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Freemont 2014 Review (uncut)

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Freemont 2014 Review (uncut)

Anyone interested in Italian 10-year government bonds? Return on offer: 1.99% annually!

Hello, any takers?

But to whom does the virtually bankrupt Italian government sell them then?
Well: to the European Central Bank (ECB) and to the big European so-called “system banks”, who can now “borrow” money from the ECB at a negative interest rate. No wonder, they are willing to buy the bonds offering a 1.99% return…

Do you ever wonder why we didn’t see a European currency crisis this year, like the ones we saw in 2013 and 2012? The politicians learned their lessons, right?
Yes indeed. The lesson they learned is that stories about bankrupt governments who are unable to repay there debts should not hit the main newspaper headlines anymore.

Back then, the ECB had less mechanisms to bail these countries out. The countries had to raise their funds on the currency markets. And when investors didn’t trust that it was a particular good investment to lend money to governments ever deeper in debt and with no track record of keeping public expenditure under control, they demanded a higher interest rate.

Now in 2014 that has been taken care of. The ECB bails them out, either directly or indirectly, through the above-described mechanism. So no headlines this year about a Euro crisis. Germany has given in, the euro is back on track, and the grand European project is saved.

And nobody knows who pays for it. The politicians certainly won’t tell you. They just talk about “stability” and “confidence”.

Well, here then, a brief list of who pays:
  • The European tax payers who pay their governments who then donate it to the ECB or provide tax payer backed guarantees.
  • Anyone who has assets in Euros (bank accounts, real estate, shares in businesses, loans extended). The Euro has plummeted against the dollar with 12% in 2014. You might have worked for those 12% of your assets many years.
  • Although a subgroup of the above, but worth mentioning separately: those who have saved for their retirement. With these low interest rates, amounts needs to be saved in order to provide for one’s retirement that are so enormous that it is beyond the reach of 99% percent of the population. For example: a generous 2.5% interest rate will provide a saver with 25000 Euros a year of pre-tax income on a million Euros saved. Take it from here.

Stock Market Madness

As a result of the meagre interest rates on offer savers have been putting their money in the stock markets this year, forcing them to take reckless risks. It is a bubble waiting to burst. Telltale sign was the nervous behaviour of stock markets in the autumn of this year with huge swings at the first sign of a run to the exit.
Virtually all central banks have now been taken over by Keynesians. They have one goal and that is to keep the party going (i.e. the stock market) for another day.

At each sign of trouble wild promises of ever continuing monetary expansion and low interest rates are made. Japan has been practising Keynesian economics since 1990, and is now burdened with a 240% government debt to GDP ratio, and an economy that refuses to grow, despite Keynes’ theory. Abe’s (of Abeonomics) insight was that the Keynesian policies of the last 2+ decades simply were not radical enough. The problem was not Keynesianism, but that it was too weak a version of Keynesianism.

Even so called growth miracle China is fully on board to monetary expansion too, building grand new cities, waiting for people to fill them.

Other important developments in 2014:

The witch-hunt on the tax avoiders/ evaders (the words are ever more often, one suspects deliberately, conflated) continues unabatedly. The public sentiment fostered successfully by mainstream media is that the governments should just crack down on tax avoidance.

Then governments (which are staffed by well -intentioned public-spirited people) will have all the money they need to finally solve the world’s problems. The only thing that entrepreneurs and corporations should keep on doing is exactly the same thing they are doing now: work as hard as they can, employ as many people as they do now, invent, create, take risks, but just pay more tax and be satisfied with lower profits.

Riding high on this public sentiment is George Osborne, the UK’s Chancellor of the Exchequer who introduced the “Google tax”, and a General anti avoidance law in the UK.

Although the last is now a common feature in many countries, thus far this had been avoided in the UK. The traditional position being that laws, in order to prohibit certain behaviour, need to be specific, not general.

For making laws that are general in nature are based on the following idea that was traditionally seen to be incompatible with the rule of law: there is something we don’t like, but we cannot exactly pinpoint it, so we keep it general, so that we (the politicians) keep our options open. Anything that keeps options for those in power open, creates uncertainty for the population (and incompatible with liberty). Those old fashioned inhibitions have now firmly been thrown out of the window by the country that many in the world look up to as the shining beacon of the rule of law.

