The pending Brexit has, not surprisingly, caused a shakeup
in the investment world, particularly in the UK. Of particular note is that,
recently, asset management firms in Britain began
refusing their clients the right to cash out of their mutual funds. Of the £35 billion invested in such funds, just
under £20 billion has been affected.
For those readers who live in the UK, or are invested in UK
mutual funds, this is reason to tremble at the knees.
So, why have these investors been refused the right to exit
the funds? Well, it’s pretty simple. The trouble is that quite a few of them
made the request at about the same time. Of course the management firms don’t
keep enough money on hand to pay them all off, so, rather than spend all
their money paying off as many clients as possible, then going out of
business due to a lack of liquidity, they simply announce a freeze on
redemptions.
Those who are outraged may read the fine print of their
contracts and find that the fund managers have every right to halt
redemptions, should “extraordinary circumstances” occur. Who defines
“extraordinary circumstances?” The fund managers.
Across the pond in the US, investors are reassured by the
existence of the Securities and Exchange Commission, which has the power to
refuse this power to investment firms…or not, should they feel that a
possible run on redemptions might be destructive to the economy.
Countries differ as to the level of freedom they will allow
mutual fund and hedge fund management firms to have on their own, but all of
them are likely to err on the side of the protection of the firms rather than
the rights of the investor, as the firms will undoubtedly make a good case
that a run on funds is unhealthy to the economy.
The Brexit news has created a downward spike in investor
confidence in the UK – one that it will recover from, but, nevertheless, one
that has caused investors to have their investment locked up. They can’t
get out, no matter how badly they may need the money for other purposes. This
fact bears pondering.
Presently, the UK, EU, US, et al, have created a level of
debt that exceeds anything the world has ever seen. Historically, extreme
debt always ends in an economic collapse. The odiferous effluvium hasn’t yet
hit the fan, but we’re not far off from that eventuality. Therefore, wherever
you live and invest, a spike such as the one presently occurring in the UK
could result in you being refused redemption. Should there then be a
concurrent drop in the market that serves to gut the fund’s investments, you
can expect to sit by and watch as the fund heads south, but be unable to exit
the fund.
As stated above, excessive debt results in an economic
collapse, which results in a market crash. It’s a time-tested scenario and
the last really big one began in 1929, but the present level of debt is far
higher than in 1929, so we can anticipate a far bigger crash this time
around.
But the wise investor will, of course diversify, assuring
him that, if one investment fails, another will save him. Let’s look at some
of the most prominent ones and consider how they might fare, at a time when
the economy is teetering in the edge.
Stocks and Bonds
Presently, the stock market is in an unprecedented bubble.
The market has been artificially propped up by banks and governments and
grows shakier by the day. Bonds are in a worse state – the greatest bubble
they have ever been in. This bubble is just awaiting a pin. We can’t know
when it will arrive, but we can be confident that it’s coming. Rosy today,
crisis tomorrow.
Cash on Deposit
Cyprus taught us in 2013 that a country can allow its banks
to simply confiscate (steal) depositors’ funds, should they decide that there
is an “emergency situation” – i.e., the bank is in trouble. Unfortunately,
the US (in 2010), Canada (in 2013) and the EU (in 2014) have all passed laws
allowing banks to decide if they’re “in trouble”. If they so decide, they
have a free rein in confiscating your deposit.
Safe Deposit Boxes
Banks in North America and Europe have begun advising their
clients that they cannot store money or jewelry in safe deposit boxes. Some
governments have passed legislation requiring those who rent safe deposit
boxes to register the location of the box, its number and its contents with
the government.
Each year, the storage of valuables in a safe deposit box is
becoming more dubious.
Pensions
Pension plans tend to be heavily invested in stocks and bonds,
making them increasingly at risk in a downturn. To make matters worse, some
governments have begun to attack pensions. Others, such as the US, have
announced plans to force pensions to invest in US Government Treasuries –
which, in a major economic downturn could go to zero.
These are amongst the most preferred stores of wealth and
are all very much at risk. In addition, there are two choices that, if
invested correctly, promise greater safety.
Real Estate
The Mutual funds in the UK that are presently in trouble are
heavily invested in real estate. But real estate that you invest in directly
does not face the same risk. However, any real estate that’s located in a
country that’s presently preparing for an economic crisis, such as those
mentioned above, will be at risk. Real estate in offshore jurisdictions that
are not inclined to be at risk is a far better bet. (An additional advantage
is that real estate in offshore locations is not even reportable for tax
purposes in most countries, because it cannot be expatriated to another
country.
Precious Metals
Precious metals are a highly liquid form of investment. They
can be bought and sold quickly and can be shipped anywhere in the world, or
traded for metals in another location. Of course, storage facilities in
at-risk countries may find themselves at the mercy of their governments.
However, private storage facilities exist in Hong Kong, Singapore, the Cayman
Islands, Switzerland and other locations that do not come under the control
of the EU or US. Precious metals ownership provides greater protection
against rapacious governments, but storage must be outside such
countries.
The lesson to take away here is that, if you can’t touch it,
you don’t own it. Banks and fund management firms can freeze your wealth, so
that you can’t access it. Governments and banks can confiscate your wealth.
If you don’t have the power to put your hands on your wealth on demand, you
don’t own it.
This evening, take account of all your deposits and
investments and determine what percentage of them you do truly own. If you
decide that that percentage is too low for you to accept, you may wish to
implement some changes…before others do it for you.
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Jeff Thomas is British and resides in the
Caribbean. The son of an economist and historian, he learned early to be
distrustful of governments as a general principle. Although he spent his
career creating and developing businesses, for eight years, he penned a weekly
newspaper column on the theme of limiting government. He began his study of
economics around 1990, learning initially from Sir John Templeton, then
Harry Schulz and Doug Casey and later others of an Austrian persuasion. He
is now a regular feature writer for Casey Research’s International Man and
Strategic Wealth Preservation in the Cayman Islands.
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The author is not affiliated with, endorsed or sponsored
by Sprott Money Ltd. The views and opinions expressed in this material are
those of the author or guest speaker, are subject to change and may not
necessarily reflect the opinions of Sprott Money Ltd. Sprott Money does not
guarantee the accuracy, completeness, timeliness and reliability of the
information or any results from its use.
