The Coming Investment Ice Age

19 December 2011, 16:15

Sam Townsend

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The Coming Investment Ice Age

You’ve probably seen the disturbing headlines on the Internet that scream “The End of America” … “America’s Financial Doomsday” … “Aftershock” or something similar.  Maybe a well-meaning friend has forwarded them to you.

While a bit overdone and sometimes hucksterish, these Internet programs really have helped bring great awareness to the menacing precipice that the global financial system teeters upon – and the dreadful calamities that await economies that tumble over the edge and crash.  Such messages have also created audiences who become eager for solutions … especially for real solutions that can actually work in the face of awesome threats we face in these increasingly turbulent times.

Most of these “gone viral” internet horror stories swirl with proposed “solutions” based on hyperinflation predictions. Their promoters busy themselves offering the allure that you can be a “clever”, and even a wealthy, player in “The Game” of investing by simply following their “even smarter” recommendations.

Sometimes they shout gold; sometimes they tout off-shore banking; sometimes it is all about their “well-researched” bank or investment picks.  Sometimes it is their trading and hedging strategies involving leveraged derivatives or “ETFs” (“exchange traded funds”) which themselves are derivative “chips in the big casino.”    It all still leaves the chilling question:  If “The Game” simply stops – either because the other player is “out of money” or because the government or the markets call “Game Over” – what happens to you when “The Game” simply folds or they put it away?

What happens to your “chips” if you have followed recommendations of those who suggest that almost anyone can win “The Game” following their strategies?

What if the insurance company isn’t able to pay off … or your derivative hedging strategy fails because the counterparty on the other side of your contract or investment security can’t settle?  What if banks restrict withdrawals … or retirement plans with assets controlled by the government require investment in government securities? What if the market is flooded with gold in the transition and its price plunges while many are trying to raise cash in order to prevent impossible debt pre-implode. What if there is a mad scramble for food or other life necessities?

We’re not saying the markets will collapse next week … or that Financial Armageddon or Doomsday is at hand … and that life as we’ve known it is about to end abruptly … but it could. 

Owning paper investments and real estate assets that are encumbered by debt are akin to playing “The Game” of Russian Roulette … Tangible assets that are also “sustainable living investments” offer more assured and solid survival and success odds.

And wouldn’t you really rather get your investments and other assets out of harm’s way before it does? And wouldn’t you rather still earn acceptable returns while preserving and even growing your capital? And wouldn’t it help you and yours to maintain healthful, economic, and sustainable lifestyles … even as the America and world we have known tumble over the brink?

Sustainable Living Assets are sound, real, and of time-tested value … in good times and in bad. They can also enable you and yours to live in healthy, economically and socially viable ways that produce valuable and essential wealth and services right here in the “Good Ol’ USA” … much as we did a half century or more ago when America was the most productive and respected nation in the world.

But before we explain how you and those for whom you are concerned can join with many other Americans enjoying Abundant Sustainable Living, we’d like for you to realize, for sure, that “The Game” in the “Big Casino” cannot be won by most people … if indeed by anyone! It’s a much more “high-stakes game” than most of its players realize.

One important reason is that even very astute and nimble players may not be able to cash their winnings – no matter how huge their pile of “winning” chips at the moment “The Game” ends.  And it will end!

End of “The Game”

Rational and informed people on Planet Earth realize that dire consequences, including worsening global recession, insolvency of households, businesses, banks, and governments – all of which would be accompanied by growing social chaos and suffering that is inevitable. At the very least, they recognize that economic and social recovery will be difficult and take many years. They hope, though, that he “End” of “The Game” and a drastic change in the lifestyles we have known will not happen anytime soon or may even be avoided … even as warning signals flash and intensify all around us.

What few people seem to understand however – even if they realize that values of widely held investment assets, such as stocks, bonds, annuities, and real estate could be decimated beyond current, already depressed, levels – is that national and global financial systems and the markets themselves where such investments are traded could cease to function. Unfortunately, many financial services and investment professionals seem to not recognize this fact.

In other words, even if investors guess correctly on the price direction of particular assets or markets – and even if they accumulate substantial “paper profits” which they have not yet converted to cash by liquidating their investments and then re-investing them in something “safe” – they could find themselves in a position to lose all or a substantial part of their assets if the markets on which their investments are traded were suddenly to “freeze up”.

“Impossible” or “unlikely”, you say?

