Financial Strategies in Depression Times
publication date: Oct 4, 2011
|
author/source: Brad Hamill
I have had a number of readers ask for advice on how
to best financially weather a deflationary depression. What form of
asset allocation should one use?
Disclaimer
I am not a licensed investment advisor. Any thoughts and/or opinions written herein are strictly mine, and should not be construed as investment advice.
Easy Investing
Many entities seek to make financial investing into a daunting subject where they can charge exorbitant fees to lose people money in market downturns. I’m going to give thoughts on how to invest, why to invest, and what to expect from investing – all in an easy to understand format.
How to Invest
A deflationary depression occurs as a nation’s money supply significantly shrinks relative to the demand and supply of goods and services. This reduced money supply makes each “unit” of money worth more, since there are fewer units to go around. Effects of this include lower wages, lost jobs, reduced prices in many (but not all) areas, etc.
We can see a glimpse of this with the recent downturn in the economy. Here is a chart showing the US Dollar Index:
Notice how the Index has significantly strengthened over the past month. This is due to worldwide debt defaults, without a corresponding increase in the various money supplies to offset them.
When people tell you that the US Dollar is going to “crash” then you should just point them to this chart.
“Money” is very simple to understand. The total money supply in a nation is the sum total of all claims on future labor. “Debt” is a promise of future labor. “Money” is a claim on debt.
Here are my three simple rules for how to invest in a deflationary depression:
1) Have direct “first in the pecking order” claims on as much debt as possible.
2) Keep your asset allocation as “liquid” as possible.
3) Use 10% of your resources to invest in things that are 180 degrees counter to your strategy.
Why to Invest
Let’s tackle Step 3 of my investing strategy first. Why would you invest 10% of your financial assets into something that you think will lose money?
It’s a concept known as “hedging”. We all like to think that we’re right, but the possibility of being wrong is very real. Hedging allows part of your portfolio to still make some gains even if the rest falters.
Ok, so where should one invest their 10%? My opinion is that physical precious metals are the best option. Why? Because I believe they will be dropping in price, they can be very “illiquid”, and they typically sit as “third” in the pecking order against existing debt. You’ll learn about liquidity and pecking order as we move along.
What happens if my deflationary depression hypothesis is wrong and we instead experience major inflation of 20% or more annually? Your hedge of precious metals would likely go up in value, become more “liquid” in nature, but still be third in the pecking order against existing debt. Not bad at all.
Step 2 is to keep your asset allocation as “liquid” as possible. What do I mean by this?
“Liquidity” is a measure of how fast you can convert your financial assets into useable cash. US Dollars have instant liquidity, while other financial instruments will take longer to convert. It is my opinion that assets should be kept within a three month or less window of liquidity during a deflationary depression. One should also consider keeping three months of “cash on hand” in case there are regional bank closures. This cash should be enough to cover debt payments, groceries, fuel, and utilities.
Step 1 is to be first in the “pecking order” of as many claims on debt as possible. What does this mean?
“Money” is a “first-order” claim on debt. If you loan somebody $10 then you have a claim on his or her future labor for that same $10. You are first in the pecking order.
The United States government sells Treasury securities. These are debt (promises of the future labor of its inhabitants). Large international banks purchase most of these securities, so they are first in the pecking order for that future labor.
The Federal Reserve (controlled by the international banks) will sometimes purchase this “money” [claims on debt] from big banks, and give them currency (US Dollars) in return.
There’s something extremely important to notice with this. At no time do the international banks or the Federal Reserve give up “first in the pecking order” control of that debt. Instead, currency is issued – which is backed by “money”. In other words, currency (US Dollars) is actually a claim on money – or a “second in the pecking order” financial holding. A person holding a $20 bill does not have “direct” claims on the future labor of Americans. The banks still control the US Treasury securities. Make sense?
Let’s go one step further. What happens when you deposit your currency (US Dollars) into a bank account? You now have a “third in the pecking order” financial holding. You have a claim to currency, which is a claim to money, which is a claim on the promise of future labor. This isn’t hard to understand if you take a few moments to think it over.
What about the purchase or selling of precious metals like gold and silver? These are also “third in the pecking order” financial holdings, since they can only be bought with currency or sold for currency.
What type of investment can you make where you have good liquidity and are first in the pecking order? The answer is physical holdings of 3-month US Treasury bills. Will these earn you any interest? Not really, but they will protect you from losing money in many other areas of a deflationary economy.
It is my opinion that a good strategy for financially surviving what lies ahead is a 3-month supply of cash, a 10% investment in physical gold and/or silver, and the rest in 3-month US Treasury bills.
What to Expect From Investing
Will the investing strategy that I have outlined make you wealthy? No, but I believe it is the best way to protect financial assets from losses.
What about the purchase of property? Is that a good investment? I believe it is a very bad financial investment right now – however, it could be a good overall “investment” if you don’t mind losing value on it and plan to make use of it for other purposes. Rental property is one exception that could do very well as people continue to lose their homes.
How about buying a house? It is an absolutely horrible time to be buying a house in my opinion. On the other hand, selling a house and renting might be a great option if one can get a good price on their home.
What about retirement accounts? It is my belief that retirement accounts might possibly be seized in the years ahead and turned into annuities for the account holder. This would allow the government to create an enormous new “trust” fund to replace Social Security and Medicare, which have been bled dry. The excuse could be that they are seeking to “protect” families from the volatility of the marketplace. As such, I divested my retirement accounts in December 2007 and paid the tax penalty.
If one is “trapped” in certain financial plans then it might be worth checking to see if funds can be transferred to various money-market accounts instead of equities. If not, then it might be a good idea to seek equities that at least pay a dividend. No matter what, it is vitally important that everyone have an “exit strategy” for his or her retirement plans if the need arises.
