Some financiers believe that debt is a good thing and is the way to go. However, there is debt and there is debt. In America, total credit increased from USD1 trillion in 1964 to USD50 trillion in 2007. This is a 50-fold increase in 43 years!
Whilst it cannot be said that Thailand is in the same boat, it should look over its shoulder and learn from the impending US disaster. Thailand needs to sort out its ever increasing household and public debt to sustain the economic growth of the country and its people.
As my business partner, Paul Gambles, said recently, “Thailand acted after the 1997 Asian financial crisis, but there is a real danger that the country is falling into bad old habits as government debt is approaching 60% while consumer debt has reached 80%, and that is scary for future growth when these two things are happening side by side.” The problem is, there is less room for the government to manoeuvre when public debt reaches such an awful rate, while domestic consumption is hampered as consumers tend to spend less because of their debt burden.
As a way of comparison, most of the euro-zone economies which have a massive debt burden recorded public debt below the 60% threshold, but the rise in private debt greatly contributed to how the public debt continued to carry on going up through the roof.
As of the first quarter, Thailand’s household debt increased to 8.97 trillion baht which is equivalent to 77.5% of Gross Domestic Product (GDP), compared with 1.36 trillion baht or 28.8% during the 1997 crisis. Things get worse, the rate then increased to 9.27 trillion baht or 79.2% of GDP in the second quarter.
According to Public Debt Management Office data, the outstanding public debt as of the end of August totalled 5.30 trillion baht or 44.63% of GDP.
With regards to the international markets, the Thai economy will be largely influenced next year by the growth outlook of the US and Chinese economies. The one difference between Thailand and other developing economies is how to manage the current account deficit effectively and stimulate economic growth through the passage of infrastructure projects - although some say the money raised for these is only there to pay of some of the existing debt, but that is another story…
It is possible that Thai economic growth could come in at 5% next year on the back of the 2 trillion baht infrastructure investment plan despite obstacles to growth such as the rice-pledging scheme and swelling household debt.
However, high growth at an unsustainable level would not contribute to future economic well-being of the country because the best way to sustain growth is to mitigate the debt problem.
Steve Keen, a professor of economics and finance at the University of Western Sydney, said the Thai government might want to consider writing off consumer debt and shouldering a budget deficit for a while to soothe the impact of financial meddling, “Given the scale of state policy on non-land-owning Thai farmers, there simply has to be a debt write-off or some form of debt-to-equity solution to reduce consumers’ debt burden,” he said. If not then Thailand may well be on the road to rack and ruin.
Rising household debt generates concerns because the lowest end of the economic spectrum is shouldering a heavy debt burden, while there is no commercial monitoring as the records of government loans go into specialised financial institutions and the Finance Ministry which means there is no public control over what happens thus giving grounds for potential outcries re transparency and good governance - which is another reason for having no debt as then no-one can lie about it.
We start off with two famous quotes:
1. “It is only one step from the sublime to the ridiculous” - Napoleon
2. “The definition of Insanity is doing the same thing over and over again and expecting a different result.” - Einstein
Today we are talking about Quantitative Easing (QE) as it has been “Madness” and “Ridiculous” to continue with it and it will lead to the “insanity” of many when they come to realise what it will, eventually, bring.
This is all down to the politicians and central bankers. The former because they know that the measures needed to sort the world’s economic problems require short-term, unpopular, solutions that no voter will want. That the latter have kept up with QE is purely down to the fact they do not know what else to do and also do not want to lose their jobs. However, what both have done is basically insane.
As Joanne Baynham of MitonOptimal said recently, “Ever since the much needed bail out of the banks in 2008, Central Bankers have become hooked on their own medicine and continue to print unprecedented amounts of money, in the hope of reducing unemployment and creating growth.”
However, the reality of it all is that the effects of QE on GDP growth have been mediocre to say the least. Also, it has to be recognised that most western economies still have millions of unemployed with America still showing more than 7% unemployment.