Hardly! It happened barely one month ago on one of the largest securities exchanges in the world – and right here in the United States.

On October 31st, MF Global Holdings Ltd became the 8th largest bankruptcy in U.S. History. The trigger for the failure of this massive derivative trading operation was the revelation that up to $1.2 billion of client funds were missing. You see, MF Global, headed by Jon Corzine, former Goldman Sachs Vice-Chairman and Democratic New Jersey Senator and Governor, traded for its own account as well as for clients. Their highly leveraged multi-billion dollar bet on the debt of European governments went so wrong that they, presumably, dipped into client funds in a failed attempt to carry their positions.

The media are covering these aspects, but they have been largely silent about the really serious implications of this event to the investing public concerning the unsustainability of modern financial markets themselves … and the investments that trade there.

Much of the credit for bringing this to public view now can be attributed to Ann Barnhardt, who headed Barnhardt Capital Management, a futures trading and hedging firm specializing in cattle and grain commodity futures until she announced in an open Internet letter on November 17th that the firm had ceased operations.

Securities firms come and go and cease operations for a variety of reasons. The reason for this firm ceasing operations is what made news. Ann Barnhardt explained it this way,

“The reason for my decision to pull the plug was excruciatingly simple: I could no longer tell my clients that their monies and positions were safe in the futures and options markets – because they are not. And this goes not just for my clients, but for every futures and options account in the United States. The entire system has been utterly destroyed by the MF Global collapse. Given this sad reality, I could not in good conscience take one more step as a commodity broker, soliciting trades that I knew were unsafe or holding funds that I knew to be in jeopardy….”

“… What was a surprise was the reaction of the exchanges and regulators. Their reaction has been to take a bad situation and make it orders of magnitude worse. Specifically, they froze customers out of their accounts WHILE THE MARKETS CONTINUED TO TRADE, refusing to even allow them to liquidate. This is unfathomable. The risk exposure precedent that has been set is completely intolerable and has destroyed the entire industry paradigm. No informed person can continue to engage these markets, and no moral person can continue to broker or facilitate customer engagement in what is now a massive game of Russian Roulette.

“… I now suspect that the reason the Chicago Mercantile Exchange [the largest futures and options trading market in the world] did not immediately step in to backstop the MFG implosion was because they knew and know that if they backstopped MFG, they would then be expected to backstop all of the other firms in the system when the failures began to cascade – and there simply isn’t that much money in the entire system. In short, the problem is a SYSTEMIC problem, not merely isolated to one firm.

“And so, to the very unpleasant crux of the matter. The futures and options markets are no longer viable. It is my recommendation that ALL customers withdraw from all of the markets as soon as possible so that they have the best chance of protecting themselves and their equity. The system is no longer functioning with integrity and is suicidally risk-laden. The rule of law is non-existent, instead replaced with godless, criminal political cronyism….

“There was no possible way to continue given the inevitability of the collapse of the global financial markets, the overthrow of our government, and the resulting collapse in the rule of law.” (for the entire letter see:  http://www.zerohedge.com/news/entire-system-has-been-utterly-destroyed-mf-global-collapse-presenting-first-mf-global-casualty )

“I could no longer tell my clients that their monies and positions were safe in the futures and options markets – because they are not.”

“There was no possible way to continue given the inevitability of the collapse of the global financial markets.”

“The problem is a SYSTEMIC problem, not merely isolated to one firm.”

The implications to all intangible and commodity investors in the United States and beyond – including those held in securities firms and banks around the globe – are serious. They are “game changers”.  For those who continue to trade securities, I ask, “Can you afford to be wrong if suddenly it is “Game Over”?

I speak as one who has some knowledge in these areas. A former bank president and senior lender, I was also a registered investment advisor, financial planner, and asset manager. I have also earned profits in “The Game”. In 2008 during the Global Financial crisis, my own equity holdings gained 97% in value as stock prices declined by roughly half of that amount. And, yes, I employed mutual funds that maintained positions inverse to particular stock market indices by using futures contracts and options. In years gone by, I have traded such leveraged derivative contracts directly. Nonetheless, I have more recently taken steps to protect family assets and livelihood against threats that I describe here and in the other media I help publish.

Securities investing and trading today is like standing close to an active volcano – ready to erupt. Ask yourself, “How close can you stand to the financial and investment system volcano, and how fast can you run?”

Let’s look at some evidence we can’t afford to miss.

