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.

What is Poor?

As one of the biggest shopping day of the year dawns, we look out the window and -- to quote the archetypal priest -- we think of those less fortunate. No, dear Reader, we don't mean those who couldn't buy their family a new plasma TV. We refer to those in the world are inconceivably poor: they cannot even afford proper nourishment.

For example, take Haiti. 80% of Haitians live on $2 or less a day -- making them part of the 2.4 billion or so who live on the same budget. Mind you, Reader, than isn't $2 for food a day, that's just $2 a day. They are so poor they are eating baked mud, potentially ingesting various toxins or parasites. This mud they eat is euphemistically referred to as a cookie.

Mmmm, cookies.

We have no ethical axe to grind, one way or the other. We merely feel greatly irked at people who worry when they cannot blow large amounts of money on the holidaze. For instance, a worker at a recently-reopened cookie manufacturer in Ohio said, after getting a $1,500 gift card, 'I can give my kids a Christmas.'

Really? No kidding. We can see a couple ounces of gold dancing in our eyes if someone handed us $1,500. A person in Haiti would have probably screamed for joy, since they could then have eaten on $5 a day for about a year... but this person instead saw Wal-Mart, or possibly Toys-R-Us.

No one in the West quite understands what it truly means to be poor. We certainly don't, and we don't want to, either. The poor of Haiti have little-to-no hope of improving their financial situation, because they cannot even afford to live hand-to-mouth. In the West, one still has the potential to improve one's finances, even in this Depression. If one gets a windfall, like the worker and her $1,500, one must think long and hard about spending it wisely. Use it for a lasting improvement in one's living conditions: pay down debt; shore up investments; buy some precious metals. To fritter away a windfall, time and time again, launches one on the road to perfect understanding of just how poor the average Haitian really is.

An Alternate View of the Depression

Today we discovered a very interesting blog. It is called "Meltdown 2011," and presents what we would call a conspiracy interpretation of current events. The author, a Mr. Scott Gallup, believes the 2007 Depression, or "The Meltdown" as he calls it, is being created intentionally to further the ends of what he calls 'Shadow Powers'. Generally, we discount such a viewpoint, but nevertheless listen to it.

The 'doom and gloomers' have had a better predictive track record than the rest of the population lately, and one could chalk that up to the 'broken clock is right twice a day' effect. On the other hand, given the present economic crisis, the notion that they might be on to something deserves a bit more attention than usual.

If you can navigate Meltdown 2011's enigmatic layout, you will find a treasure trove of 'alternative ' information. We would categorise much of it as more than a little tired, but some of it is original and well-informed, such as it's coverage of issues in the precious metals markets (which was what drew us to the site in the first place).

It is a taxing task to attempt to wrap one's head around vast and complex issues. We ourselves attempt this with open-mindedness, and avoid reductionism. Our opinion is that even if some would-be overlord class is attempting to manage the world's institutions, economies, people and so forth, they are almost certainly not up to the task, and would fail to achieve their intended results. Ultimately, the only functional human systems are those where power and decision-making are widely distributed. Efforts to set up non-functional systems may bring misery and suffering (the Soviet Union again comes to mind), but in time they do collapse.

There are always attempts by politicians, seen and unseen, to grab power. That is what they live for, after all. Perhaps the 2007 Depression will be perceived by the political class as a capital opportunity to grab more power. Perhaps they will even succeed for a time. However, the more vigilant the citizenry is towards attempts to take power from it, and the more prepared they are for such an assualt, the less likely they are to be overpowered. Meltdown 2011 may be going overboard a bit in the vigilance department, but nevertheless it provides interesting food for thought.

Investing in a Depression

Income loss is the one fixture of every depression in recorded history, and so too will the 2007 Depression severely lower income. Whether through inflation or deflation, it is bound to occur. Income from investments is just as threatened by the 2007 Depression as income from employment. One only needs to look at: the drop in corporate earnings; the falling stock market; the minuscule yield on bonds, including government bonds; the increasing possibility of default of bonds, including government bonds; meaninglessly low interest rates on bank deposits.

In deflationary depressions, like the 1929 Depression, cash is king because its purchasing power increases. This can happen through several ways: its market value increases (as in a hard money system); the velocity of money drops (i.e. the speed at which people spend money for stuff); supply physically decreases (as theoretically possible in a paper money system, maybe); some combination of all the above.

Although it is possible that in the 2007 Depression "cash is king," we are of the opinion that cash will be trash in the very near future. Because the Federal Reserve is putting its considerable might into preventing deflation at all costs, we feel that inflation is the name of the game. This will happen through several ways: physical supply of money will expand at an accelerated rate; the velocity of money increases; or a combination of the two.

As all but one historical paper money experiments have ended with a hyperinflationary depression, investing will take on a new face. It will not necessarily be to increase wealth; rather, it will be to lose as little as possible, or hopefully preserve it. Gone are the days of making investments which will increase steadily in value. As one individual of our acquaintance put it, when the water goes out before a tsunami hits, don't go onto the sea bottom and fight over the fish. Head for higher ground instead.

We feel very strongly that the tsunami will come in after the synthetic CDOs we wrote about in yesterday's post start unwinding. Between then and now, however, 'higher ground' may be a difficult thing to find. Investment markets of all varieties are in disarray, and supposed safe havens (bonds, precious metals, and select foreign currencies) don't look so good. One could take cynical risks, and throw one's lot in with one of the biggest swindlers in human history: JP Morgan. When their synthetic CDOs start paying out, they might be the biggest winner... or they might not be. Time will tell.