Stock Markets Worldwide are Stabilising

The Problem with Europe

The Greek election on 17 June is holding the world in bated breath. But whatever the outcome, ECB will be pumping a lot of liquidity into the banking system. If Greece were to decide to leave the Eurozone, the first thing ECB will do is to lend trillions either directly to the affected banks or to the governments. This is to ensure there will not be a run on banks and that the banks will be adequately capitalised. Bond vigilantes may attack Spain and Italy by driving the yields up, but Germany will surely decide to sanction money printing to buy up every EUR of bond that the Spanish and Italian governments sell. Germany has to, otherwise the Eurozone will break up. The Eurozone has benefited Germany a lot more than it has helped the other states because the EUR currency is so devalued that Germany's conglomerates find it easy to export. They have a huge industrial sector after all. But the EUR currency hasn't been kind to the rest. It has made the other countries' exports very uncompetitive. Decades of high personal and corporate taxes has made companies wary of investing in the countries. The tax revenues were ploughed into generous retirement benefits, social welfare, which is consumption. Consumption drives present growth but takes away future growth. The huge tax revenue could have been used to boost infrastructure to boost competitiveness. The labour laws are so rigid that companies have to contend with taxes eating away their profits, and unable to restructure their workforce. If you find it difficult to fire people, you will definitely be afraid of hiring. I was told by a French colleague that if you work for a French MNC, you cannot be fired and even if the company is in financial trouble, you will always be given a position of same pay and rank within the company.

If Greece choose to stay, the saga will drag on. As long as Europe cannot reform, cannot lower their personal and corporate taxes, cannot raise the retirement age, reduce drastically unemployment benefits, dismantle labour laws, it cannot get out of this current mess. Greece, along with the rest of Europe, will find it very difficult to balance their budgets. They will try to move towards the East Asian economic models, but the people will revolt violently against any sort of reforms. Queen Elizabeth the First made paying taxes voluntary, the British economy flourished during her rein and tax revenues rose to record levels. So to encourage people to work harder, to entice companies to invest more, Europe has to dismantle its tax regime. Look at the tax rates of the Nordic countries against Singapore. Sweden's personal income tax for the median earner is 16%, but its highest tier is 57%! Its value added tax is a whopping 25%, which is a huge disincentive to work and spend. Singapore's highest tax bracket is 20% and median income tax 0%. GST is only 7%. Singapore must never move to the European tax model because we will surely degenerate into the same malaise.

Taxes in Scandinavia Much Higher Than in Singapore

I took the Eurorail recently from Paris to London. A female entrepreneur that sat next to me told me how when she was promoted, she actually earned less! She was from Tanzania and was a very accomplished restorer of castles and luxury properties. A mortgage broker from London joked that every year, he works for free from Jan to May before he starts to pay himself! If you have very high taxes, you will choose leisure over work and your incentive to get a promotion will greatly diminish. If you are a business owner, you will hire fewer workers because the tax burden reduces your profitability. If you earn $10m a year, your staff cost is $1m per year and material costs $5m per year, you'd achieve $4m of pretax income. But if the corporate tax is 50%, your net profit will only be $2m. If you're a listed company, you will pay less dividends to shareholders. But if your corporate tax is only 20%, you'd pay only $0.8m, leaving you with $3.2m of net profit. For the next year, you'd be thinking of expanding your headcount (creating more jobs, who will in turn generate more tax revenues). You'd be considering to invest in more machinery. But if you have high corporate taxes, you'd be giving up on France and thinking of expanding in Singapore / Hong Kong instead.

When I walked the streets of Barcelona, Paris, Geneva or Brussels, I see a lot of refugees from African and central Asian countries. They are uneducated, many of them illegals, roaming the streets. Don't get me wrong, I am not against humanitarian efforts. But if the type of people that you attract is mainly such, then you have a big problem. Europe needs to attract the most skilled talent. It needs wealthy entrepreneurs who will invest. There are many Indians, Chinese, Americans with top notch degrees in IT, Business, Medicine, Accounting etc. but strict labour laws that prevent hiring non Europeans make it impossible to attract talent. And even if they are offered jobs, the high income tax deters many talents from working in Europe.

Stock Markets Are Stabilising... Tentatively

Speaking of the stock markets, I think it is slowly showing support. Whether it is short covering, or by bargain hunters, it is indicating a temporary halt in the decline. With the probable QE by ECB very soon, it is highly possible that gold, silver and stocks will rise again, at least for a few months until the next crisis hits us. 

But valuations are very cheap. Earnings yield in the S&P500 is around 5.5% higher than 10-year bond yield. The same goes for Nikkei, FTSE100, Australia, Canada, France, Germany, Hong Kong, Italy, Singapore and Spain. The only markets where stocks offer lower yields than bonds are Greece and South Africa. It is even rarer that dividends are higher than bond yields. But this is indeed the case for S&P500, Nikkei, FTSE100, Australia, Canada, France, Germany, Hong Kong, Singapore and Spain.

Earnings Yield vs Dividend Yield vs 10-yr Bond Yield

With such attractive valuations and unless interest rates spike up (unlikely until 2014), it is highly likely that any correction from hereon will be small... This looks a lot like 2000 - 2003 when stocks bounced along the lows until global economy starts to pick up. 

Amsterdam

Amsterdam is a beautiful city. It has canals with boats which serve as homes moored along the sides. The government does not mandate that all sewage from these boats should be treated so I was quite lucky not to take a swim on the murky waters of the canal.

Public Toilet for Gents

 Amsterdam is a city of Van Gogh and Rembrandt. Anne Frank's House is also located near the city centre. I took many walks along the beautiful streets and the most moving part of the tour was the visit to Anne Frank's House. What stirred me was the complacency of the Jewish refugees who left it too late to leave Germany. Many fled to neighbouring European countries like Holland and expected to find safety. The smarter ones fled to far away lands like the US and Palestine.

Beautiful Canal and Its Murky Waters

I found one of the best Tapas ever in Amsterdam. Not even in Barcelona did I taste such good stuff. Here's a picture that I took. There are many more food pictures but I'll download it slowly. This restaurant is called La Oliva. The service is fantastic. I must write more about it later.

La Oliva - The Best Tapas Ever!