Evidence of the Unsustainability of Conventional Investments

Without making blatantly unrealistic assumptions, the sovereign debt of every nation on this planet is “unrepayable”. As Erskine Bowles, top Democratic establishmentarian and Co-Chair of the President’s National Commission on Fiscal Responsibility stated, “I think we face the most predictable economic crisis in history.”

Most European countries, whose economies together are comparable in size to the United States, now are seeing significant increases in their borrowing costs – if indeed they will be able to continue to borrow from the capital markets at all.  Such interest rate increases move any country rather quickly towards default unless they could borrow or confiscate sufficient assets from their own residents to satisfy their budgetary and debt service needs. In that event, even liquid assets sitting in brokerage, retirement, and bank accounts could be at risk.

Those countries having central banks which create their currencies out of thin air, such as the U.S. and Japan, the world’s two largest borrowers (Italy is third), have been frantically trying to bail out their governments and banks. After first reducing the rate at which they lend to other banks to near zero, they are – in desperation – trying to solve debt problems by more borrowing and by monetizing their governments’ exploding and unserviceable debts. They have nowhere else to go, and time is running out.

As Bill Buckler recently wrote in his excellent economic and investment bi-weekly newsletter The Privateer (#692 November 27, 2011, http://www.the-privateer.com), what politicians and bankers around the globe are saying, in effect, is:

“If we can’t borrow our way out of trouble we’ll have to print our way out!”

Buckler adds, “Almost alone amongst the financial and political potentates of the world, the German Chancellor [Merkle], a handful of her ministers and the new ECB boss are pointing out that this is not a “solution” to anything. Everything in both economic theory and history backs them up. But they are spitting against a hurricane of unleashed terror from those who have bet the global system on the ridiculous belief that an asset which is somebody else’s liability is ‘risk free’. If the debt is defaulted upon, the “asset” is gone [emphasis mine]. If the debt is allowed to be valued on the “market”, the markdown of the debt equals the markdown of the “asset”. It is as simple as that and no amount of yelling, screaming or appealing to orthodox policy can change the fact. . . .

Ours is a monetary system that destroys wealth in order to function. It is a “credit-based” system where monetary “assets” are borrowed into existence. As Bill Buckler writes, “When Mr Bernanke expresses his abhorrence of what he terms “deflation”, he is not talking about falling prices for everyday goods and services. He is talking about falling prices for financial “assets”, the vital “collateral” for the banking system. He is watching that happen in Europe. He knows that at some point, it will cross the Atlantic.” (The Privateer Dec 11, #693)

Falling “National Dominos” Can End “The Game”

“The establishment in the U.S. – and both political parties – know full well that if Europe goes, they will follow. There is no difference whatsoever between the debt paper created by the U.S. Treasury and the debt paper created by the Euro nations or any other nation in the world.”

With a globally interconnected financial system in cyberspace, an investment deep freeze in Europe rapidly chills the financial systems and economies on both sides of “The Pond”. Fed Chairman Bernanke and the other political and economic potentates know this only too well. What they are really concerned about is what we are calling, a “Financial and Investment Ice Age”.

As we know from history, all booms “bust”. And as we can all see … if we just look … the plight of “Main Street” reflects severe economic distortions deriving from the effects of “Wall Street Games” and statist governments enabled by banking systems creating fiat currencies out of thin air by borrowing them into existence. Those distortions are as stark as they are unsustainable. The observed anger, even if misdirected, of “Occupy Wall Street” (and similar movements in other cities) testifies to those distortions. So does reality!

Knowing that the process of printing more money or trying to pile the debt higher is ultimately futile, the financial and political potentates nonetheless do this “to buy time” in postponing crisis but at a cost of further debasing their currencies through inflation and by accelerating their draining of real wealth and productivity from their economies.  This, then, sets themselves up for even greater system and societal devastation. In Time to Head for the Ark, I drawn the analogy that this is like flood waters building up behind an overstressed dam.

The amounts of debt involved have reached previously unimaginable levels, yet most nations continue to run historic and unsustainable deficits in ways and in amounts that boggle the mind. The U.S. Federal interest-paying debt now exceeds $15 trillion and is increasing at the rate of $200 billion a month, necessitating increasing borrowings by at least that amount. Currently, about half of what the Federal Government spends is borrowed. What misadventures they additionally support are much greater. Total U.S. debt is at least $60 trillion and its guarantees of obligations of agencies, businesses, and governments total many times that unimaginable amount.

