By George Noga
Our Foundation’s recent special report, The Crisis of Spending, Debt and Deficits, concluded the crisis appears all but certain to reach critical mass. In that report I promised a Communiqué about measures to protect your assets and family and even to profit. This is it. Our report concluded the crisis most likely would erupt between 2013 and 2015; it also warned there was a not insignificant chance the crisis could explode at any time; it could begin tomorrow morning. You need to take protective actions in months and not years.
“I promised a Communiqué about protecting your assets and your family and even to profit from the crisis. This is it.”
The crisis will begin abruptly when government no longer can borrow money on acceptable terms. Overnight, the government will be forced to slash spending by up to 50% including social security, Medicare, Medicaid and pensions. Simultaneously, existing federal debt owned by banks, insurance companies, mutual funds, foreign countries and pension funds would plunge in value. This financial meltdown, combined with savage cuts at all levels of government, could make the resultant crisis the worst in American history.
A Great Many Americans Already Have Acted
Despite the US stock market weakness and tumult, a small number of certain stocks recently have established record highs. At this writing (early September) the market is down for the year; however, these companies are up 25% having outperformed the market by ≈30%. What do these stellar performing companies have in common? There is only one, nexus, i.e. they all make products essential for survival and protection against calamity. The Wall Street Journal wrote this is: “a sign some investors may be taking the prospects of financial Armageddon more seriously than one might think.” Let’s look closer at these companies highlighted by the WSJ.
“There is only one nexus: they all make products necessary for survival and for protection against a calamity.”
Hormel Foods Inc., maker of spam and a host of other long shelf life products, recently hit an all-time high. Dr. Pepper Snapple Group is up over 30% this year; it makes purified drinking water and Schweppes – good for some medicinal purposes. Cummins Inc. is at its high; it makes a wide range of generators. Airgas Inc. and Air Products & Chemicals Inc. both are at record highs; they make gas masks and related products. Other stellar performers include J.M. Smucker Company (preserves and peanut butter); Ball Corp (manufacturer of metal cans and packaging); and baby food maker Mead Johnson Nutrition Company.
I spent much of this summer in Montana where poker is legal. I played regularly in a no-limit Texas Hold’em game in Kalispell with local professionals and small business owners including the owner of the biggest gun shop in the area. A recurrent topic of discussion during the many hours the game droned on was the shortage of ammunition. The owner of the gun shop told us there were gaping shortages throughout Montana and that supply simply could not keep up with historically high demand. I asked why there was such a severe shortage. The gun shop owner replied: “People are nervous about economic and political conditions”.
“It takes enormous demand to drive large company stocks
to record levels and to run Montana out of ammo.”
It takes enormous demand to drive stocks of large companies to record highs and to run Montana out of ammo. This isn’t just a few people on the fringe. A great many Americans already have taken action to protect their assets and their families from what they see as a growing threat. Your fellow Americans are trying to tell you something; perhaps you should listen.
What You Need to Protect Against
Protection is extraordinarily problematic because it is difficult to be certain what to protect against. We need to consider all of the following – singly, successively or in some combination: (1) deflation; (2) inflation including hyperinflation; (3) economic collapse; and (4) debt repudiation and/or restructure. We need to take into account a fifth possibility (however slim) that there will be no crisis or that the consequences will not be as brutal as feared. We consider each possibility individually and then attempt to forge a reasoned overall approach that provides maximum protection combined with minimum risk and disruption.
It also is imperative to plan for a breakdown of public services including water, sanitation, power, law, order and the collapse of the US dollar. Protective measures for this eventuality are presented infra in a separate section about protecting your family. The final section touches on possibilities to actually profit from the crisis. Now – let’s look closer at each of the possibilities.
Deflation: Deflation (most likely accompanied by severe depression) is the most probable outcome. Nevertheless, government initially may print money, resulting in inflation. Ultimately however, the economy will implode resulting in deflation. The assets that provide most protection include cash (treasury bills), long-term bonds, high quality dividend paying stocks and US dollars. Avoid real estate, commodities and precious metals.
