Penn Wealth Publishing

2018.11.18 Penn Wealth Report Vol 6 Issue 05

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18 Nov 2018 PeNN Wealth Report volume 6 issue 05 19 Penn Wealth Report Copyright 2018. All Rights Reserved. Weekly BusiNess Report Weekly BusiNess Report Domestic and International Headlines somehow accumulated a massive $12 billion debt load. Government watchdog agencies in the United States and Malaysia have now identified at least $4.5 billion of that amount flowing out in "irregular" transactions. For example, $681 million ended up in Razak's personal bank accounts (he has since been ousted from power and is now facing corrup- tion charges). 1MBD now appears to have been a mas- sive ponzi scheme designed to enrich the well-connected. At least ten countries are involved in the investigation of the scheme, which involved hundreds of hidden accounts and dozens of nefarious individuals. So, where does Goldman Sachs fit in the picture? At least three Goldman senior exec- utives have been implicated in the crime, and photos of former CEO Lloyd Blankfein with a Malaysian individual at the center of the storm—a banker who goes by "Jho Low"— have certainly not helped the optics. What's more, Goldman made out like a bandit while working for the 1MBD fund. e bank made a whopping $593 million on several bond sales which raised $6.5 bil- lion for the fund—enormously more than is typical for such a relationship. e new Malaysian government is trying to claw back billions of dollars from the scandal, to include Goldman's booty. e fallout has already been massive, and the multi-country investigations are just beginning. Razak faces at least ten charges in Malaysia, ranging from corruption to money laundering, with his wife also facing charges. e US has charged Jho Low (though his whereabouts are unknown), along with sev- eral Goldman bankers. After the photo of Blankfein with Low hit the wires, GS shares fell nearly 10%, and are now down 20% year-to-date. It will take a long time to sort out the intri- cacies of this case, but one thing is certain: it will go down as one of the biggest financial scandals in history, and it will place a lot of bad actors behind bars. In the meantime, we wouldn't touch Goldman Sachs (not that we would have anyway). GermaNy's Q3 ecoNomic coNtractioN may PorteNd more Bad NeWs comiNG for eu One of the reasons hapless Angela Merkel has been able to hang onto power in Germany for the past twelve years has been the strong comparative growth of the German economy over the past decade. Going forward, that economic growth may just mimic Merkel's declining political career. For the first time in three years, German GDP actually contracted over a quarterly period, falling 0.2% in Q3. For the sake of comparison, US GDP came in at 3.5% for the same period. Several factors led to the contraction, including the ongoing trade war with Washington, the messy breakup with the UK (which has affected trade between the two nations), and a new touchy-feely regulatory constraint which has caused a bottleneck of new German vehicles trying to exit the pro- duction line. e regulatory problem stems from the new Worldwide Harmonized Light Vehicle Test Procedure, or WLTP. (Don't you just love the first two words of the beast?) WLTP requires automakers to undertake a new pro- cedure to achieve "more accurate" emissions readings. Of course, the irony of this with respect to Germany is the arrest earlier this year of Audi's (owned by Volkswagen) CEO over the diesel emissions scandal. e auto- makers wouldn't dare admit it (lest they face the wrath from Brussels), but this regulation will amount to another feel-good boondog- gle which will not increase air quality on the continent, just further tie the hands of the German car companies. We have already been underweighting developed-Europe due to the slowing growth we see headed the continent's way in 2019. From economic woes among its poorer Southern European members, to increased infighting, to fallout from the execution of Brexit measures, we much favor small- and mid-cap US companies (not dependent on sales to Europe) over any of the developed nations across the pond. On that note, we recently added the Rogers AI Global Macro ETF (BIKR $23.81/sh) to the Dynamic Growth Strategy and placed a stop on ESGD, our large-cap foreign ETF (62% Europe-based). BIKR is based on the expertise of famed global investor Jim Rogers, combined with an artificial intelligence (AI) overlay to select the top 20 nations around the world in which to invest. For example, Argentina, Austria, and Brazil are current top holdings in the fund. Back to Germany. For a visual of just how mediocre the country's growth has been, take a look at the 1% line on the graph below. crisis iN the uk as may hit from all sides oN the NeGotiated Brexit deal With eu We have never been big fans of British Prime Minister eresa May (she is not exactly the second coming of Margaret atcher, after all), but one has to feel for her considering the position in which she currently finds herself. After negotiating a Brexit deal with the smarmy, arrogant creatures in Brussels, May presented the deal as the "best hope" to get a clean breakup from the EU, but the 585-page deal is anything but clean, and members of her Tory Party know it. Shortly after reviewing the plan, two senior members of May's cabinet resigned—one of which was the Brexit secretary himself. Former foreign secretary Boris Johnson pro- claimed the deal to be the worst of both worlds: it locks the UK into the EU customs union without being able to unilaterally with- draw, and it gives the EU the power, for all intents and purposes, to scuttle trade deals the UK makes with other countries. What was the point of Brexit, again? As could be expected, the opposing Labour Party jumped at the chance to bash the prime minister while she was down. Party leader Jeremy Corbyn said his members would vote against this "half-baked deal." Labour was vehemently against Brexit from the start. Since they are in the minority, Labour could not stop the deal, but virtually all Tory Members of Parliament need to support it to gain passage, and that is looking less likely. As for May's political future itself, it only takes 48 Tory MPs giving a vote of no-con- fidence to trigger a leadership challenge, and a simple majority of party members (159) to begin an actual no-confidence procedure and possible ouster of May as the party's leader. While that is unlikely to happen, it is hard to see the current Brexit deal passing Parliament. As Johnson noted, it places the UK under the control of a trade structure which it has no power, post-Brexit, to shape. Arrogant European leaders would willingly cut off their nose to spite their face. Take a look at how the European stock market has fared against a pretty lousy US market YTD. GloBal strateGy: euroPe GloBal strateGy: euroPe

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