In Europe, investors are beginning to rebel against holding their governments’ IOUs. It will happen here, and a struggling and “at risk” global economy at the precipice of deflationary collapse into an Investment Ice Age affords no place to run.

In the scramble for liquidity, loans are repaid or defaulted. They aren’t borrowed. So global liquidity contracts … even as economic activity implodes. As recession deepens, tax receipts also contract squeezing businesses, households, governments and their banking systems even more. The only reason the U.S. still reports positive Gross National Product growth is because GDP measures spending and not production of wealth. Even so, even that contrived measure of economic growth is again narrowing.

At-Risk Investment Strategies in “The Game”

Emerging economic realities combine with eroding confidence that “The Bust” can be avoided for much longer heightens interest in strategies that “hedge” financial and economic positions or to “insure” against their failure. Unfortunately, there is a huge and widespread disconnect between the growing numbers who talk about economic and systemic collapse and the very few who publicly acknowledge the resulting implications to the ability of financial markets to continue to function.

If markets don’t continue to trade – and the institutional counterparties like Solomon Brothers, Bear Stearns, and MF Global, Greece, Italy, etc, etc, etc, fail – trillions of dollars in intangible assets may not be worth using for wallpaper in your bathroom. Under such circumstances, neither may banks or brokerage houses be able to honor your withdrawal requests.

When people rely upon “The Game” of the financial or investment securities markets to implement and maintain those threats to economic and lifestyle stability … or even survival … it is as if they are standing on a bog of quicksand.  One hugely significant and largely unreported “Game” invisible, for the most part, to millions of players exemplifies the tragic weaknesses of “The Game” and its “unwinability”.

The More Sophisticated and Complex, the More Deadly

The more “sophisticated” the particular market or investment instrument is, the more potentially deadly. Consider the immense exposures globally in “credit default swaps” (CDSs) and their cousins “interest rate swaps”, etc, etc, etc.

These “Financial Weapons of Mass destruction”, as Warren Buffet refers to them, now may aggregate $700 trillion or more.  As Bill Buckler points out, “CDSs have doubled every year from 2003 to 2007. This growth paused in 2008 – early 2009 and then exploded again with the onset of ‘quantitative easing’” [when the Federal Reserve and other central banks began buying huge amounts of government debts].

These Weapons of Mass Destruction allow, in effect, banks, insurance, companies, and large businesses to “insure” one another against loss.

It’s like a bunch of drunks trying to hold one another up.   Never mind that “a falling tide lowers all boats” and that the combined systemic exposure of all these inter-connected or interdependent obligations dwarfs all the economies of the world combined.

One can hardly find a better illustration of “systemic risk” than these credit default swaps and their WMD cousins.  Their ominous implication to the viability of the financial system and global economy of all such financial instruments lies in the fact that all players in “The Game”, including the banks and governments, rely upon the viability and performance of the party on the other side of the contract.  Those on the other side of market transactions and contractual obligations are called “counterparties”.

There are “counterparties” in every single financial transaction involving intangible assets and the viability of every such investment “asset” depends upon:

  • Performance by the business, bank, or governmental counterparty
  •  Orderly and responsibly functioning markets

Neither crucial market foundation can be assured in any country in the world today for any intangible financial asset.

In my books Time to Head for the Ark and Harm’s Way Financial Planning and Asset Management, I expand upon the evidence for unsustainability of the U.S. economy and financial system.  I also explain both the futility and danger of currency-dependent planning and investment strategies featuring stocks, bonds, and many other forms of securities and also annuities issued by governments and insurance companies. Also depositor liabilities of our banking system are at risk, regardless of the bank’s “risk rating”. I also present the sustainable investing strategy.

As we discuss briefly here, the systemic exposures of intangible assets, and the markets in which they trade, argue for only trading strategies involving amounts one can afford to lose being managed by the nimble and astute … “The Game” is only for those who can stand close to the volcano and run very fast as it begins to rumble.

Since buying is limited or nonexistent in market selloffs, the exits are narrow. If too many try to run through narrow exits at the same time, none may get through. Is that a rumbling sound that I hear?

And To What Assets Should You Run?

What if the crushing DEFLATION that actually began with the Global Financial Crisis in 2007-2008 continues to accelerate over the next few years?   We should expect a deflationary depression that rivals the two decade-long deflation of the Great Depression that exploded upon the scene with the Crash of 1929? If so, we can expect sharply lower prices and wages for most everything, including precious metals … for years!  Such a hard freeze for investments and economies would seem almost like an “Ice Age” … hence my title for this piece.