Inflation/Hyperinflation: The first instinct at the outbreak of the crisis may be for the government to print money to avoid civil unrest and to pay entitlements at least temporarily while it gropes for a solution. Such monetizing of the debt will result in immediate and severe inflation; it will not lessen or forestall a crisis. Government may use its gold hoard of 147 million troy ounces to issue gold-backed bonds. Even with gold at $5,000 an ounce, this will raise $730 billion – enough for the government to plug its budget gap for only 4-6 months. Remember: government can confiscate privately owned gold; it has done that before. Assets that provide protection against inflation include TIPS (Treasury Inflation Protected Securities), C-DIPS (Certificates of Deposit Inflation Protected), commodities, real estate, precious metals and foreign assets. Assets to be avoided are stocks, bonds, cash and US dollars. Should we experience hyperinflation, your best bets are: (1) foreign equities, particularly blue chips and producers of essentials; (2) assets in resource rich countries such as Australia, Canada, New Zealand and Brazil. It is also good to borrow money and to own some precious metals. Watch out for bank failures; don’t keep money in unsound banks.
Economic Collapse: Again, banks will go under. Avoid debts. Don’t be dependent on government for anything – or for as little as possible. Foreign government bond funds and currencies offer protection; avoid all US government securities. Some precious metals may be necessary to serve as a medium of exchange. Additionally, you will need to consider protection against a breakdown of essential services discussed infra.
Debt Repudiation and/or Restructure: The larger the debt, the shorter the maturity and the higher the interest rate, the greater the chance of the government repudiating or restructuring. Outright and total repudiation is unlikely. More likely is a forced restructure whereby the government lowers interest rates, lengthens maturities, accrues (but does not pay) interest or mandates conversion into some other government security. Although government bonds are good to hold during deflation, this must be tempered by the possibility of a government repudiation or restructure. Don’t forget about exchange controls on currency.
No Severe Crisis Materializes: Consider yourself lucky and count all the preparations you made as cheap insurance. There is some chance, however meager, a crisis can be postponed or even avoided. There also is an infinitesimal chance if a severe crisis hits, the worst will not happen. What do you believe will happen when government no longer can borrow money and must cut all spending by up to 50%?
Protecting Your Assets
Following is a list of the actions everyone should take or seriously contemplate, i.e. the no-brainers. These actions are the most obvious, embody the least amount of risk, work under the most crisis scenarios and deliver the most bang for the buck. In nearly all cases, these actions will not penalize you severely should a crisis fail to materialize.
Between 5% and 10% of your assets should be in gold and silver. The bulk should be in gold funds; my favorite is First Eagle Gold Fund which has increased annually by 24% in the past 10 years. Buy US silver coins. A bag of 1,000 silver dollars contains 773 troy ounces while a bag of dimes or quarters has 715 ounces. This is excellent as a medium of exchange for smaller transactions. With silver valued at $18 per ounce, a bag of silver dollars (which sells at a premium to silver) costs $19,700 while a bag of dimes/quarters costs $13,500. Buy gold in one-tenth ounce gold coins issued by many countries. These serve as an effective medium of exchange for larger transactions.
TIPS and C-DIPS should also be owned; this is for asset protection as well as to cover you in the event of inflation. Moreover, in a normal or even deflationary environment, these investments will not punish you for owning them.
Own bond funds that focus on highly rated bonds (both government and corporate) in countries with no debt bombs ticking. Some excellent choices include: (1) Alliance Bernstein High Income; (2) Loomis Sayles Global Bond Fund; (3) T Rowe Price International Bond Fund; and (4) Oppenheimer International Bond Fund. Furthermore, these funds will not hurt you should the worst fail to happen.
Open two bank accounts – one in Canada in a Canadian bank denominated in Canadian dollars and a second one in an ultra safe US bank. The account in Canada will protect you in the not so unlikely event government imposes exchange controls. Readers residing in Florida may wish to consider Drummond Community Bank in Cross City, Florida; it is easy to find on the Internet. A supporter of MLLG has researched this matter and concluded Drummond is the safest bank in Florida and one of only a few ultra safe banks in the entire United States. Once again, if the crisis is milder than feared, these bank accounts will not cause you harm. Note: Drummond only accepts new accounts from Florida residents.
Retain some elements of a traditional stock portfolio; however, make sure it includes an emphasis on the bluest of blue chip stocks of companies that produce essential products and pay a high dividend. It should be properly diversified globally.