The Conservative government in the UK also pressed ahead with moving towards a public register of beneficial owners of companies and has been one of the forces behind the attempt to force countries to sign up to automatic exchange of tax information by 2017 (or perhaps not forcing, but making them an offer they cannot refuse). It is the same government which has seen its public debt spiral out of control, while revelling in its mantra of being “austere”.

2014 has seen a continuing trend of words losing their common sense meaning. But wait, George Osborne has just published new plans to bring public debt under control –in the next parliament. Not sure how he can make plans for the next parliament.

There was a funny angle to the hunt on tax avoiders as well this year…

Jean-Claude Juncker president of the European Commission was given some heat because of the “disclosure” of the fact that Luxembourg gave favourable tax rulings to foreign companies (download them here), while he was prime minister of Luxembourg for 18 years and Minister of Finance/ Treasury for 14 years. The fact that this is considered a disclosure is itself revealing, since giving favourable tax rulings was open policy of Luxembourg for many years (along with the Netherlands and many other countries). Giving those favourable tax rulings is now seen as being unfriendly to other governments who are after all jointly fighting tax evasion.

What we consider funny about it is that he is now publicly confronted with his hypocrisy. As president of before mentioned commission he now has to condemn it, but during all those years while he was ruling Luxembourg he was defending the old fashioned idea that Luxembourg was sovereign in its tax matters, and was not an extended tax collection or tax information gathering arm of other governments; and he was considered the best guardian of all that was Luxembourgish (a lot of banks on a small territory offering water-tight bank secrecy).

Which other countries made their mark in 2014? Russia…

We cannot leave out Russia, of course. Putin is playing a dangerous game with no winners. We must be fair, praise is due to some politicians, those who remained anonymous and operated behind the scenes and have managed to at times temper the temperament of the hot-heads, which if unrestrained (on both sides), could easily escalate the tensions between Russia and the rest of the world into a world war. This is what happened a 100 years ago when World War 1 started because hotheads were running the show: nobody was giving in, everybody’s ego and honour was at stake, and nobody wanted to be seen to be weak.

And what about the US? Their foreign policy of the past 15 years was this year especially exposed for the dramatic failure that it has been. Anyone heard about Syria this year? Nope, they were the big culprit last year. The US was financing the “freedom fighters” against Assad and supplying them with weapons, directly and indirectly. Those weapons and the weapons supplied to the US-trained Iraqi army who fled and left their weapons behind when they were attacked in Mosul this year, are now in the hands of ISIL. An acronym that 12 months ago only a small group of people had heard of (those familiar with the International Society for Individual Liberty:

Hong Kong was in the news this autumn

Hong Kong is traditionally known for its rule of law, freedom of speech, and people minding their own business, contributing to making it into one of the most prosperous and free countries in the world. In 2013 it courageously stood up to the US by letting Snowden escape. However, there are few ideas as appealing to the young as the ideal to try to live of off other people by trying to vote the right politicians into power; hence the student protests this year for full fledged Western democracy in the name of freedom.

Hong Kong has never known one man one vote democracy, and the vast majority of the hardworking people and businessmen in Hong Kong is all too aware that one man one vote democracy might just destroy, or at least derail, the success of one of the best performing cities in the world.


Yet another major development in 2014 was the collapse of the price of oil in the past few months. It has contributed to the devaluation of the Russian Ruble. Saudi Arabia initiated an oil price war, targeting a low oil price in order to put the shale oil producers out of business which have sprung up in the last decade in the US and Canada during a period of high oil prices.

This is an economic lesson to learn from: if you have oligopolistic power trying to dictate market prices at a too high level, it encourages new production methods which were hitherto unprofitable. Also, it encourages mal-investments into production facilities on the assumption of these continuing higher prices. Now they are going into reverse, Saudi might still be selling the oil at a margin when variable costs alone are taken into account, but not enough to recover fixed costs associated with past investments made. Setting them too low is not a long term strategy either: you are just postponing the inevitable while in the mean time you are losing money on investments made.

Where the energy markets might take us in 2015 and beyond is very much the result of the political dynamics. We suggest to read Marin Katusa’s, New York Times bestseller, The Colder War.