That’s it! I hope your investment strategies meet with great success.
Disclaimer
I am not a licensed investment advisor. Any thoughts and/or opinions written herein are strictly mine, and should not be construed as investment advice.
Easy Investing
Many entities seek to make financial investing into a daunting subject where they can charge exorbitant fees to lose people money in market downturns. I’m going to give thoughts on how to invest, why to invest, and what to expect from investing – all in an easy to understand format.
How to Invest
A deflationary depression occurs as a nation’s money supply significantly shrinks relative to the demand and supply of goods and services. This reduced money supply makes each “unit” of money worth more, since there are fewer units to go around. Effects of this include lower wages, lost jobs, reduced prices in many (but not all) areas, etc.
We can see a glimpse of this with the recent downturn in the economy. Here is a chart showing the US Dollar Index:
Notice how the Index has significantly strengthened over the past month. This is due to worldwide debt defaults, without a corresponding increase in the various money supplies to offset them.
When people tell you that the US Dollar is going to “crash” then you should just point them to this chart.
“Money” is very simple to understand. The total money supply in a nation is the sum total of all claims on future labor. “Debt” is a promise of future labor. “Money” is a claim on debt.
Here are my three simple rules for how to invest in a deflationary depression:
1) Have direct “first in the pecking order” claims on as much debt as possible.
2) Keep your asset allocation as “liquid” as possible.
3) Use 10% of your resources to invest in things that are 180 degrees counter to your strategy.
Why to Invest
Let’s tackle Step 3 of my investing strategy first. Why would you invest 10% of your financial assets into something that you think will lose money?
It’s a concept known as “hedging”. We all like to think that we’re right, but the possibility of being wrong is very real. Hedging allows part of your portfolio to still make some gains even if the rest falters.
Ok, so where should one invest their 10%? My opinion is that physical precious metals are the best option. Why? Because I believe they will be dropping in price, they can be very “illiquid”, and they typically sit as “third” in the pecking order against existing debt. You’ll learn about liquidity and pecking order as we move along.
What happens if my deflationary depression hypothesis is wrong and we instead experience major inflation of 20% or more annually? Your hedge of precious metals would likely go up in value, become more “liquid” in nature, but still be third in the pecking order against existing debt. Not bad at all.
Step 2 is to keep your asset allocation as “liquid” as possible. What do I mean by this?
“Liquidity” is a measure of how fast you can convert your financial assets into useable cash. US Dollars have instant liquidity, while other financial instruments will take longer to convert. It is my opinion that assets should be kept within a three month or less window of liquidity during a deflationary depression. One should also consider keeping three months of “cash on hand” in case there are regional bank closures. This cash should be enough to cover debt payments, groceries, fuel, and utilities.
Step 1 is to be first in the “pecking order” of as many claims on debt as possible. What does this mean?
“Money” is a “first-order” claim on debt. If you loan somebody $10 then you have a claim on his or her future labor for that same $10. You are first in the pecking order.
The United States government sells Treasury securities. These are debt (promises of the future labor of its inhabitants). Large international banks purchase most of these securities, so they are first in the pecking order for that future labor.
The Federal Reserve (controlled by the international banks) will sometimes purchase this “money” [claims on debt] from big banks, and give them currency (US Dollars) in return.
There’s something extremely important to notice with this. At no time do the international banks or the Federal Reserve give up “first in the pecking order” control of that debt. Instead, currency is issued – which is backed by “money”. In other words, currency (US Dollars) is actually a claim on money – or a “second in the pecking order” financial holding. A person holding a $20 bill does not have “direct” claims on the future labor of Americans. The banks still control the US Treasury securities. Make sense?
Let’s go one step further. What happens when you deposit your currency (US Dollars) into a bank account? You now have a “third in the pecking order” financial holding. You have a claim to currency, which is a claim to money, which is a claim on the promise of future labor. This isn’t hard to understand if you take a few moments to think it over.
What about the purchase or selling of precious metals like gold and silver? These are also “third in the pecking order” financial holdings, since they can only be bought with currency or sold for currency.
What type of investment can you make where you have good liquidity and are first in the pecking order? The answer is physical holdings of 3-month US Treasury bills. Will these earn you any interest? Not really, but they will protect you from losing money in many other areas of a deflationary economy.
It is my opinion that a good strategy for financially surviving what lies ahead is a 3-month supply of cash, a 10% investment in physical gold and/or silver, and the rest in 3-month US Treasury bills.
What to Expect From Investing
Will the investing strategy that I have outlined make you wealthy? No, but I believe it is the best way to protect financial assets from losses.
What about the purchase of property? Is that a good investment? I believe it is a very bad financial investment right now – however, it could be a good overall “investment” if you don’t mind losing value on it and plan to make use of it for other purposes. Rental property is one exception that could do very well as people continue to lose their homes.
How about buying a house? It is an absolutely horrible time to be buying a house in my opinion. On the other hand, selling a house and renting might be a great option if one can get a good price on their home.
What about retirement accounts? It is my belief that retirement accounts might possibly be seized in the years ahead and turned into annuities for the account holder. This would allow the government to create an enormous new “trust” fund to replace Social Security and Medicare, which have been bled dry. The excuse could be that they are seeking to “protect” families from the volatility of the marketplace. As such, I divested my retirement accounts in December 2007 and paid the tax penalty.
If one is “trapped” in certain financial plans then it might be worth checking to see if funds can be transferred to various money-market accounts instead of equities. If not, then it might be a good idea to seek equities that at least pay a dividend. No matter what, it is vitally important that everyone have an “exit strategy” for his or her retirement plans if the need arises.
That’s it! I hope your investment strategies meet with great success.
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