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Since so many of the financial
community talk endlessly about where to invest, it always seems good to focus
on the issue of financial safety. In my view, way to much emphasis is given
to getting investing ideas, and little to how to keep what you have. Lots of
people get caught in that.
It doesn’t help that the
financial media, like CNBC is always saying ‘how can you play
this’ or where would you invest in this situation. There certainly is
nothing wrong with that, and surely CNBC wants to be relevant and useful to
their massive world audience. But, aren’t there times where the
clearest strategy is what NOT to do?
But financial professionals make
money by selling various investments, where they make a commission. There is
just little incentive to encourage a person to put his money in a safe place
and park it for a while. So, we never hear about that (or rarely).
Stay for the long term paradigm
One of the most dangerous
investing paradigms we hear over and over and over is that a person should
stay in the stock market because its average gains over 100 years or
something is like 10 or 12% (they say). These stay forever people say if you
get out of markets when they drop, you end up selling at bottoms, and if you
were to stay with it, the market recovers …etcetera.
But of course, when the markets
are facing a huge crash, this concept of hanging in there wears a bit thin. If
you look at what happened to stocks in 1929 worldwide, or the US, the stock market dropped over 90% in a couple of years, and began the Great Depression in the US that lasted 10 painful years. Stocks did not start to really recover till the mid
1950’s.
So, if people followed that
logic of staying in for the long term, they were basically wiped out. I think
that it’s clear that the idea of always hanging in markets looking for
the ‘long term’ is a bogus and self serving idea for the
brokerage industry.
The Yield paradigm
Then we can consider what I call
the Yield paradigm. (A paradigm is a deeply held way of thinking about
something, which often you don’t even realize.) The Yield paradigm is
that, if you have money it always has to be ‘working’. The person
cannot sit still if it’s not ‘always working’. This one
keeps a lot of people out of gold longer than they should. It also keeps
people in dangerous markets way too long for their own good.
The Yield paradigm is also a
reason many people stay in the stock markets, as they believe that they
should never let their money sit ‘idle’. This paradigm works well
together with the ‘stay in the market long term’ paradigm, and it
again keeps people in markets when, perhaps, they should be out in cash or
something (or gold coins in possession).
Now, Jesse Livermore, one of the
greatest stock speculators of all time, stated in his books that there were
clearly times to be totally out of the markets, in cash, and just go fishing.
(He had a big motor yacht in the Gulf and he would literally go fishing for
months when he was out of the markets).
Jesse Livermore NEVER stated
that one should always be in the markets because they ‘give an average
return of 12% long term’. He knew that was bogus.
But, the logic of that ‘be
in markets for the long term’ paradigm is very seductive. And, when
people end up taking huge losses in stock crashes they inevitably return to
that seductive idea, to comfort themselves. And, what really bothers me, is
to see financial professionals and media repeating over and over that
‘stay in markets long term and don’t get out’ mantra, all
the while people are losing a fortune.
So, let’s dispense with
that idea about always staying in markets because that is horse shit.
Cash, CDs, and gold coins
Our next point is to compare
cash, CDs and gold coins. Once one frees his mind from the two paradigms we
discussed above, then he has to find a place to sit ‘in cash’
whilst he waits out the market crashes. Of course, one of the biggest
problems right now is that banks and brokerage accounts are not all that
safe. There is the issue of bank runs and so on.
Personally, I would think the
safest way to keep your cash (not having institutional risk) is at home in a
safe (which you don’t tell people about!). Of course, lots of people
get nervous doing that. And you won’t get interest. But you can’t
have it both ways. In this case, one might choose a middle of the road
approach, and half here and half there.
The most secure cash would be a
gold coin. OF course, a gold coin does not earn ‘interest’ and
this key issue trips up many who would or maybe should go out and get a gold
coin or two. Inevitably, when there is a currency crisis, they end up
panicking and trying to get some gold or silver when its too late and not one
will sell it.
I do not like safe deposit boxes
because the government can lock you out of them. Bank ‘holidays’
can also lock you out from your cash just when you need it most.
And of course, there is always
the issue of the government confiscating gold again. But I would like to
point out that no strategy can cover all risks, and anyway, a government can
confiscate anything in an emergency.