Worst Book Of The Year

The Freemont 2014 award for worst book of the year is that of Thomas Piketty! Who was enthusiastically promoted by the talking classes and mainstream media as revolutionary. Its “revolutionary” theme is that the rich get richer and the poor poorer. On the bright side the book broke a record of having the smallest percentage of readers who started the book but didn’t finish it (2.4%). For those who are interested in a summary of the book and its refutation, you’ll find it here: Why is Piketty Wrong?
One of the other continuing trends in 2014 has been the proliferation of so-called non-governmental organizations (NGO’s). Yet another piece of evidence on how language is being twisted to suit the purposes of its users, NGO’s are organizations which are not directly controlled by governments but they are often directly as well as indirectly financed by governments through trusts and charities which are often in turn subsidized by governments. In this way governments try to create a public debate dominated by them and the players financed by them.
Which brings us to Freemont’s…

Worst NGO Of The Year Award

The winner this year is the Tax Justice Network! The Tax Justice Network is partly financed by the government of Finland. It is always invited to talk with governments and intergovernmental organizations like the OECD, so that it looks like they are inviting independent parties to talk about issues such as combating tax avoidance and financial transparency.

In 2014 it become as a result a much more powerful player. It has been making great strides in convincing governments of African countries to renegotiate their tax treaties with OECD countries and get rid of those low withholding taxes and favourable tax regimes which make it attractive for foreign investors to pour money in their countries.

The theory is, of course that, even if they raise these taxes, and abolish favourable tax regimes the investors will still keep coming and the level of investment will remain the same, only difference is that they will now pay more taxes. Which these taxes the politicians will then be able to address the world’s problems and solve poverty, or so the theory goes.

How About Dubai?

Enough said. How did the United Arab Emirates, and in particular Dubai, fare in 2014? Stock markets and property markets flatlined in 2014 after the enormous boom in both sectors in 2013 (stocks were up 100% and property around 30%). Dubai has become noticeably busier: more cars, more people in the metro, the restaurants, more schools, more hospitals, property redevelopment launches, more hotels, Dubai International Airport almost becoming the busiest international airport in the world (behind Heathrow), commencement of low fare flights from the new biggest airport to be in the world (Dubai World Central). Many new places opening and new services being introduced.
We at Freemont see on a daily basis the light in the eyes of tired entrepreneurs coming to these shores to set up business when we tell them the Dubai story, and their sense of wonder that such a place still exists in this day and age.

Typically they are business owners who have worked hard for many years, they might have created 100’s of jobs and paid millions of Euros in taxes. And while they still might grudgingly be willing to pay some of those taxes just to be in the home country that they love, the thing that really makes them bitter is the public hatred and atmosphere of resentment that has been created against entrepreneurs in the past few years in particular.

They, who carry the world (Atlas Shrugged), they who pay for all that the politicians get to spend, they get as their only reward: envy and hatred. When they come here they come here with a sense of wonder: that this is the only country in the world where you get to keep the money your earn, where you know what you can get and what it costs – upfront (the annual fixed license fee you pay to run your business), where your assets are safe from arbitrary freezing and confiscation, where you can focus on your business instead of compliance, where you can still pay in cash if you want, and most of all – in the Arab tradition – where wealth and success are respected, and can be displayed without shame.

This is not to say that nothing will ever change. The UAE is, and has been for many years, under increasing pressure from a raft of international organizations (governmental and so-called non-governmental) to sign up to this that and the other thing because these are the things that sophisticated countries do, and if you want to be one of us you have to do that too. You can probably guess the things we are referring to…

These are the things which you have to be for in most of the world unless you want to set fire to the index card of allowable opinion (as you will discover when you read the wonderful Real Dissident): social welfare and state pensions for all residents, state mandated and or provided health care, social security taxes, labour unions, income taxes, VAT, asset forfeiture, public registers, minimum wages, affirmative action, automatic information exchange, you get the picture.
In the spirit of the path set by Dubai’s leaders more than a 100 years ago it has so far managed to not give in too much to foreign pressure and during this period has provided a clear and remarkably consistent message to anyone who is contemplating doing business here: you can come here to work or do business, but you have to “hold up your own pants”, you pay a fixed annual fee – upfront – for doing business here, but you get to keep what you earn, no exchange controls, free trade, and if you want or need something – you can buy it.

That security and certainty created by a 100 years of consistent policy is a major contributor to the remarkable growth seen here. If any of that is tinkered with that security and certainly painstakingly built up by an unchanging message for over a 100 years is gone. The golden goose can be slaughtered only once. The UAE is virtually the sole man standing with offering a economic system different from anywhere else. We submit that imitating the rest of the world, becoming indistinguishable from most of the other 195 countries is not the way to differentiate yourself, and wish the UAE and its leaders strength and courage in standing up to the pressure.
Happy new year, and make the most of it!

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