An Investor’s Most Valuable Asset in a Crisis

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Posted by The Savvy Retiree on April 27, 2016 in Money Saving Strategies, Personal Finances

“Sittin’ in the morning sun
I’ll be sittin’ when the evening comes
Watching the ships roll in
Then I watch them roll away again, yeah

I’m sittin’ on the dock of the bay
Watchin’ the tide roll away, ooh
I’m just sittin’ on the dock of the bay
Wastin’ time…
— Ottis Redding, (Sittin’ On) the Dock of the Bay

You’ve probably heard (some version of) that old tale…

An American businessman is on vacation on a Caribbean Island. One afternoon, he wanders away from the comfort of the buffet table at his all-inclusive hotel and takes a leisurely stroll along the beach.

After a while, he comes upon a rickety old jetty. The sun sparkles on the crystalline water around him, the tide gently lapping at his feet. In the distance, at the end of the jetty, he sees a faint silhouette. On a whim, he decides to wander over for a chat…

When he reaches the end, he sees that the figure belongs to an old fisherman. Next to his tackle box, a few live fish swim in a bucket. His catch for the day.

The businessman watches him for a while. Every now and then, the old man reels in a large fish. Nine times out of ten he throws them back. After seeing the same thing over and over, the visitor can’t help himself.

He approaches the old man.

“Friend, I see you’re catching more fish than you can possibly carry here.”

“Yes, the sea is kind and generous,” comes the reply.

“Well,” the businessman begins, “I don’t mean to presume…but I think I have an idea for you.”

“Oh, I like ideas,” smiles the old fisherman.

“You see, you could take all these extra fish you’re catching to the market and sell them for a profit.”

The old man feels another tug on his line. Once again, he reels it in and, like every time before, he tosses the fish back into the ocean.

Shaking his head, the tourist continues. “You see, with the extra money, you could hire more fishermen to join you on the pier. And maybe some of the young boys from the village to carry the fish to market for you.”

“And what would I do with the extra money?” the fisherman inquires.

“Well, you could buy a boat. Head out to the reef there, where there are even more fish.”

“I see,” smiles the old man. “And what do I do with those fish?”

“Well, you take them to the market and sell them too. Now you’d really be pulling in the profits. You could afford an even bigger boat. Maybe even buy a couple. You could trawl along the outer banks. Hit the really big catches.”

“Sounds exciting,” the old man replies, reeling in…and letting go…yet another fish.

“And what do I do with all those fish?”

“Well…you sell them, of course!” exclaims the businessman, growing a little frustrated that the old man seems not to be hearing, or understanding, his plan.

“Once you have enough boats…and you’re catching enough fish…and making enough money…you could…”

“I could…”

“Why, you could retire!

“I see. And what would I do then?”

“You could do whatever you want! You’d be retired! What is it you like to do?”

The old man smiles once again, “I like to sit here…quietly…and fish.”

This week, we’re talking wealth independence. Having the means to do what you want, when you want.

That doesn’t necessarily mean having millions of dollars in the bank… Heck, it needn’t even require having millions of pesos in the bank. Depending on the kind of lifestyle you have in mind, living the “good life” might cost a lot less than you think. (We’ve covered the “price of happiness” in the past. See here.)

That said, we’d want more than a few “fish in a bucket” if financial conditions were suddenly to change. Spending your days doing exactly as you wish is one thing…but the ability to imagine the unimaginable—and prepare for it accordingly—also has its merits.

Maybe that means a spot of fishing in the morning…selling some fish at the market…investing some money in a little boat…then hitting the jetty again for another relaxing session in the afternoon.

Or something like that…

One never knows when the fish might stop biting…or when some know-it-all jerk might come along to disrupt your peace and quiet.

In today’s guest column, our friend and colleague, Eric Fry, wonders what might happen if the utterly unimaginable suddenly became…less so.

Read on for more, below…

Imagining the Unimaginable

By Eric J. Fry

In some circumstances, a vivid imagination can be an investor’s most valuable asset. On the threshold of a crisis, for example, a vivid imagination is the only analytical skill that really matters.

We may be approaching such a moment.

If, as I fear, the global monetary system is hurtling toward some sort of crisis, the power to imagine “what ifs” could become an increasingly valuable skill.

To illustrate the beneficial power of imagination, let’s flip through a few pages of recent monetary history…

During the 1997 Asian currency crisis, the Thai baht and Malaysian ringgit both lost half their value in a matter months. One year later, the Russian default caused the ruble to plummet about 80%. Then, in 2002, at the outset of the Argentine economic crisis, the Argentine peso lost about three quarters of its value. A similar story played out in Brazil, as the real unraveled during the second half of 2002—falling nearly 50% against the dollar in just five months.

