euro and the European Central Bank. Portugal, Ireland, Greece and Spain are economies in meltdown mode - their debt to GDP ratio is supposed to be 3% max - well, they have something like 10 or 12%. And Greece, in case you were wondering, is teetering on the edge of implosion. Their debt ratings look horrendous. A "common currency", the Euro, blackmailed by dubious standards of qualification and lack of enforcement. It is a political currency - not a currency based on common standards. How can a currency based on heterogeneous nations with different economic cycles march forward together in unison? It can't. And neither can the European Central Bank force them. The ECB must play to the lowest common denominator and try to massage interest rates into a "one size fits all" policy.

Yeh, but what does all this have to do with me, you ask. Alot. The Eurozone is staggering, blundering along with strong recessionary tendencies, little growth perspective and this means many companies are VERY WARY to start hiring again. This also means wages and salaries are more or less going to be capped in the near term. Which means job prospects are limited and more money through wage increases is also not likely. Credit from banks to small business is still being curtailed and this puts a hamper on many business owners to get credit they might need to expand, or at worst, stay alive during a downturn in the economy. This is not me being a Cassandra and painting all black - but it is our current reality. And we would do ourselves a disservice to ignore reality.

Will we come out of this eventually? Of course we will. But the question still open is, in what shape will we come out?

The general point is this : in an economy based largely on exports, Germany must ask the question, who can we export to if everybody else is also in recession ? The German Ministry of Finance has come out and stated today : "the pace of recovery is slowing". Tax revenues are declining by a massive 7%. Communal tax bases are drying up as business slows. This affects you and me, directly. I think the message is : be prepared.

The Euro currency has started to come under pressure and is at its weakest level in nearly six months and may be getting weaker further on the outlook around Greece. Currently trading at 1.3966 to the US Dollar. The DAX market has in these last few weeks broken MAJOR support of the uptrend line - current support lies in the yellow zone.. This may be the start of a larger correction in the equity markets - as anticipated by many.

Two factors have contributed to the massive EUR sell-off. Firstly, and perhaps most importantly, Greek government yields have risen dramatically as Greece is struggling to convince investors it can finance the eurozone’s biggest public deficit. Markets are afraid that the Greek debt problems will have a negative spill-over to other debt burdened countries within Euroland. Secondly, China’s attempt to curb bank lending by increasing reserve requirements and tightening of money market conditions has
increased risk aversion, which benefits the US dollar. A vast amount of traders caught on the wrong foot with long EUR positions and short USD might also have contributed to the sharp decline in EUR/USD.

What does this tell us investors ? The EUR is weakening. The USD is strengthening. On a relative basis, the recent approval of Bernanke as head of the US Federal Reserve takes away one risk to the USD. Likewise, the Federal Reserve has stated they will likely keep interest rates low for 2010 but planning their exit strategy. The ECB has also stated they plan to keep interest rates low in 2010. So, while they tell us the recession is over, their actions of keeping ample liquidity and low interest rates tell us they don't believe their own press releases.

Randolph Buss
Financial Editor
contact me : editor@gmrletter.com

The FDP’s German Economic Minister Hr. Bruederle stated that Germany does not yet have a self-sustaining economic recovery; risk remain to outlook :
- Economic recovery will be bumpy in Germany
- Q4 Growth below expectations; 2010 GDP forecast to reflect Q4 growth
- Exports are a uncertainty for 2010
- Winter having "dampening effect" on economy

On top of this, the European Central Bank is likely to keep interest rates at 1% out to Q4 2010 in order to “support” the economy. The problem with this outlook is that it deafeningly looks like a deflationary type of scenario where the consumer gets squeezed from both sides : on the one hand we see salaries stagnating or dropping, as we have often times discussed ; but we also see that the cost of living is actually not so deflationary as prices continue to rise in medical insurance, social expenses related to employment and other unsavoury and not so hidden costs.

The real whammy comes to savers. Germans love to save. Wrong! Bad! Savers are the worst hit because real inflation on the street is far higher than the interest rates provided at any bank for cash savings. One is penalized for saving. One loses money.

The alternative is that nimble investment in international markets becomes a near must. Unfortunately, many people do not want to take the time to become financially educated or at least a modicum thereof. They trust their banks for consultations. Unfortunately German banks have a poor track record of independent consultation in both products and follow-up with investors.

The financial future of many in the middle-class, the backbone of any society, will require that people become more interested and more discerning in their finances, their investments and their future.

Another interesting tidbit is that according to latest money flows, Asia is now attracting the most money for investment. Leaving London and New York behind. Likewise, London has now become the most expensive place for bankers with a tax of 50% on salary... Hong Kong has 11% . Now really, who is going to stay in London if offered to go elsewhere ? Tax, tax, tax - that's always a bad recipe for growth. Instead of crucifying the CDU / FDP coalition for some stimulus tax cuts, maybe we ought might consider if it could actually work !! Funny, but when the ECB cuts rates to 1% and pumps trillions into the economy nobody blinks - but the coaltion's tax cuts are PEANUTS compared to what the ECB is doing ! Just a thought folks...


Randolph Buss
Financial Editor
contact me : editor@gmrletter.com