Besides my books already mentioned, I discuss the timing and implications of the rumbling sound in my blogs, programs, and other insights shared on www.PreparedALHWays.com and present the reasons and methods for investing in “sustainable living investments” that may stave off “The Coming Investment Ice Age” for you and yours.

The first blog in this series is called, “The Silent Crash is Getting Noisier”. It explains that in real money and purchasing power the U.S. stock market began its “ice age” decline more than a decade ago and is nowhere near the bottom where it may remain frozen for some time.

In my second blog “Sustainable Investing and ‘The End of America’”, I describe the deflationary decline that began in 2008 into an “Investment Ice Age” with no thaw in sight and its potentially devastating consequences to conventional investments. I also describe the relative safety of tangible “sustainable investments” and their positive returns and lifestyle benefits.

Sustainable Living Investments Can Avoid a Long Investment Winter

The economic and investment landscape is changing in historic and often unwelcome ways. Further, the accustomed order of things in the financial services and investment banking industries, as indeed it is in most aspects of contemporary society, is likewise changing and deteriorating rapidly. In many ways, life in the status quo is becoming unreliable and increasingly threatening. Nonetheless, extraordinary opportunities exist for those who understand what is taking place and who are willing to act appropriately and in timely ways.

Prepared ALHWays programs help bring relative safety of “sustainable investments” and their positive returns and extensive lifestyle benefits to households, businesses, and investors – and to those who depend upon them.

For many decades now, the most popular investment vehicles have been mainly “intangible”. For these intangible investments, values are largely “representational” or depend upon fulfillment of promises by others or by their performance. In other words, as with the dollar itself, they lack an inherent, uniform, physical or collateralized value. They also lack the ability to produce valuable services or something of physical value, such as food, inventory or equipment:

“Representational” intangible assets include: stocks, bonds, annuities, syndications, derivatives (mutual funds, options and futures contracts, interest and credit default swaps, etc); “Promises made by others” include debts, such as bank deposits, notes, bonds, and other forms of contracts requiring performance by others. Such “financial assets” are actually someone else’s liability, or debt.  Gold and silver are the only financial assets that are not someone else’s liability, though they have become effectively demonetized since the early 1930s. Further, intangible “investment” assets are denominated in dollars or other currencies which are themselves debts of governments or their central banks.

Typical “tangible” conventional investments include “investment real estate” that can be either commercial or residential property that is intended for resale or rental or to be used in an operating business, such as for manufacturing or distribution. Again, these investments, while tangible, depend upon a healthy functioning economy to maintain or increase in value.

Sustainable Investments are “Real” and “Tangible”

What we call “Abundant Sustainable Living Investments” are largely “tangible”. They prove their investment value in sustainable living and production within local economies in real and vital ways. Their values are “real” rather than “representational” and they are useful … and even necessary … to maintaining healthy and joyful lifestyles … even in harm’s way.

“Sustainable” assets, which are essential and profitable for healthy sustainable living, offer direct personal benefit to the family, community or to the economic interests of investors. Consequently, these investments may not only preserve but also increase wealth in a wide range of environment and market settings, including under both inflation and deflation. They help facilitate and support a productive and even joyfully abundant living for investors, their neighbors, and others for whom they are especially concerned, even in harm’s way.

Besides holding tangible assets that can maintain and even increase their value over time, agriculturally centered sustainable living investments can offer valuable returns, not only if or when “the wheels fall off” but also in good times and bad – returns that are both healthy and build wealth.

Today, with sharply elevated farm product and commodity prices as well as systemic concerns and health threats inherent in “factory farming”,  the regular and renewable supply of locally produced healthful produce and animal products adds luster to an organic and pastured food industry that has already been a growth industry for decades. Such returns can compare very favorably with now highly suspect dividend and interest returns on stocks and bonds and on conventional real estate investments. Under any number of viable scenarios, “sustainable investment” returns could become priceless.

Prepared ALHWaysTM and Harm’s Way Solutions programs and strategies facilitate Sustainable Living Investing in a variety of ways. Our emphasis is upon investment allocation and helping create “investment products” (eg. cooperative investments in sustainable communities). Besides publishing and education, consulting is our main role in such projects, and we routinely joint venture with clients and various providers in helping design and implement abundant sustainable investment and lifestyle solutions.