The American Republic will endure until the day Congress discovers that it can bribe the public with the public’s money.

~ Alexis de Tocqueville

Dear Mountaineers,

We are quickly approaching the end of the year and a time during which, in the world of investing, a frenzy of forecasts and outlooks for the following year is common. In reviewing many of those outlooks thus far, I took note of prevalent theme: complacency looks high.

In general, across the board, analysts expect US and European equities to rise next year. Most expect the FED will expand its balance sheet by another USD 0.5 to 1.0 trillion. Concerns over the fiscal cliff are rare and most expect a continued ‘recovery’ in Europe. Certainly, a number of leading indicators look quite positive. Most of all, lower spreads and a calmer VIX (Volatility Index) are quoted as being signs that markets are steadier while the bigger trend points toward a “continuation of the global recovery”.

New Mountain Vision format:

We have received a number of very positive comments in regard to the new format of the Mountain Vision Update, and the new website. However, some of our Mountaineers have had problems with their computers. We are looking into those issues in order to alleviate any difficulties.

In the meantime, please note that, should you wish to view the Update as a PDF, there is a link at the top right of your E-mail. That should be helpful, for starters. Furthermore, please note that your browser configurations may need to be adjusted to allow for the HTML content sent to you.

A Mixed Outlook

At BFI, we too are discussing our expectations of 2013. In the first quarter of 2013, we will share a more in-depth version of our outlook. For now, let me summarize our expectations in a few brief words:

We expect monetary conditions to remain ‘easy’. From the US, the UK, and Europe to China and India, 2013 should be a year of more government stimulus and monetary expansion. Save any unexpected developments, we expect governments and central banks to continue their efforts of alleviating the tangible effects of a fundamentally weak economic context with more ‘easy money’. This may, in the least, be seen as a positive for financial markets and investors, at least in the short-term (i.e. into the first quarter of 2013).

However, the outlook beyond the first quarter is mixed and highly uncertain. Equity and bond markets have performed surprisingly well in 2012. The prices have reached levels that do not appear to reflect some of the risks and uncertainties in the context of a fundamentally weakening global economy. Further quantitative easing is certainly to be expected. Investors, however, should not therefore make the mistake of expecting an indefinite rally.

There are still manifold problems to consider: Our Scenario No. 2, the Reflationary Debt Trap, from our Big Picture Report is still very much in place, with all of its uncertainties and muddle-through character. The debt and deficit issues in America, the UK, Europe and Japan are not solved and I have strong doubts that more of the same policies that got us here will fix anything. On the contrary, the growing risks of a credit bubble are formidable. In the wake of all the QE policies of major central banks investors have, over the past 6 months, been encouraged to accept more risk in search of higher yields. The rally in equities over the past few months has been largely attributable to this.

The structural functioning of the Euro zone is in question. There is no simple or quick path to achieving a fiscal and banking union in Europe. Greece, although really irrelevant in terms of its economic size, may still default, which will again raise bigger questions in regard to the Euro. Meanwhile Spain and Italy are teetering dangerously. And, in my view, France is a yet more considerable basket case.

As a consequence of all this, we expect more taxes, more regulations, and more protectionism, combined with more currency devaluation and the related financial repression measures, both hidden and overt.

Mr. Bernanke – There is No Free Lunch!

I expect more ‘risk-free’ paper flooding by the FED and other central banks. Currently, those policies are not raising inflation expectation. The problem is that the risks of sudden inflationary boosts do not become visible until it is too late.

To understand the basic problems, the moral and economic issues of continuous QE policies and currency debasement, watch the interview of Nassim Taleb on Bloomberg TV. He compares the FED’s policies very visually with a ketchup bottle that you shake and shake. Nothing comes out at first; it is in essence risk-free. So you shake harder, when suddenly the ketchup splashes out, across your plate, your table, or in your face.

Ben Bernanke and the FED do not understand risk! Or, to put it differently, they are not telling the truth about the risks such policies entail. Moreover, those who are benefitting from the FED’s policies and who are enriched by their ‘quasi-risk-free’ financial maneuvers will not be punished for the risk-taking if things go wrong. It will be the savers, the retirees, and future generations shackled by excessive debt and financial waste.

BFI Offices Closed for Christmas

At BFI, our offices will be closed over Christmas and New Year. Although there is always much to do at the end of the year, we want to keep in our tradition to still take the time with our families and friends to properly honor and cherish this special time of the year. I hope that you can do the same.

In any case, in the name of the entire BFI and Mountain Vision Team, I wish you and your family a blessed and joyful Christmas, and all the very best for 2013!


Your “Swiss Mountain Guide”

Frank Suess

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