Switzerland is known as a tax haven for the wealthy. But within Switzerland, the canton of Zug is the pinnacle of economic freedom. Zug has the highest concentration of U.S.-dollar millionaires in Switzerland – nearly 10% of all households, according to Boston Consulting Group.
The highest personal income tax anyone in Zug pays is 22.9%. Companies pay around 15.4%, compared to 35% in the U.S. (the second-highest in the world behind Japan). However, if you meet with tax officials in Zug and tell them you're choosing between Zug and another canton for your business, they'll likely cut you an even better deal on taxes.
How have rock-bottom individual and corporate tax rates worked for Zug? The number of companies with operations in Zug increased from 19,000 to 30,000 over the past decade. Companies with headquarters and/or large operations in Zug include global construction giant Foster Wheeler, commodities trading firm Glencore, Burger King, SABMiller, and many others.
The number of jobs in Zug increased 20% in six years. Unemployment in the tiny canton is 1.9% (compared to 9.4% in the EU and 9.1% in the U.S.). Residential vacancy is 0.3%. According to the Wall Street Journal, "Luxury shops abound, government coffers are flush, and there are so many jobs that employers sometimes have a hard time finding people to fill them."
That's quite different than the U.S. and Europe, where high taxes and government intervention stifle entrepreneurship. (Also note the difference between the robust economy of low-tax Texas versus the sickly economy of high-tax California.) We wonder when they'll learn their lesson, though we're not holding our breath.
High taxes and conniving governments go hand in hand with money-printing. We previously explained how government money-printing hurts the economy… From the May 10, 2010 S&A Digest…
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Printing money to bail out borrowers around the world will not solve the problems of overleveraged governments or debt-ridden economies. It simply shifts the risks from private balance sheets to the U.S. government's. The U.S. dollar has assumed all of these risks. Our currency has become a ticking time bomb. |
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You can watch the dollar die, one day at a time, by keeping your eye on the growing spread between the value of long-term U.S. bonds and the price of gold. Over the last year – even as the U.S. economy apparently improved – the spread widened by about 35%… |
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And these bailouts come with another ancillary problem: They make it much harder for entrepreneurs around the world to invest across borders. You can't price assets into the future when every government in the world is printing money. When entrepreneurs can't estimate the future value of different currencies, they stop investing. |
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To prove this point, consider the long-term rates businesses pay to borrow money. GE's current cost of capital is an unsustainable 5.77%. The company has more than $200 billion of debt coming due through 2012. And the government is guaranteeing GE's debt until 2012. When the government guarantee expires, how much do you think GE will have to pay to borrow money or roll over its debts? How much would you charge GE to lend it money for 10 years if you couldn't trade out of the debt? These are very important questions. Their answers just got a lot more painful. |
Switzerland, on the other hand, has a flush government and a stable currency (the Swiss franc is outside the euro system). Take a look how the franc has performed since late 2007 as the U.S. mortgage crisis began…
Now on to the euro... In that same May Digest, we wondered what interest rate General Electric would pay if it issued debt without a government guarantee. This week, Italy will issue debt without a European Central Bank (ECB) backstop. (The ECB has bought Italian debt for the past three weeks.) Italy will sell 3.75 billion euros of 10-year bonds and 4.25 billion euros of bonds maturing in 2014 and 2018.
Italian 10-year bonds currently yield 5.09%... Yields reached a euro-era record of 6.4% on August 5 and fell to 5.02% in the five trading days after the ECB began buying. We'd bet Italy's free market borrowing rate will be much more than today's. Would you lend money for 10 years at 5% to a nation whose debt amounts to 120% of GDP?
To date, the ECB's efforts to push down yields have been unsuccessful. When the central bank began buying bonds on May 10, 2010 – buying around 16.5 billion euros of government bonds to bolster Greece – the yield on Greece's 10-year debt fell more than 4.5 percentage points to 7.77%. Ten weeks later, with the ECB still spending 176 million euros, Greek bond yields hit 10.43%. Today... Greek 10-year debt yields 18.18%.
We expect Italy to default. However, we're more troubled by the recent weakness in Germany – the European Union's financial lynchpin. Last Friday, the German blue-chip index (DAX) fell 4.6%, hitting a 21-month low. For better or worse, large institutional investors don't want to hold equities... and they're fleeing into the perceived safety of bunds (German bonds), gold, and cash. Liquidity and safety, rather than returns, are their biggest concern right now.
The ECB has monetized 120.3 billion euros of government debt (another reason for German weakness). And how did ECB President Jean-Claude Trichet defend his actions? By announcing to the world that the ECB "is not the Fed." Yes, the head of the European Central Bank's only defense to his actions is that his area's balance sheet is not as big as the U.S... Certainly confidence-instilling.
With the global crisis still raging – and central bankers poised to do the only thing they know how to do (print money) – we'd again urge you to own some gold and silver. The high prices aren't stopping the Chinese…
August is traditionally a slow month for gold sales at jewelers. But Reuters reports many shops in Shanghai have seen huge sales over the past few weeks... "The surge in prices has sparked another gold-buying craze. The 50-gram and 100-gram gold bars were selling like hot cakes," said Ms. Liu, a store manager at Shanghai's major jeweler Lao Feng Xiang. Liu said sales this month are up 30% from last year.
"Many Chinese investors and consumers see price corrections as buying opportunities. The view that gold is an enduring store of value is firmly rooted in Chinese cultural traditions," said Hou Xingqiang, a gold analyst at Jinrui Futures. "Gold's rally over the past two years and the debt worries in the West have only strengthened Chinese investors' belief that they need to own the metal as an investment asset."
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New 52-week highs (as of 8/26/11): Royal Gold (RGLD).
A good number of you have heeded our advice to sell stocks short, trade options, and – gasp – even buy bonds. We love hearing your success stories. You can send them here... feedback@stansberryresearch.com.
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Goldsmith comment: Yes, there is… In fact, Jeff Clark recently recommended his S&A Short Report subscribers buy puts on GLD. They made 265% in one week. There is also a relatively illiquid "double short" gold fund (DZZ). It soars when gold sinks.
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Regards,
Sean Goldsmith
Baltimore, Maryland
August 29, 2011
Zug is booming... Stifled entrepreneurs... Italy tests the market... Germany hits a new low... Trichet's lame comeback... China buys gold... Lots of praise today...