I’m sure you’re familiar with the famous quip, erroneously attributed to Einstein: Insanity is repeating the same mistakes and expecting different results. Well, this Sunday, Swedish voters have the chance to go insane — or to prove that they learned their lesson the first time around.
Swedes are going to the polls on Sunday to elect a new government. And there is a very real chance — let’s call it what it is: a very real risk — that the country’s former government, the Social Democrats, will reclaim ultimate power in the Nordic nation.
If so, the change in leadership would mark a dramatic shift for Sweden. It would reverse the reforms that have turned the country into the model, capitalist economy in Europe. And it would mark one of the biggest socioeconomic mistakes on the Continent since the rise of bolshevism in tsarist Russia.
If the Social Democrats win, it means that next Monday morning, Sweden instantly becomes terra non grata — a country from which you want to pull out any money you have invested in stocks, bonds or the currency.
In the January 2013 issue of The Sovereign Investor monthly newsletter, I introduced my readers to Sweden — or, rather, the new Sweden; the Sweden that emerged in the 1990s after more than eight decades of Social Democratic rule that ultimately lead to the collapse of everything that Sweden assumed was normal.
For most of the 20th century, Sweden’s Social Democrats controlled government and operated on the deeply flawed assumption that anyone born in Sweden automatically deserved a middle-class life. To provide that life, Sweden taxed the hell out of everyone and every business, ultimately building a tax-heavy paternalistic state that provided cradle-to-grave care and offered everyone outrageous, unwarranted welfare benefits.
We know it in America as the Swedish Model, the model that the Obama administration thinks America should emulate.
But that model proved an unmitigated failure.
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The moment Sweden’s economy stumbled, the welfare state’s inherent frailty emerged. Burdened by providing so many costly benefits to so many out-of-work Swedes, yet lacking enough income from the remaining workers and businesses to support the bloat, the welfare state collapsed upon itself. The economy crashed spectacularly in the early 1990s. Interest rates spiked to 500% at one point just to stanch the flood of money trying to escape the failed state.
Now, Swedish voters are considering bringing back the same philosophy that once brought the country to the edge of the abyss … and shoved it in. The Social Democrats, the party leading in the polls, are already promising to roll back the reforms that set Sweden on its path to redemption and turned it into the success story it is today. They’re also talking about raising personal tax rates to a usurious 60%. And the biggest ally with whom they’d likely form a coalition government is the communist Left Party, which despises private profit.
So much for the future of Ikea, H&M, Spotify and so many other entrepreneurial Swedish companies that have taken the world by storm in the last 20 years.
The End for Swedish Stocks and the Currency?
This is the point in our story when I would normally say not to worry, that this is just one of those temporary, exogenous moments in geopolitics that ultimately means nothing to us as investors. And most of the time, that’s true. Politics is typically little more than background noise, and beyond the rabble I usually see geopolitical opportunity rather than geopolitical risk.
But some political events have the power to destroy economies on a large scale. And Sweden’s vote is one of those moments.
A return to a Social Democratic government, allied with communists on the left, would see corporate profits plunge in Sweden as the state confiscates businesses’ earnings to pay for increased welfare payments. It means consumer confidence and consumer spending would shrivel as the state steals more of workers’ paychecks, leaving less for people to spend … which implies a slowing economy.
It also means a sharp falloff in the Swedish krona.
Currency strength or weakness is a function of supply and demand, and in a world where Swedish tax rates are rising, corporate profits are shrinking, and the economy is contracting, investors and savers will exit the krona. That implies declining demand for the currency and a rising supply of krona notes that fewer people want. Rising supply paired with declining demand means a lower value for Sweden’s currency.
So if you own any Swedish currency investments like CDs or savings accounts, you will want to pay close attention to the vote this Sunday. A win for the Social Democrats is ultimately a loss for you, and assuming the worst happens at the polls, I would use this coming Monday to exit whatever positions you have in the krona.
Ultimately, if the Social Democrats win, I will axe Sweden from my list of investable countries. The country had one go-round with socialism, and that episode proved to the world unquestionably that the philosophy of the Big Welfare State does not and cannot work.
Swedish voters who expect a different result with the Social Democrats this time around have gone insane. And that’s a great reason for investors to avoid the country if the vote comes in the wrong way on Sunday.
Until next time, stay Sovereign …
Jeff D. Opdyke
Editor, Profit Seeker
P.S. If you’d like to read more of Jeff’s commentaries, click here.
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