As part of my discussions at the upcoming Total Wealth Symposium next week in Panama City, Panama, I’ll be delving into the world of financial risk management and how to protect your nest egg in the age of growing counter party and bank risk.
Let me express the following so that I’m totally clear right from the start: I’m not a perpetual pessimist nor am I projecting financial Armageddon. The world has survived countless financial shocks and panics since the advent of capitalism and, prior to that system, disruptions in the flow of trade due to wars. Life goes on. Trade continues. Long-term bears have never made money in the market. I’m a positive investor.
But we are living in uncertain economic times. Banks are losing hundreds of billions of dollars, real estate markets are crumbling across the most populous U.S. states and banks are reluctant to lend even to their prime customers.
In a recession, the threat to the financial system is greatest and is usually accompanied by either inflation, deflation or, in this case, both. This is the first time in the post-WW II period that inflation and deflation are coexisting side by side, threatening global financial markets as leverage continues to unwind. The Fed’s bailout of Bear Stearns in mid-March has halted the slide in asset values – but for how long?
Unfortunately, the modern version of capitalism has run afoul and now resembles a casino rather than a forum to exchange goods or financial securities.
The advent of securitization, or packaging and re-packaging all sorts of securities, including mortgage-backed synthetics, has clearly become a runaway freight train. Somewhere along the line, in an effort to boost profitability, Western banks went off the deep end, introducing a host of securities levered to housing and other risky assets. Worse, that process will take years to unwind as banks and regulators desperately try to match counter parties to these millions of outstanding trades. It isn’t pretty if you have been running a bank since last summer.
What’s important now is figuring out which banks, mutual funds, currencies and bonds might be vulnerable ahead of the next blowup.
For example, there’s a perfectly safe strategy to isolate your liquid assets away from your bank’s creditors both domestically and offshore in Europe. Also, did you know hedge funds also use prime brokers like Bear Stearns? Many of these prime brokers still hold infected or toxic assets. And, which currencies are most at risk as this credit unwinding continues to come undone over the next several years? Lastly, many corporate bonds have been awarded safe credit ratings by the credit agencies – the same people that assigned an AAA-rating to Ambac Financial!
Protecting your assets both in the United States and overseas has never been more important. Make sure you fully understand what you own and the risks associated with the respective custodians holding your assets.
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