Mybergen.com Business Blog: Report from William Villafranco of Villafranco Wealth Management, December 9, 2011

FOR IMMEDIATE RELEASE
Montvale, New Jersey, United States of America (Free-Press-Release.com) December 13, 2011 -- This week I want to run and hide……..

European leaders have once again announced that they have reached a solution to their debt crisis at another summit meeting this week. Do not be fooled – the latest announcement is just another example of papering over (literally) deep-seated structural problems in the European economy. While the markets are taking great solace from the latest announcement, investors should remain extremely wary of the fact that the long-term problems that led to the current crisis are still simmering below the surface.

The new “solution” involves closer economic union among 17 of the 27 European nations. In our opinion, the UK and Hungary have both wisely chosen to remain outside of the union. The nations agreeing to the new rules will be subject to stricter budget limitations and a loss of economic sovereignty. That is the gravamen of an economic union – in exchange for the benefits of a single market and the free flow of capital and labor, countries surrender some control over their own budgets and economies. The problem is that many members of the EU decided to flout the budget rules before, and there is little reason to believe that they are either willing or capable of following them now.

There is a far more significant phenomenon operating under the surface of the European and U.S. banking system that is cause for concern. The failure of MF Global is reminding the world of the dangers of this regime. Basically, banks and securities firms have the ability to use customer assets as collateral for their own borrowings (this is called “rehypothecation”). Those borrowings can be used for many things – in the case of MF Global, they were used unwisely to purchase European sovereign debt (primarily that of Italy). In the U.S., firms are limited in the amount of leverage they can obtain on customer funds. In London, however, there is no such limitation, which is why firms like Lehman Brothers in the mid-2000s and MF Global earlier this year shifted much of their borrowing to the U.K. While these firms disclose in the footnotes to their financial statements that they do this, their disclosure is rarely specific concerning the amount of debt they actually owe. In other words, as leveraged as many large banks in Europe and the U.S. are, they are even more leveraged than reported because of these off-balance sheet obligations. In today’s world, this is occurring at a much faster pace than the growth of the collateral underlying these debts. This is a phenomenon that governments and central banks have no handle on and no control over. If people want a reason not to sleep at night, this is a good one. Systemic risk is higher than ever, regardless of what the media and government want you to believe.

The bottom line is that there are signs of economic stability in the U.S., China appears to be slowing modestly, and Europe is heading deeper into a recession. All of the risks are on the macroeconomic side of the ledger. Some of these risks are economic, others are, for lack of a better word, technical, but all of them interact to create a dangerous brew that renders the global financial system and the financial market very fragile. At the same time, especially in the U.S., there are cheap stocks and corporate credit instruments worth owning.

Simultaneously, investors should continue adding to their gold holdings because the one thing that the European “solution” tells us is that the European Central Bank will be printing Euros for as long as it stays in existence. The same is true of the Federal Reserve. Paper currencies will continue to be devalued, rendering gold more valuable with every passing day. While it is prudent to hold significant amounts of cash, gold can be turned into cash readily when needed. I would err on holding more rather than less gold until there are clearer signs that the world has regained its sanity.

William S. Villafranco is the founder and CEO of Villafranco Wealth Management. Opened in 1995, the Montvale, NJ company is an independently owned investment boutique focused on their clients’ goals of wealth preservation and growth. With over $300 million in client assets, the firm manages the portfolios for a range of high-net worth individuals, estates, and families. Bill has over 25 years experience in finance and investing. After working for large banks and investment firms, he founded Villafranco Wealth in order to offer clients an outstanding level of personal attention and fully customized advisory services. Bill also acts as trustee for a variety of family trusts and philanthropic organizations.

Bill founded the Footprints in the Sand Foundation, a 501 c (3) non-profit organization, to provide assistance to children and families who have experienced a recent tragedy. To date the Foundation has assisted over 120 families in Northern Bergen county and Southern Rockland County.

Disclaimer:

This blog does not provide individually tailored investment advice. It has been prepared without regard to the circumstances and objectives of those who receive it. This report contains general information only, does not take account of the specific circumstances of any recipient and should not be relied upon as authoritative or taken in substitution for the exercise of judgment by any recipient. Each recipient should consider the appropriateness of any investment decision having regard to his or her own circumstances, the full range of information available and appropriate professional advice. Villafranco Wealth Management recommends that recipients independently evaluate particular investments and strategies, and encourage them to seek a financial adviser's advice. Under no circumstances should this publication be construed as a solicitation to buy or sell any security or to participate in any trading or investment strategy, nor should this publication or any part of it form the basis of, or be relied on in connection with, any contract or commitment whatsoever. The value of and income from investments may vary because of changes in interest rates or foreign exchange rates, securities prices or market indexes, operational or financial conditions of companies, geopolitical or other factors. Past performance is not necessarily a guide to future performance. Estimates of future performance are based on assumptions that may not be realized. The information and opinions in this report constitute judgment as of the date of this report, have been compiled and arrived at from sources believed to be reliable and in good faith (but no representation or warranty, express or implied, is made as to their accuracy, completeness or correctness) and are subject to change without notice. Villafranco Wealth Management and/or its employees, including the author, may have an interest in the companies or securities mentioned herein. Neither Villafranco Wealth Management nor its employees, including the author, accepts any liability whatsoever for any loss or damage arising from any use of this report or its contents. All data and information and opinions expressed herein are subject to change without notice.

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