David Stockman, who used to be an economic advisor to ex-President Ronald Reagan, has been quoted as saying, “The economy has added only about 4 million jobs since 2000 while the Fed’s balance sheet during that time has gone from $500 million to $4 trillion. Clearly printing money, expanding the balance sheets, driving interest rates to zero is not helping… The faster they taper and the sooner they admit they’ve been totally wrong in trying to be the monetary politburo, running the financial system of the world, the more likely we are to get out of this mess.”
The fact of the matter is that not only has growth been seen as less than average, but the sharing of that growth has been “ridiculous” with lots of “insanity” thrown in for good measure. Considering all of this was meant to help the banks distribute money to kick-start the world’s economy the bankers have forgotten one small detail … they forgot to share and kept all the money for themselves. In fact, it could be argued that this is nothing less than criminal negligence. They have returned to the big, fat profits of yesteryear by keeping the money they were meant to help local businesses with. Central Banks today, with their loose monetary policy, have allowed the rich to become richer, given that money has effectively become free. Marc Faber, in his latest ‘Gloom, Boom & Doom’ report, highlighted that since 2007 the top 1% of Americans have seen their net wealth grow by an annualized 1.9%, whilst the bottom 50% have seen their wealth fall by 44% [Source: Federal Reserve’s survey of Consumer funds and flow of funds]. To put it basically, not only have the bottom 50% seen their wealth fall but now have the further embarrassment of only owning 1.4% of the total net wealth in America.
One thing the two bunches of madmen (politicians and bankers) seem to have forgotten is that nature will take its course and drive out the people who created this unholy mess. History will not look upon them favourably as it will be seen that they could have averted the impending disaster easily and a lot less painfully but put themselves before the good of the people. It will also see that Central Bankers only seem to understand one thing and that is a keenness to print money, for it is obvious they do not appear to know what else to do. In this scenario of further madness, it means more of the same; i.e., asset inflation and markets which will become increasingly expensive before they eventually crash back down.
As a former Fed official, Andrew Huszar confessed to the Wall Street Journal recently, “We were working feverishly to preserve the impression that the Fed knew what it was doing.” What he was talking about was the idea of buying bonds on the open market, the so called Quantitative Easing, so that the banks would then be in a position to lend this money to Joe Public - something that is, in large, yet to happen, unless you are massively bullish on student loans.
So, what is the reality of all this? Well, we are living in a word of Central Bankers who appear to have lost their marbles and, in their attempt to create growth have brought about a situation where there are potential asset bubbles everywhere. But as the former Citigroup CEO Chuck Prince once said, “As long as the music is playing, you’ve got to get up and dance.”… and we all know how that ended!
* A line from Bridge over the River Kwai
As with everything, there are pros and cons to Tracker Funds. Some people think it is almost impossible to beat the markets so why not join them?
For those who do not know, a tracker fund is one that tracks the actual performance of a particular market or sector. The funds are usually cheap and can help those new to investing get a feel for marketplace(s) and how equities will perform in the long run. It also means you get automatic diversification within a specific market area.
Last week we looked at the Un-Americans and why US expats were trying to give up citizenship. For those living and working offshore and who want to remain as Americans there are still tax efficient ways of saving money.
One of the biggest challenges for Americans who are offshore is how to get a tax advantage on any savings that would otherwise be open to US tax at the rates indicated on this page below:
|Top rate of Income tax||35%||39.60%|
|Top rate of Capital Gains tax (Long Term Gains*)||15%||20.00%|
|Top rate of Capital Gains tax (Short Terms Gains*)||35%||39.60%|
|Top rate of tax on ordinary dividends||15%||39.60%|
|* Short Term Gains are defined to be gains realised within 12 months of purchase.|
|**Medicare to be charged where total unearned income exceeds $200,000 or $250,000 if individual is married and filing jointly.|
I am the first to admit that Americans who are taxpayers can get both income and capital gains tax deferral but it can be very costly just using the old qualified variable annuity contracts - especially for those who in their forties and fifties and saving for retirement. There is also the problem that fund choice is limited so that, naturally, can inhibit potential growth.
