Gyroscopic Investing

These kinds of problems are never going to be solved. The countries in the EU are radically different culturally and economically and there is no chance it will work out long-term. I just hope it doesn't kick off a war when it all ends.

I am inclined to agree with Craig on this one. The Euro is a disaster on wheels and it's going to end badly. Not sure if that will be sooner or later but I can't see it surviving absent a much stronger confederation that is all but impossible to visualize.

For what it's worth I just looked up the financial markets (something I rarely do) and as of 1115 PM PDLT there is a pretty broad sell off going on in Asia. Not a panic but clearly a lot of nervous traders.

Ad Orientem wrote: I am inclined to agree with Craig on this one. The Euro is a disaster on wheels and it's going to end badly. Not sure if that will be sooner or later but I can't see it surviving absent a much stronger confederation that is all but impossible to visualize.

For what it's worth I just looked up the financial markets (something I rarely do) and as of 1115 PM PDLT there is a pretty broad sell off going on in Asia. Not a panic but clearly a lot of nervous traders.

Cyprus is not a large economy in terms of the EU (or anywhere really), so I'm not sure if the reaction will be that strong. Now if they do the same thing in Spain, Italy, etc. then I think it will be time to get out the popcorn. Then again there is always the chance investors may (rightfully) fear they will do the same in these other countries and take pre-emptive action.

BTW. Harry Browne was right again. They always do these kind of things over a weekend when the markets/banks are closed and never during a time where people can react immediately.

Without fail once again, the Ides of March foretells calamity.  That is one freakin' long cycle.

Also, what's to say that if they were going to screw people via FDIC, they wouldn't do it to holders of T-bills? I mean, if your going to renege on your promises, what's the limit?
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FDIC insured persons typically don't own nuclear weapons, unlike many holders of Treasury paper.

I couldn't help myself and peeked a bit at the market. Looks like US investors are seeing a nice jump in--no surprise--gold and bonds, our flight-to-safety assets.

craigr wrote: These kinds of problems are never going to be solved. The countries in the EU are radically different culturally and economically and there is no chance it will work out long-term. I just hope it doesn't kick off a war when it all ends.

Of course, the same has been said many times about the individual states that form the U.S.A.

My father asked this morning, "other than money under the mattress, what do you do?"

Of course there is gold under the mattress, but some may consider that to be the same as money.  It is a little bit different, in that inflation doesn't directly reduce its value, nor can it become invalid by executive decree.

Or you could try a bank in another country, or multiples of that.  But isn't that what the Russians were doing in Cyprus?  Perhaps their problem was picking another weak country in the known to be troubled Eurozone.

Treasuries might be different.  But if you look at the history of Treasuries in the U.S. or anywhere, really, sovereign financial difficulties have always resulted in trouble for the holders of sovereign debt.

Brokerage accounts are obviously not all that different from bank accounts.  And it seems they would make a more interesting target.  I wonder if they are also affected in Cyprus, or if there just isn't enough of those there to make the effort worthwhile, or maybe just not the news.  Or maybe that it isn't "cash" makes it more difficult?

Perhaps even holding stock certificates would be better than holding in a brokerage account.  Definitely the gov't would find it more challenging to go to every company to get a list of shareholders than to go to already known and registered financial services firms which submit tax reports on their clients every year.  Of course, if receiving dividends on directly held shares then the company (usually their transfer agent) will also be submitting tax reports on you.

I keep coming back to gold under the mattress.

AgAuMoney wrote:

craigr wrote: These kinds of problems are never going to be solved. The countries in the EU are radically different culturally and economically and there is no chance it will work out long-term. I just hope it doesn't kick off a war when it all ends.

Of course, the same has been said many times about the individual states that form the U.S.A.

I would point out that it already did kick off a war once. We're still together, but the underlying issues that caused our civil war were not really resolved. Both sides gambled, and one side won, but the losing ideologies didn't just disappear.