In each of these situations, investors who imagined crisis conditions ahead of time, and who moved most of their wealth into U.S. dollars or gold, lived to fight another day.

That said; it is relatively easy to imagine that a currency crisis might occur in a place like Russia or Brazil—countries with long histories of monetary incompetence and chicanery.

But it is not nearly as easy to imagine a dollar crisis, much less a crisis that engulfs the entire global monetary system. To imagine such a crisis requires an imagination so vivid and wild that it borders on hallucinogenic. The dollar remains one of the strongest currencies on the planet and no ominous threats seem to be looming beyond the horizon.

So what could possibly go wrong?

To attempt answering that question, let’s put on our “imagination cap”…

Here’s one idea: A large cyber-attack of some sort cripples the global monetary system, at least temporarily. Perhaps that attack inflicts its damage by corrupting the foreign exchange transaction data of the SWIFT (Society for Worldwide Interbank Financial Telecommunications) system.

The SWIFT system handles about $6 trillion in electronic transactions per day—or about $1.5 quadrillion dollars a year. For perspective, $1.5 quadrillion is equal to about 20 times the world’s annual GDP. So, obviously, an attack on SWIFT could produce massive instability.

Here’s another possibility: A cyber-attack that focuses more directly on the U.S. dollar—perhaps by causing trillions of electronic U.S. dollars to disappear, or even worse, by causing trillions of electronic dollars to appear. A cyber-attacker could undermine or destroy the value of U.S. dollars by hyper-counterfeiting them.

The Federal Reserve’s Website boasts that its Fedwire Funds Service “enables participants to initiate funds transfer that are immediate, final, and irrevocable.” If, therefore, a cyber-attack broke into the Fedwire system, that attack might be able to produce trillions of new digital dollars, and then disperse those dollars to millions of accounts in transactions that would be “immediate, final, and irrevocable.”

Millions of people on the planet would become instant millionaires, which would mean that trillions of U.S. dollars would become instantly worthless.

I have no idea if such an attack would be possible. (I can’t even figure out how to record television shows on my smart TV). But based on the cyber-attacks that have occurred already, how could it not be possible for future attacks to become increasingly ambitious, brazen…and successful?

Here’s a third idea: The world’s central banks provide too much of a good thing. They continue conducting their institutionalized counterfeiting until they destroy the currencies they are supposed to be protecting.

This idea requires very little imagination, as it is already happening. As James Grant, editor of Grant’s Interest Rate Observer remarked recently:

Our central bankers—the former tenured economics professors—are defying common sense. Central banks the world over have conjured some $10 trillion [into existence] since 2007. How could that not be destabilizing?…

Central bankers are making it up as they go. They are doing what the World War I generals did: Doubling down on tactics that hadn’t worked and that, to the intelligent layman, seemed as if they’d never work. But the generals went to “general school” and the central bankers have those PhDs.

Another thing: Radical monetary policy begets more radical monetary policy—more of the same and more intense of the same. We’ve gone from very low interest rates to zero percent rates. And now the talk is about negative interest rates.

We’ve gone from one episode of quantitative easing to the second and third…and there’s talk of still more. There’s talk in respectable, establishmentarian circles about “helicopter money”—meaning shoveling out new currency and just sending it off to taxpayers because the banking system can’t seem to process loan applications fast enough.

The Federal Reserve purports to be conducting a highly sophisticated monetary policy. But it is simply printing money, just like hundreds of monetary authorities have done hundreds of times over the last 2,000 years. Operating behind euphemisms like “quantitative easing” and acronyms like TWIST, ZIRP and NIRP, the Fed is doing nothing more than pushing the “Print Dollars” button over and over again.

This monetary “system” works just fine, as long as all parties to the system maintain their faith in it. Faith, rather than a tangible asset like gold, supports the value of the U.S. dollar, and of all the other currencies in the world.

Therein lies the greatest risk to the system. Central bankers can influence faith, but they can’t control it.

Like high priests of the monetary system, central bankers can deliver their homilies; they can recite their liturgies; they can conduct their rites and rituals, all in the hope that they will inspire their flock to engage in ever greater acts of faith.

But they cannot control faith.

If some sign from the heavens—or the financial markets—causes the flock to question its faith in the current monetary regime, it might turn to a faith that requires a lot less faith. The flock might turn to something more tangible like, say, gold.

I am not predicting such an outcome, merely imagining it.

Admittedly, in the context of the global monetary system’s apparent calm and stability, a serious currency crisis seems almost unimaginable. But the time may have arrived to begin imagining instability…not because it is certain, but because it has become less unimaginable.

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