There are alternatives though some of which maybe thought of as a tax efficient savings plan with Article 3 (1) (k) of the US-Malta Tax Treaty which, with US approval, allows income and growth within the plan to be free of US tax. These plans are only available to American tax payers or Maltese residents. Because of this, there is no American withholding tax on US source income and growth. Obviously, this gives some great advantages for taxpayers who want to put money aside for their retirement.
Since these plans are Qualifying Plans from the American tax point of view, investors are able to claim relief on realised income and growth made within the Plan thus saving between 20.0% and 39.6%.
Once the plan owner has reached the age of fifty they can take out any savings in the form of retirement benefits. These withdrawals can be taken in the form of a lump sum - up to thirty percent of the Plan total and then further lump sums can be taken under the guidelines stated in the Maltese Programmed Withdrawals rules. Under Article 17 (1(b)) of the US:Malta Double Taxation Treaty none of these withdrawals will be subject to either American Federal tax or Maltese withholding taxes. This can be done since these lump sums are ‘franked’ against untaxed income and growth thus allowing the taxed ‘basis’ to be taken out later tax free providing the payments are taken as lump sums. The benefit of this type of plan is twofold. Firstly, it can give gross roll up to defer US tax on realised income and growth on investments. Second, savings will be gained via payments of untaxed income through the aforementioned lump sum payment plan.
This type of investment vehicle is treated by the IRS as a Foreign Grantor Trust. This means the plan is treated as part of an estate for American Estate Tax when the holder passes away. This means there is no limit on the amount of savings which can be contributed as they are not removed from the estate itself. Any contributions will not get any US tax relief as they are taken to be ‘tax-paid’ capital which gives it the ‘taxed basis’ of the fund.
The good news for investors is that the reporting requirements are done by the company which operates the plan. They will also give the plan holder an ‘Owner Statement’ which will allow them to complete the 3520 forms and obtain treaty relief. The plan also needs to be declared on the Report of Foreign Bank and Financial Accounts (FBAR) and Form 8938 - again the company will give you all the information needed.
This type of plan gives clients a tax efficient policy for American tax payers who live overseas. This is because it allows for income and growth gained from savings to grow without any American tax liabilities. As explained above, there is also the benefit of an absolute saving in American taxes.
This kind of plan should appeal to people who are over fifty years of age - especially when compared to the more traditional forms of investment available to US citizens. So, after all, it is possible to be American and tax efficient - who would have thought it?
More and more American tax payers are choosing to lose their citizenship or residency status. Indeed, by the middle of this year there were record numbers and the most so far for this century.
Many people were more than a tad surprised when Alan Greenspan, economist and former chairman of the U.S. Federal Reserve, stated recently that share prices were “relatively low”. This is especially so given that the S&P 500 index has produced returns of around 160% since the bad old days of early 2009.
The shenanigans in Washington over the last few weeks have been fascinating. Will they make a deal or not and at what cost to each party? It has been brinkmanship gone mad and all for the sake of face and one-upmanship.
Last week the US Government had to ‘shutter’ some of its ‘non-essential’ operations because the Senate, the Representatives and the President, all of whom need to agree, could not reach consensus on spending plans. In most countries this would be somewhere between humiliating and unthinkable - although it should be noted that US ‘non-essential’ does not do anything to rid us of intolerable politicians, they’re still operating [I use the term loosely] as normal [I use the term ironically] even though they should be the first people not to get paid.
But in American politics this is quite normal - admittedly it has not happened since 1995 but this is something like the 18th time since 1982 so it is not exactly uncharted territory. In fact it is actually one of the system’s checks and balances. When I tried to explain this recently, I was asked. “But why do the checks and balances have to be so stupid?”
I couldn’t answer.
But maybe the answer is that they are not stupid; it is just the politicians that are. We already found that out (if we had any lingering doubts) earlier in the year when we went over the fiscal cliff. The sequester was a programme of budget cuts that were designed to be too stupid to actually pass but existed merely as a threat to both sides that if they could not agree something sensible then ‘silly’ season would prevail. Guess what, they couldn’t agree something sensible.
