Switzerland - The Trading Sovereign Of Europe

Includes: EWL, FSZ, HEWL, SWZ
by: Alan Longbon


Large positive external trading income.

Strong internal private credit creation.

GDP rolling over and a need for government action.

This report was produced using a balance of national accounts assessment of Switzerland.

One can summarize the national accounts in the following formula:

Private Sector [P] = Government Sector [G] + External Sector [X]

GDP = Private Sector [P] + Government Sector [G] + External Sector [X]

See the methodology section below for more detail on this formula.

The private sector is where the stock market is and we as investors want the stock market to go up. The stock market can only go up if the flows into it are positive. The private sector derives income from three sources:

  1. Credit creation from banks.

  2. Externally from overseas commerce.

  3. Government spending.

In an ideal scenario, the private sector would receive large, and growing income flows from all three sources, and at the very least, the overall impact should be a positive flow overall even if one or two of the three flows are negative. The stock market in the private sector, as well as all other private financial assets, should rise if the overall income flow into the private sector is positive. Certainly, the stock market would be unlikely to rise if the income flows were negative. Even in a shrinking economy, some sectors can grow while the rest of the pie shrinks.

We will look at each inflow in turn and start with the private sector.

Private Sector

The chart below shows the level of private credit creation entering the private sector through commercial banks.

The chart shows that private credit creation is growing at steady, sustained rate with minor step ups in some years.

The chart below shows the stock market.

The chart indicates that the stock market is trending upwards and looking to make a second attempt to meet and exceed the all-time high set in 2008 at the peak of the GFC boom-bust.

The chart below shows GDP.

The chart shows that GDP has risen very strongly from 2002 until 2013. GDP now looks to be rolling over into decline. Not good.

The following chart shows the M3 money supply.

The chart shows that the money supply has been steadily increasing with the expanding economy. A bullish chart. As soon as one sees an expanding money supply, one thinks, what about inflation? Especially when one sees GDP in decline.

The chart below shows inflation. Inflation is trending upwards but is still very low at barely one percent. In the prior period, inflation was negative.

In any private sector, one would like to see the customer base expanding and ever more transactions, and for that, you need people and lots of them. The chart below shows population.

The chart indicates that the population has been steadily expanding in a healthy shallow curve upwards. This means more people to make, buy and sell things too. With only around 8.5 million inhabitants Switzerland is quite small.

One must also have jobs for this population so they can earn an income, produce things and makes sales to and from. The chart below shows total employed persons.

The chart reveals a steady growth in the number of employed persons making things and with pay packets to spend. Of the 8.5 million people in Switzerland, 5 million of them are working.

The flip side of employed persons is unemployed persons and shown in the chart below.

The chart shows that the unemployment rate is steady at a relatively low 3 to 4 percent and has moved in this range since 2000.

Employment can also be expressed in terms of machines and land as the chart below shows.

The chart indicates that capacity utilization moves in a band between 90 to 76 and is currently at 80 and trending down. This means there is additional capacity to use before real inflation can occur.

Households have some debt though, as the table below shows.

Domestic credit to private sector (% of GDP World Bank 2015)






(Sources: World Bank and Trading Economics)

Private debt has grave implications for aggregate demand if there is too much of it. The problem is that as some stage - generally considered to be 150% of one's income - the debt servicing costs become a drag on general consumption. A phenomenon that Economist Professor Michael Hudson has coined "debt deflation." A situation where debt service payments reduce income purchasing power for real goods and services and the real economy declines. This may explain the rollover in GDP.

High levels of debt make an economy extremely fragile to recessions. Non performing loans lead to mass asset sales and a sudden fall in asset values.

The price of accommodation is rising steadily and has reached the former all-time high set in 1990. Switzerland was hard hit by the 1989/90 financial crisis known in the USA as the savings and loan crisis.

Most people in Switzerland do not own their home as the chart below shows.

This is one of the lowest home ownership levels in the world. Normally a high debt land has high house prices, and high home ownership levels as most people have a large mortgage and large mortgage payments to make on their relatively expensive accommodation. Switzerland has high debt levels however it does not have high home ownership levels which mean the private debt is money borrowed and invested in some other asset. Perhaps the taxes and cost of living are so high that people are borrowing to maintain their lifestyles and this accounts for the high debt level. Maybe a Swiss reader can comment on life in that land in the comments section below?

The bottom line is the private sector is growing but appears to be decelerating and going into decline and it has a high level of private debt.

External Sector

The external sector captures trade and commerce with other countries and is best captured by the current account. The current account is exports less imports, and it also captures capital flows in and out of the country from financial transactions and investments. A positive overall result is best.

The chart below shows the current account balance. The chart shows current account is both positive and trending upward.

Important for external sector results is the currency exchange rate, shown in the figure below.

The chart shows that the currency has been falling since 1970.