We don't know where things in Cyprus will end up (or whether they'll even end in Cyprus), but if governments and supra-national entities are willing to contemplate the extreme measures in play it begs a few questions: Is "gold under the mattress" really an insurance policy? What's to stop physical gold overseas from being "confiscated" along with bank deposits?

cnh wrote: We don't know where things in Cyprus will end up (or whether they'll even end in Cyprus), but if governments and supra-national entities are willing to contemplate the extreme measures in play it begs a few questions: Is "gold under the mattress" really an insurance policy? What's to stop physical gold overseas from being "confiscated" along with bank deposits?

Anything can happen. Diversification is a double edged sword in some aspects because if you split something into two assets or two locations for your funds you increase survivability, but you may also expose your assets to higher likelihood of something happening to one of them. For instance, I think you should split money between more than one brokerage. However if you split from Brokerage A to Brokerages A and B and something happens to B later then you lose. But then again, that same bad thing could have happened to Brokerage A and you lose even more if you didn't split things.

In general with the idea of overseas diversification, in our book we don't list out a lot of options that people use for good reason. It applies to Cyprus as well:

1) Avoid countries where there is a history of taking things that don't belong to them and/or sacrificing foreign investors first.
2) Avoid countries that have a history of currency and economic stability problems.
3) Avoid countries that have a history of putting people in power that require a salute.

I think #2 is definitely an issue for Cyprus/Greece. These guidelines aren't bulletproof, but they are a good start.

Cyprus has interesting issues because they were being used by Russians and others to chase higher yield savings accounts. So they had a setup where the banking system was much larger than the economic GDP. Kind of like a Greek Iceland. And of course similar problems eventually happened there. So I think there is another lesson here about not chasing after yield in your investments. There is no free lunch.

Ad Orientem wrote: The NY Times is reporting that a senior Euro official declined to rule out that the same measure could be taken elsewhere. Wow. Just wow.

This could turn out to be a litmus test.  The rest of the world's governments are going to be watching very closely as these events unfold.  If there are little to no negative repercussions, it just might embolden other countries to take similar actions under the right "emergency" circumstances. 

Be afraid.  Be very afraid. 

craigr wrote:

cnh wrote: We don't know where things in Cyprus will end up (or whether they'll even end in Cyprus), but if governments and supra-national entities are willing to contemplate the extreme measures in play it begs a few questions: Is "gold under the mattress" really an insurance policy? What's to stop physical gold overseas from being "confiscated" along with bank deposits?

Anything can happen. Diversification is a double edged sword in some aspects because if you split something into two assets or two locations for your funds you increase survivability, but you may also expose your assets to higher likelihood of something happening to one of them. For instance, I think you should split money between more than one brokerage. However if you split from Brokerage A to Brokerages A and B and something happens to B later then you lose. But then again, that same bad thing could have happened to Brokerage A and you lose even more if you didn't split things.

In general with the idea of overseas diversification, in our book we don't list out a lot of options that people use for good reason. It applies to Cyprus as well:

1) Avoid countries where there is a history of taking things that don't belong to them and/or sacrificing foreign investors first.
2) Avoid countries that have a history of currency and economic stability problems.
3) Avoid countries that have a history of putting people in power that require a salute.

I think #2 is definitely an issue for Cyprus/Greece. These guidelines aren't bulletproof, but they are a good start.

Cyprus has interesting issues because they were being used by Russians and others to chase higher yield savings accounts. So they had a setup where the banking system was much larger than the economic GDP. Kind of like a Greek Iceland. And of course similar problems eventually happened there. So I think there is another lesson here about not chasing after yield in your investments. There is no free lunch.

