What Does Really Matter?
Recently our friends at WHVP published an eye-opening article, The Swiss View: “It doesn’t really matter that much” discussing Fitch downgrading the US credit rating:
“Fitch announced that they downgraded the credit rating from the U.S. from AAA to AA+. ….(citing) the suspended debt ceiling and the high debt-to-GDP ratio.
…. While the announcement itself is already worrying, it is not comparable to the reactions that followed…packed with unreasonableness and arrogance.
…. Jamie Dimon, CEO of JPMorgan…stated that the downgrade is ‘ridiculous’ but that ‘it doesn’t really matter’ since the market, not rating agencies, determines borrowing costs. While this is not wrong per se,…understand that markets, to a certain extent, base their decisions on rating agencies.
…. The funny part about that is that back during the U.S. mortgage crisis, the same rating agencies were criticized that they adapted their ratings towards the wishes of the institutions they rated. Now, the U.S. is officially trying to influence this decision.
However, it is not only Jamie Dimon who felt frustrated. U.S. Secretary Janet Yellen commented on this decision as ‘surprising’ and ‘entirely unwarranted.’
From an outside perspective, it is surprising that such influential and educated people do not recognize (or admit) that the U.S. financial household is in trouble.”
I contacted Urs Vrijhof-Droese, Managing Partner of WHVP for further explanation. Urs, an expert in international banking is based in Zurich. I’m a WHVP client.
DENNIS: Urs, thanks again for taking your time for our readers’ benefit. Please clarify something for me.
When you quoted Dimon, “It doesn’t really matter” I came away with a different meaning. Were you implying the downgrade in rating, “doesn’t really matter” to the rest of the world either? Rating agencies notwithstanding, the world understands what is going on with US deficits and are taking that into consideration. Did I miss something?
URS: Thank you, Dennis, for reaching out and having me in your newsletter.
Jamie Dimon’s quote mainly inspired the title. However, you are right. The international community is aware of what is going on in the US. There has been a significant increase in the money supply since the Great Financial Crisis that accelerated during COVID. This immense spending led to inflation dispatched as temporary until it went out of hand. And now, there is even more spending with the Inflation Reduction Act. Honestly, this downgrading is not a huge surprise; it’s a logical consequence of the last decade.
DENNIS: Speaking of inflation, a few years ago an Argentinian bought our home in Tampa. He was dumping their currency as fast as he could and buying other assets. If the world is on to the US game, do you see other countries dumping USD as fast as they can?
URS: Not just countries. In July, several clients of ours sent over more USD, asking us to take them into other currencies, preferably the Swiss Franc. While this happens occasionally, these are small fish compared to what we see globally.
Asian countries, with China at the forefront, are getting out of the USD. This de-dollarization is a process, not finalized within days, but months and years. Instead of holding USD, the national banks buy other currencies and gold. The central banks’ interest in gold has gained a lot of traction within the last few years. The trend is clear. The US, and the USD, will continue to lose influence.
In addition, the countries Brazil, Russia, India, China, and South Africa, known as BRICS, are becoming more structured. One of their ideas is to create a new currency backed by gold.
Why? America uses the USD to enforce its interests, weaponizing the dollar. The eastern countries don’t want to be heteronomous anymore. Accordingly, we see an apparent movement towards a multipolar world.
DENNIS: You mentioned clients getting out of dollars into Swiss Francs. Is the prime motivation for other countries dumping dollars their concern about inflation or the weaponization of the dollar?
Regardless of the reason, if other countries don’t want to hold dollars, who will finance our ridiculous spending?
You recently wrote about double-digit interest rates for Mexican pesos; could our government be faced with a similar situation? If so, I doubt the US could even pay the interest on our outstanding debt; much less even more piled on.
URS: I feel the prime motivation is other countries want to decouple from the US and become more self-determined. Despite the US financial troubles, the US still has enough friends who are willing to buy their debt.
However, the US government does not need double-digit rates to struggle. The real issue is that despite the current debt level, the Inflation Reduction Act is not delivering as promised, while the US government continues to spend at historic levels.
Who will finance your spending? In my opinion, the US will become the next Japan. If nobody else buys their debt, they will force their people to do so.
America’s pension funds would be a possibility. We see an inevitable movement towards the government deciding what can go into the pension plans and what cannot.
For example, suppose the government mandates that pension funds to hold about 40% in green bonds. The Inflation Reduction Act allocates a lot of money toward so-called green projects. In essence, they would force IRAs, pensions and other retirement money into buying government debt, removing the choice from the investor themselves. As I recall, isn’t that one reason you moved much of your self-directed IRA offshore?
DENNIS: Yes, it was.
A few years back Speaker Pelosi created quite a stir when she made that suggestion; pension funds, 401k and IRAs shouldn’t hold “risky stocks,” but rather requiring holding “safe” government bonds.
Haven’t Japan and the EU also monetized their debt, spending money they don’t have? Wouldn’t they be faced with the same problem?
URS: Indeed. Japan monetized its debt to its extreme, resulting in the lowest interest rates worldwide. If they raised rates, they would have a huge problem paying interest on their debt.
Unlike the US, Japanese investors and the Bank of Japan hold about 90% of its debt. This is why it still works. We saw a devaluation of the Japanese yen last year; Japan has enormous issues. The Yen is not the world currency which makes the situation somehow different.