Currencies tend to gain strength when their asset backing improves. Rising GDP and employment levels normally give the currency strength. A steady exchange rate is important for overseas investors as one does not want to suffer losses through a sudden exchange rate rise or fall. Switzerland looks to be steady and has traded at the same rate for the last five years.

As an exporting land, Switzerland has an incentive for a lower exchange rate to make its goods cheaper for international buyers. A government does this by suppressing domestic demand for imports via taxation and encouraging high private debt levels. The debt information above and the taxation information to be presented below show that this is indeed the case.

Government Sector

The government budget is in the chart below.

The chart shows the government is at best neutral. In the past one can see that the government has drained up to 2 percent of GDP from the private sector and that this timed in each case to the boom-bust of 2000 and 2007. Only after the financial crisis of 1990 did the government inject any more than 2 percent of GDP into the private sector. Given the conservative nature of the government the 2 percent of GDP injection was more than likely the result of automatic stabilizers deployed in the form of unemployment benefits for jobless workers rather than a conscious discretionary decision by government to support the private sector.

The table below shows taxes. Taxes drain money out of the private sector and destroy financial assets.

(Source: Trading Economics)

The tax rates compared with the rest of the world are high, especially for workers at 40 percent of income. 40 percent of internal aggregate demand is taxed away and destroyed. The yawning disparity between the corporate tax rate and the personal tax rate is a scandal and shows who controls the political agenda and government.

The Swiss have further complicated business with a value added tax that is notoriously hard to administer and favors larger firms with more bureaucratic administrative muscle over smaller ones.

As a net exporter (unstated) economic policy is to promote international competitiveness with low taxes for export companies and high labor taxes to suppress internal demand for imports. This policy mode tends to stop the currency exchange rate rising but also stops the standard of living and well-being rising as well. Such a policy setting benefits business owners at the expense of the rest of the population.

Switzerland is a currency sovereign and does not need to tax or borrow money from the private sector to fund itself as it is the source of the money. Draining the private sector with taxes, or borrowing from it is akin to putting seawater back into the sea. Public taxation policy is an obsolete gold standard mentality. The gold standard has not applied internationally since 1971 and yet its legacy remains.

Sectoral Analysis Methodology

Each nation state is composed of three essential components:

  1. The private sector

  2. The government sector

  3. The external sector

The private sector comprises the people, business and community, and most importantly, the stock market. For the stock market to move upwards, this sector needs to be growing. This sector by itself is an engine for growth and innovation; however, it only needs income from one or both of the other two sectors to grow.

The government through its treasury also sets the prevailing interest rate and provides the medium of exchange. Too much is inflationary and too little is deflationary. It puts the oil in the economic engine and can put in as much as its target inflation rate allows. It is not financially constrained. For a sovereign government with a freely floating exchange rate, any financial constraint such as a matching bond issue is a self-imposed restriction. A debt ceiling is also a self-imposed restriction as is a fiscal brake.

The external sector is trade with other countries. This sector can provide income from a positive trade balance, or it can drain funds from a negative trade balance.

For the stock market in the private sector to prosper and keep moving upwards, income is required to be put into the flow. Otherwise, the sector can only circulate existing funds, or is being drained of funds and is in decline.

The ideal situation is that the private sector has a net inflow of funds and is always growing, thus giving the stock market headroom within which to expand in value. For this to happen, one or both of the other sectors have to be adding funds to the circular flow of income.

The following formula can express this relationship:

Private Sector = Government Sector + External Sector


GDP = Private Sector + Government Sector + External Sector

For the best investing outcome, one looks for countries with stock markets located in private sectors that are receiving positive income flows overall. Top marks come where private credit creation, the government sector, and external sector are both in plus and trending upwards.

Applying the Numbers

When we take our inputs and place them in our formula, we can calculate the following sectoral flow result based as a percentage of GDP. Note that GDP is declining, so the flows also decline in absolute terms even if static as a percentage.

Private Sector Credit Creation


External Sector


Government Sector









(Source: Trading Economic and Author calculations based on same)

At present, this is the third best scorecard on the planet regarding overall flows. One can see though that the heavy lifting is done by the external sector and the private sector and that the government plays no role at all.

One can see from the table that every year over 15% of GDP, in additional income, flows into the private sector and increases the value of all financial assets located there. This includes the stock market. This is one of the highest rates of revenue generation and flow in any land in the world at present and is a strong argument for making an investment into the private sector.

Investment access to Switzerland when one is not there can be made via the following ETFs.


iShares MSCI Switzerland Capped ETF


First Trust Switzerland AlphaDEX Fund


iShares Currency Hedged MSCI Switzerland ETF

I asked a charting friend of mine to assess when a good entry point would be for an investment into the Swiss stock market and he produced the chart shown below.

In a chart pattern common to most western industrialized lands the stock market is running up to a high over the next two years (point B) and will then most likely fall with the recession around 2019/20 down to point C.

The next country on the list is South Korea where we can move away from small city-states and small countries and look at a land with a larger population and a GDP over double the size of Switzerland.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.