The usual warning*.
I am so puzzled by the complete disconnect between the public discourse as reflected in MSM and the obvious trends in reality. Nobody can possibly expect anything but economic calamity, and that has been obvious since about 1995, they have goosed the Fed’s output of $ in boom-bust cycles of increasing height, and the Lehman collapse was the last bust, in 2007, with the biggest and longest creation of fiat ever in history since.
Everyone is arguing about how many more peaks of the market there will be before the crash. One last chance to lose everything, how can you pass it up?
Great fortunes are lost in these times. Nobody who studies the pattern of losses at major turning points in economic history believes in holding stocks or bonds as they happen. The financial system world-wide crumbled in 1929 and in those previous panics. The largest banks and industrial firms were suddenly on the auction block, their worth close to nothing. You can get wealthy buying things then, but best you know what you are doing and invest in a portfolio.
But holding existing financial instruments, including currency, through a major inflection of economic history is how you lose your fortune. Invest immediately after the event, provided the political system isn’t being too stupid. Otherwise, gold in the ground in a quiet place and wait. To do otherwise is to take an unknown risk for less than infinite gain. Foolish.
So investing for maintaining wealth over decades requires getting out of markets plenty early, a balanced portfolio of property that produces income across different countries and will continue to do so in any economic situation, and getting back into financial markets when everyone else is screaming for the exits and politics nevertheless sensible.**
That is also obviously what a pension fund would do, after having provided for the next few year’s payments via maturing bonds. It is not as if it is hard to see bubbles nor major crashes, although it is not knowable that political systems are going to turn out OK, from the evidence.
So why are pension funds still in financial instruments? I don’t believe any pension manager alive is under any illusion about the actual state of the economy. MSM can’t keep it all under wraps, and the average pension fund manager is a smarter cookie in 2015 than in any previous year. Their boards set investment plans, percentages in categories, and I bet a lot of pension fund managers wish they had more latitude to move to cash right now.
From my position outside the financial system, no rational investment manager would have a penny in any financial instrument at this time in history. What platform could you stand on to hedge the risk? The events in the news are failures of those platforms, failures of nation states to enforce the rule of law, great chaos must ensue. Given all of the proven skims and riggings in our recent financial history, what rational pension funds in the world are going to invest in US stocks through US institutions? The rate of return will need to include Wall Street’s various skims and the risks due to unreliable justice in disputes.
Large and increasing risk coupled with declining rates of return are not a good investment environment.
That understanding leads to understanding what comes next, and the reason for all of the capital controls being erected around the world.
Stock markets are ultimately based on investor confidence. Wall Street had a bit of a monopoly for a while, and abused its investor’s confidence. Now investors have alternatives, and US pressure has not resulted in offshore accounts being eliminated. Ultimately capital controls are a tax : they can always be evaded, the only question is how much it costs. A standard approach is importers buying expensive goods, with the excess being a stream of funds moved offshore, very hard to detect and harder to prove. Bitcoin and other digital financial instruments will make it even easier to move funds, so standard financial systems have set in place the forces for their ultimate replacement, think of it as ecological secession.
Ignoring the ups and downs of a particular currency relative to everything else is mandatory, those risks must be hedged. That is normally done via a marketbasket of currencies. If you hold gold you hold a marketbasket of currencies automatically. Gold is as near a guaranteed neutral, no possible loss, investment as it is possible to get, exactly what you need when financial north switches south. That is the allure, forget all the mystical power of heavy yellow metals that clink so nicely, gold is a no-loss investment in times of chaos. It doesn’t appreciate, but it doesn’t depreciate either.
Short-run, the financial problems in the US will likely be more severe than in other countries, as they are less financialized and less wealthy. Given decent politics and citizens who work at acting with wisdom and intelligence, countries that chop off their financial systems can begin an economic recovery in a few years, Iceland was an early example.
This is very late in the cycle, wise money left the financial system before Lehman. Very intelligent money before MF Global. Since the beginning of 2015, I must have read half a dozen times that ‘now the smart money has left the stock market’.
The situation for any investor in the US is now much like what it has been for Russians in the past decade. You have a lot of cash, and can’t diversify your investments enough inside the US, it is no longer a safe business climate and the economic chaos is just beginning.
So money will now leave the US in ever-larger amounts, interest rates will rise, investment for new businesses and technology will be tight, and the US economy will slide at ever-faster rates until we are again living within the productive capacity of the nation, including the very-much smaller slice we citizens will allocate to any government-equivalent functions.***
From this point of view, if the Fed does raise rates as it keeps threatening, it will be because it has been forced to do so to keep sufficient funds in the US to liquify the the markets and banking system. Otherwise, the risk-reward ratios of other markets would pull too much cash out of the US.
In a world where 10 basis points is an arguing point in negotiations, the many layers of skimming and fees reduce the return on a portfolio quite dramatically. That is the reason we will need capital controls, to prevent money from leaving a moribund economy managed by a kleptocracy.
*Search this site for the many warnings about the insidious propaganda this site contains. All blogs are trying to control your mind, this one is real up-front about that, and that is much more dangerous than the average blog. You have been warned.
**After I wrote that bit of obviousness, I went looking for advice. It is not easy to find, mostly how to manage investments and choose stocks. It already made the big important decision for you. Otherwise, I saw nothing inconsistent with the above. Being in the middle of the avalanche is no place for the farsighted, risks necessarily far outweigh potential gains, that is inherent in systems so fubared that they inflect. If that is not obvious to you, I recommend that you not invest. The most neutral non-investment is gold, contrary to most financial advice.
***Those will likely not be recognizable to current government employees, NONE of whom will be involved. This era ends with the rise of the web and the peer-to-peer communications that makes possible. Government is no longer needed as an intermediary for most of its current functions.