The debt to GDP ratio in the EU is around 80%, which is relatively high, however the current debt to GDP in the US is currently over 122%.
Like the US and Japan, the EU politicians must raise taxes and reduce spending to reduce its debt. Unfortunately, politicians in the EU are chasing some ideals but forget the economy. They lack a compass. If the spending continues it will inevitably cause real financial issues also.
DENNIS: You mentioned the BRICS nations setting up an alternative currency to the USD. In your view, is the world losing faith in the USD?
URS: The world gets mixed messages from the US. Many great people have contributed to America’s success, and helped raise the standard of living throughout the world. However, on the other side, you have the government, where the created value gets burned. From the outside, it looks like a power struggle.
Many Americans tell us they no longer feel represented in their government; many of the decision-makers have lost touch with reality. There is a huge mismatch.
While some have lost faith in the USD, other governments are fed up with how the US government tries to control them. They are not willing to accept that anymore. The people see that development and the lack of faith in the USD come into play.
I don’t see them dumping USD right away, but rather they will allow the debt to mature and not buy more. If they all dumped right away, they would lose billions as the dollar would quickly tank.
DENNIS: One final question. If the USD is heading toward collapse, and possibly some other currencies as well….
If you were advising a US citizen who just won a huge lottery, perhaps $100 million after taxes, where would you suggest they invest it to protect themselves from potential out-of-control inflation and a government potentially desperate for tax dollars?
URS: The concerns are justified. Regardless of the amount, my answer would be the same.
I would split it up into four shares and recommend:
- 30% should be used to access international diversification. Choose one or two jurisdictions you have faith in, open a bank account, and move the money to these countries. Invest it in different currencies and geographic regions.
- 10% goes into precious metals, primarily gold and silver.
- 30% allocated to real estate and land, a great inflation hedge. Income-producing property would be a real plus.
- The remainder be invested in cash and the stock market in the US, looking for safe yield, to help cover daily expenses.
DENNIS: Thank you for your time.
URS: My pleasure, glad to help.
Dennis here: What “does matter” is the US financial household is in trouble. “Too big to fail” banks bet trillions in high-risk derivative bets, and taxpayers are covering their losses.
Our government, making no effort to curtail spending, continues borrowing trillions. The interest cost alone will destroy our financial system. Bankers and politicians fiddle while the nation burns….
Some investors are doing what they can to protect themselves, while others will be taken by complete surprise.
|Editor’s note: I’ve been a client of WHVP for over a decade. I have an offshore account, with investments around the world in foreign currency as a hedge against inflation of the USD.
I have no other financial arrangement with them of any kind, no referral fees, kickbacks – nothing.
An offshore asset manager is a great diversification method for those who are so inclined. I am happy to give them a forum in exchange for sharing their global perspective for our readers’ benefit.
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On The Lighter Side
Hard to believe it is mid-September, kids are back in school and fall is rapidly approaching. The NFL started last weekend with all the appropriate hoopla. Every team tries to convince their fans to spend lots of money because, during the offseason, they improved and are primed for victory. It never quite works out that way, but the marketing people have fun with it.
I have an infusion scheduled for next week, then we head back to Arizona in October for a Pet Scan (report card) to see if cancer issues are still under control.
My beloved Cubs are actually playing meaningful baseball for the moment. That beats the last few years when they were out of any form of contention before the August trade deadline. I don’t have any illusions about them winning the World Series, but the drama of a pennant race makes watching a lot more fun.
In the next week or so, the hockey preseason starts, and Jo and I are looking forward to that.
Between family, friends and our love for our sports teams, we are kept busy and enjoying life for the moment.
Quote of the Week…
“For almost 200 years the US dollar was backed by gold or silver.
Today the US dollar is an IOU from the Federal Reserve, not backed by anything. The emperor has no clothes.”
— Dennis Miller
Last week I shared some information titled “1%” from Phil C.
99% of those born between 1930 and 1946 (worldwide) are now dead. If you were born in this time span, you are one of the rare surviving one percenters of this special group. The age range is between 77 and 93 years old, a 16-year age span.
Here are some more items on his list:
- Newspapers and magazines were written for adults and the evening news was broadcast on your radio. You got to read the comics while they read the news.
- Most highways were 2 lanes (no interstates).
- You went downtown to shop.
- You walked to school.
- Your parents were suddenly free from the confines of the depression and the war, and threw themselves into working hard to make a living for their families. They were glad you played by yourselves.
- You entered a world of overflowing plenty and opportunity; a world where you were welcomed, enjoyed yourselves.
- You felt secure in your future, although the depression and poverty were deeply remembered.
- Polio was still a crippler. Everyone knew someone who had it.
- You came of age in the ’50s and ’60s.
- World War II was over and the cold war, terrorism, global warming, and perpetual economic insecurity had yet to haunt life.
- Only your generation can remember a time after WWII when our world was secure and full of bright promise and plenty.
- You grew up at the best possible time, a time when the world was getting better.
And my favorite:
- More than 99% of you are retired now, and you should feel privileged to have “lived in the best of times!” (As I look back, how lucky we were….)
Until next time…
“Economic independence is the foundation of the only sort of freedom worth a damn.” – H. L. Mencken
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