But the sequester/cliff was no big deal - except for the failed attempt by the government to make some kind of point by messing up flight arrivals and departures, which ‘they the people’ quickly revolted against and Congress suddenly found a miracle cure for.
Similarly, the shutdown is no great deal per se - not in global economics terms at any rate. I am acutely aware that some 800,000 people will go salary-less until this is resolved but the economic cost seems to have been determined at just 0.1% of Q4 GDP for each week of shutdown.
It is not, by itself, likely to cause any lasting damage unless…the politicians do something really, really stupid.
We have to see this as a prelude to the debt-ceiling debate - if the shutdown drags on until then and if positions have become so intransigent that the debt ceiling increase cannot be agreed then we are starting to get into more worrying territory. Long tail risks, such as downgrades (remember that the US downgrade previously came as a direct result of debt-ceiling political intransigence), and maybe even ‘default’ start to creep in. Schroder’s Greg Taljard recently made the point at the Singapore Expert Investor Forum that by mid-October Apple Inc. is projected to have 5 times as much cash in its bank account as USG will have. I think that Greg was talking up AAPL’s corporate bonds in that statement but I would have used the point to talk down USG.
That said, T-Bills continue to rally from their oversold levels which maybe highlights the madness of the politico-economic outlook right now. One interesting aside right now being that Australian developer, Deal Corp, is converting a Melbourne lunatic asylum into an up-market residential development - if ever we needed a metaphor for Australia’s property market, the Deal Corp guys have gift wrapped that one for us!
The tail risks to the US and global economy of downgrade or even default are starting to make headlines everywhere but most commentators are missing the point - if the underlying US recovery was healthy then this would just be a short term piece of news froth - a buying opportunity for good quality assets temporarily mispriced by a storm in a congressional coffee cup. All would quickly get back on track.
If the underlying economy, as remains my thesis, is not recovering, then the process will aid price discovery - the retreating tide will help us to see to what extent the US and global economies have been swimming naked.
Either outcome would be a form of resolution although the latter will be the more painful, although we would argue ultimately necessary, transition. After four years of capital market recovery but real economy stagnation, it would be healthy for valuations to retrace back to levels more connected with fundamental factors (some 90% of that capital market performance can be traced directly to stimulus and we would argue that the remainder can be traced there indirectly). As long as you are not swimming naked (too high exposure to US equity markets) you may get badly buffeted but the coming transition could be the greatest investment opportunity for decades.
Either way, the key for all investors is to have the right risk focus going into this. Therefore, if it is possible, people should embrace the volatility as an opportunity - a difficult challenge that, if planned properly, can be overcome.
In fact our earnest hope is that if the underlying economy is in as bad a shape as we believe, then the shutdown àceilingàFOMC meeting will bring on the reset that policies have prevented. Unfortunately though, the reality is that we may get dragged through a lot more policy-making before that.
A great many adjustments, although they may hurt the unprepared in the short term, are badly needed but require a trigger to make them happen. Policymakers want to avoid that as long as possible, even though the future consequences would be more and more dire each day they fail to address the underlying issues, because they want to get re-elected.
It is still most likely that the current issues will get resolved and the can gets kicked further down the road and the present problems are just another chapter in this ongoing saga. If this is the case then we will have spent a lot of time fretting over nothing. But there is a chance that all the intransigence leads to loss of control which leads to a forced re-set, with a huge global crisis preceding a genuine recovery.
People can only watch the political posturing in full readiness and respond accordingly. If you can, get liquid as soon as possible so you can get out or get in dependent on what your own particular strategy requires. As many people know, the Chinese word for crisis is the same as it is for opportunity.
Most asset classes posted losses for the month of August, with the exception of some commodities. Around month end nervousness in markets was mostly blamed on the likeliness of an attack on Syria.
Territorial Restrictions: Around the world, the cost of healthcare varies considerably. And healthcare insurance companies make it their business to keep abreast of rising healthcare charges so as to ensure premiums charged for those expensive areas will not land them with unexpectedly large bills. To which end, expats should expect to find different premiums charged for the following three zones: Europe, North America (including the Caribbean) and the rest of the world.