Then, we get to what is becoming
one of my favorite topics, the tax deferred retirements. I am coming to
believe that these vehicles are particularly inappropriate for the longer
term in the US and elsewhere. Putting aside the clearly self serving motives
of the brokerage industry in creating these (with tons of lobbying), the
inevitable collapse of the USD would likely wipe out most tax deferred
retirements.
If the USD was not in such
danger, perhaps the tax deferred retirements would be all right going
forward. But, I do not personally believe these that safe for the next 5 or
so years. The risk of a USD crisis is all too real.
Another thing about tax deferred
retirements is that I am certain that, in a big US financial crisis, they
will go after any remaining big pools of money, and guess what the biggest
and most obvious target will be? Those juicy $trillions of ‘tax
deferred’ retirements! They likely will double taxes on taking any
money out of them in a real US economic emergency. If that happens, as I
suspect, so much for the tax deferral savings!
So, in effect, you are saving
for the government and not so much for yourselves, like you were led to
believe. Now, this is my assertion, not a certainty.
Bonds
I have a friend who bought quite
a bit of California tax exempt revenue bonds. He worked for years saving a
couple million at two teaching jobs. Now, with California in a huge financial
mess (again) his bonds have lost 20% of their value, though they are not
defaulted. Of course now, he is very reluctant to sell the bonds, as maybe he
should, due to the 20% hit. He then will end up taking a lot of risk going
forward, as California is ground zero of the real estate collapse. As the
bonds fall further in value, it becomes harder for him to sell them.
California’s budget will
be a disaster for years going forward. In fact, they just made a request for
a big loan from the US government so they can pay their bills in coming
months.
I give this example because this
guy’s issue is the same for many people. The reason he is in the tax
exempt bonds is to get yield. And, now he is facing some real risk of losing
the money altogether. Once again, always insisting on getting yield (the
yield paradigm) is a dangerous thing to do.
Return OF capital
Perhaps he would be far better
to get a bunch of CDs within the insurance limit. He would not get as much
yield, but has a much lower chance of losing his money. I know what I am
saying is obvious, but there are a lot of people in this situation. Moving to
lower yield to reduce risk is what must be done today, in my opinion. PIMCO’s
chief El Arian just stated the real issue right now is return OF capital, not
return ON capital. He is right.
In fact, that exact problem,
return of capital is the main source of the world credit crisis.
So, I think the main point of
this article is that people need to find out how much those two dangerous
paradigms are driving their thinking. Getting it wrong can be hugely costly.
Sometimes it’s just best to sit in cash.
Now, at this moment, the US stock market has not lost over 50%, like many foreign markets have recently. (China for example down over 60%). So, perhaps it’s timely for you to take a good look
at your thinking, and see just how deep those two paradigms are in you. Many
times, we don’t even realize how deep a paradigm has ingrained itself
into our thinking. You need to find this out. You have to examine
yourself…
We have a nice survival edition
of our newsletter out this week. Stop by and have a look.
The Prudent Squirrel newsletter
is our financial and gold commentary. Subscribers get 44 newsletters a year
on Sundays, and also mid week email alerts as needed. We alerted our
subscribers April 20 that the USD was bottoming. The USD has strengthened
significantly since. The alerts include quick notification of important
financial news developments by email. Subscribers tell us that the alerts
alone are worth subscribing for.
I had one potential subscriber
ask me if the newsletter has much more content than these public articles,
ie, if it was worth subscribing. The answer is that the public articles have
less than 10% of our research and conclusions that subscribers see, not to
mention the subscriber email alerts of important breaking financial news. We
have anticipated many significant market moves in the last year, such as
imminent drops in world stock markets within days of them happening, and big
swings in the gold markets within days of them occurring. We have also made a
number of good calls on big currency swings, such as with the USD, the Euro
and the Yen.
Chris
Laird
Prudent
Squirrel
Chris Laird has been an Oracle
systems engineer, database administrator, and math teacher. He has a BS in
mathematics from UCLA and is a certified Oracle database administrator. He
has been an avid follower of financial news since childhood. His father is
Jere Laird, former business editor of KNX news AM 1070, Los Angeles (ret). He
has grown up immersed in financial news. His Grandmother was Alice Widener,
publisher of USA magazine in the 60?s to 80?s, a newsletter that covered many
of the topics you find today at the preeminent gold sites. Chris is the
publisher of the Prudent
Squirrel
newsletter, an economic and
gold commentary.
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