Diversification

We had a conversation with a friend the other day, about how to diversify one's portfolio properly. Despite how we may sound on occasion, we don't believe that having all one's wealth in anything -- even precious metals -- is a good thing. We're bullish, but we're not that bullish; when we start hearing 'sure things,' we get nervous... and we don't want to sound like the pushers for Bernard Madoff. The Uncle Bernie Affair is a good example of, shall we say, over-bullishness.

However, there is more to diversification than simply investing in multiple sectors of an economy. The likelihood of any one scammer, like Mr. Madoff, making off with one's life savings is decreased if one keeps any one investment to an acceptable percentage of one's total assets. We remember the stories of the people who gave everything to Mr. Madoff, only to lose everything... and we can't really feel sympathy for them. Greed got the better of them, and lo, the price of such greed was revealed.

We are often worried that, despite our best efforts, our investments may be in the loving arms of someone similar to Mr. Madoff. In the era of Peak Scam, one cannot be too careful. So, we are looking at more than just diversification within one economy: we are looking at multinational diversification, albeit on a small scale.

Why, you ask? Well, having all one's money is U.S. Dollars, or euros, or pound sterling, or Japanese yen, is effectively the same as giving all one's money to Uncle Bernie. It's betting the farm on that particular nation's ability to hold together and defend its national currency and economy. We are not at all confident enough in any one nation to have all our assets valued in its currency... and subject to its political caprices.

It's a question of scale, to be sure; one needn't have a ranch in Argentina, a fishery in Iceland, and a factory in Russia. However, we feel it is a prudent idea to at least have some assets outside of one's nation of legal residence. International diversification will be increasingly important in the years ahead, and, as we mentioned, it can be done on a small scale, even for the average individual.

Racing to the Next National Blow-Out

As the financial hydrogen bomb cloud over Iceland begins to fade, her citizens are beginning to adjust to life in a long, cold nuclear winter. Surrounded by a glow-in-the-dark landscape, and a currency that burns to the touch, they've begun to pick over the ruins of their previous life. With a new coalition government in the works, and the age-old practice of whaling to provide jobs, Iceland will probably pull through... though she will be vastly changed. We hope they can find some whales.

Frankly, though -- and not to seem callous -- Iceland was a weak hand. One can call upon the Galbraith Financial Principle: the best and biggest will fail last. Iceland was neither biggest, nor the best; she was merely the first country squashed flat by the 2007 Depression. The question one should be asking is not how will Iceland pull through, but rather, who's next. This piece has a very good list: Great Britain, Latvia, Greece, Ukraine, Nicaragua. We would add Mexico to this list; however, these are probably the next countries to go.

Personally, we would put our money on Great Britain: she's in rough shape, and with the annihilation of the pound sterling in the works, the Brown Government could very well go to pieces a la Iceland. When governments say they aren't concerned about the value of its issued currency, bad things can happen. The Brown Government may feel it's on top of the situation, but it's no more in control than Zimbabwe's.

Then there is the terrible crime of hubris: Mr. Paul Marshall recently told a Treasury committee that a Madoff scandal in the U.K. is "very unlikely." Funny, but we remember Mr. Madoff himself saything that very same thing... Big investors are assuring the Brown Government that there is no "U.K. Madoff," but if the government believes that load of lies... they're unworthy of governing.

Dark Clouds over the Eurozone

In a wee little article, Bloomberg released the news that the United Kingdom will not be allowed to join the euro. As a friend of ours noted, the shorter the article, the worse the news. In this case, it means that the European Union is going to let the pound sterling hang in the wind, as it were. This will not be good for the pound, of course. One of the big hopes for the pound was the possibility for exchanging them in for new, shiny euros.

British Parliament, figuring they have nothing to lose, is deliberating on whether or not to loose the dogs of war: quantitative easing. By allowing the Bank of England to delay its reporting of the amount of money it's pumping into the U.K. economy by a month or so. It's not like the Bank knows what it's doing anyway, but this move ensures the pound sterling will die a screaming, hyperinflationary death.

As if to rub salt in and rub sandpaper over the festering wound is this charming piece from the London Times. The action of taxing savings accounts will amount to nothing more but confiscation, a rape of savers in order to 'restore prosperity.' We suppose the mindset is, 'if you won't spend it, we will!'

Although this problem is presently only the United Kingdom's, it is not isolated from the rest of the Eurozone. If it appears that the Bank of England's efforts are working, the rest of the European Union will not be far behind in implementing similar policy. As central bankers are a reactive lot, and not anticipatory, the Eurozone will not see the doom of the pound sterling -- and indeed the euro itself -- until hyperinflation has already murdered the currencies.