Avoid or minimize: (1) large amounts of cash in US and European banks; (2) traditional certificates of deposit; (3) indebtedness; and (4) real estate, which will perform well only in event of inflation. Finally, (5) your insurance company may not survive; carefully assess all policies with cash value and convert to cash if indicated.
Sophisticated investors may wish to consider: (1) hedge funds designed specifically for an economic crisis; and (2) structured financial products based on derivatives.
Protecting Your Family
As unpalatable as the thought may be, you need to consider reasonable measures to protect your family from societal breakdown. I have faith in the American people and do not believe there will be lawlessness except perhaps in isolated pockets. Moreover, the historical record contains abundant examples that when such breakdowns have occurred, people banded together for protection, mutual support and for enforcement of civil order even in the absence of police. Conversely, situations such as New Orleans in the aftermath of Katrina also are part of the historical record. Nevertheless, even a temporary interruption of basic services by both government and the private sector could result in chaos threatening to your family. Even if you consider the possibility of societal breakdown remote, steps to protect your family are judicious.
“Contemplate urgently needing a firearm and not having one.”
Much has been written about societal breakdown or collapse; there is broad agreement about the sequence of steps to be taken in preparation First, educate yourself about such a scenario. Second, make plans. Third, build community with neighbors as you will need to rely on each other for certain things. Finally, implement sensible and prudent measures. The main things you are likely to need are summarized below:
Supply of gold and silver coins in small denominations for a medium of exchange as described supra. You also may want to stock some barter items. Finally, keep a stash of US currency (enough to live on for a few months) in your home as banks may not be open and currency still might be acceptable as a medium of exchange.
Guns and ammunition for protection. You can buy a shotgun, rifle, pistol and ammo for well under $2,000 – cheap insurance indeed. Contemplate your family being in a position where you urgently needed a firearm and did not have one!
Water is much more essential than food. A good and inexpensive solution is to keep a large supply of bottled water (and/or other potables) in your home. Buy a fine water filter (cheap) so that you can convert other water (pool – bathtub) into drinking water. For maximum protection, drinking water is readily available in 55 gallon drums.
Food – again the quick and easy solution is to maintain a large supply of canned foodstuffs. For maximum protection there are many sources of long term food supply readily available for purchase on the Internet.
Maintain either a propane supply or generator for providing minimal power. Keep a large supply of candles or flashlights and batteries for light.
“Be cautioned: the above actions are sufficient only for a temporary and mild-moderate crisis – not for the BIG one.”
The list covers the basics. Protecting your family needn’t be costly or inconvenient. Most measures represent nothing more than sound advice for any disaster. Be cautioned: the actions above are sufficient only for a partial and/or temporary crisis – not for the BIG one.
How to Profit from the Debt Crisis
Only when you have taken all requisite measures to protect your assets and family should your thoughts turn to profit. Moreover, merely protecting and preserving your assets will result in considerable profit. Prescient investors such as Bernard Baruch and Joseph Kennedy anticipated the 1929 stock market crash and sold their stocks in advance. Even though they didn’t short stocks, they emerged much better off, i.e. they profited immensely buying up valuable assets when no one else could. When you retain your assets intact while everyone around you loses most of theirs, you ipso facto profit immeasurably.
“There are two dangers: first, you will not act at all; and second, you will delay acting until it is too late.”
If preserving your assets while everyone else is losing theirs is not enough for you, then consider the following. You can leverage up some of the recommended assets such as precious metals and international bond funds. Second, you can short government bonds and commodities. Third, buy structured financial products, derivatives and/or hedge funds designed solely to profit from the debt crisis and/or economic collapse. To minimize risk, you can do some of the above via options rather than futures contracts that contain unlimited risk.
There will be many fortunes made bottom fishing, i.e. buying up valuable assets at or near the bottom of the crisis. This is far more difficult than it sounds as there will be many false bottoms before the real bottom is reached. Things will seem the darkest at the bottom and it will take uncommon perspicacity both to correctly call the bottom and to summon the courage to act.
In closing, there are two dangers: first, you will not act at all; and second, you will delay acting. The actions described herein are not extreme and will not hurt badly should the dreaded crisis be averted or delayed. Compare this to the risks to your assets and to your family of inaction if the crisis hits at any level approaching its full potential force.
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