Agreed. But I wonder if we overestimate the diversification benefit and/or underestimate the risk of placing individual assets abroad, subject to laws, regulations, and forces over which we have no real control and which can be very expensive to recover.  After all, when things get tough, history appears to show that governments will all too willingly mistreat foreigners while attempting to protect their own electorate.

cnh wrote:Agreed. But I wonder if we overestimate the diversification benefit and/or underestimate the risk of placing individual assets abroad, subject to laws, regulations, and forces over which we have no real control and which can be very expensive to recover.  After all, when things get tough, history appears to show that governments will all too willingly mistreat foreigners while attempting to protect their own electorate.

This is all true. It's just a decision that each investor needs to weigh themselves. Personally, I don't think keeping all assets in a single country is a good idea and it's worth the risk to diversify. But the flip side is I see a ton of advice that is basically advising people to jump from the proverbial frying pan into the fire. For instance when I read advertisements advising people to move money from the U.S. to a place in Central America, or similar locale, I shake my head. I mean the U.S. has problems, but it doesn't compare to many other places on the planet.

If you keep your money in a bank that's insolvent you shouldn't be surprised when you don't get it all back. They should be happy the European tax cattle are taking some of the losses.

No country is going to nuke the US because they don't get their bond principal back. It's much more likely that foreigners will get screwed (they can't vote).

The point of democracy is having a small group take total control by bribing voters with stolen goods. That was Obama's (and to a slightly lesser extent Romney's) entire campaign.

Having depositor's lose money is the best solution. It doesn't matter if they have a lot or a little. The market has been overvaluing the promises of government. The government can't suspend the laws of economics.

A couple weeks ago I said people should only enough cash in the bank that they are willing to lose completely. If you're going to have cash you might as well stuff it under the mattress. After taxes the return on short-term (high quality  ) paper is practically nil anyway.

Kshartle wrote: If you keep your money in a bank that's insolvent you shouldn't be surprised when you don't get it all back. They should be happy the European tax cattle are taking some of the losses.

No country is going to nuke the US because they don't get their bond principal back. It's much more likely that foreigners will get screwed (they can't vote).

The point of democracy is having a small group take total control by bribing voters with stolen goods. That was Obama's (and to a slightly lesser extent Romney's) entire campaign.

Having depositor's lose money is the best solution. It doesn't matter if they have a lot or a little. The market has been overvaluing the promises of government. The government can't suspend the laws of economics.

A couple weeks ago I said people should only enough cash in the bank that they are willing to lose completely. If you're going to have cash you might as well stuff it under the mattress. After taxes the return on short-term (high quality  ) paper is practically nil anyway.

The flaw in this argument from the politician's perspective is that power in a democracy comes from votes, and money alone doesn't buy votes. It certainly won't buy the votes of people whose savings you just allowed foreigners to steal. At best, the politicians who allow something like this to happen will be severely punished at the ballot box. At worst, well, they'd better hope the populace isn't well-armed and inclined toward violence.

What foreigner is stealing who's money?

I was saying it's more likely if T-bill's were defaulted I think it would be foreign bondholder's who get hurt and domestic voter's will be made whole. What politician is going to support a haircut for T-bill's in granny's money market? It would be political suicide.

I don't think the US is going to outright default though. They will just continue to devalue at a greater and great pace.

Pointedstick wrote: money alone doesn't buy votes.

How about we just use the word stuff? Stuff buys votes. Other people's stuff works best.

How about we just use the word stuff? Stuff buys votes. Other people's stuff works best.

+1

Kshartle wrote: What foreigner is stealing who's money?

I was saying it's more likely if T-bill's were defaulted I think it would be foreign bondholder's who get hurt and domestic voter's will be made whole. What politician is going to support a haircut for T-bill's in granny's money market? It would be political suicide.

I don't think the US is going to outright default though. They will just continue to devalue at a greater and great pace.

The US did default briefly in 2011 when the Republicans tried to hold the debt ceiling hostage.  It didn't take long for them to reverse course, since the DJIA is the GOP's favorite polling method and it reacted rather decisively.  Anyway when you can get around the problem so easily by issuing more debt, it's hard to see anyone seriously considering a Treasury default as an option.

But I'm less confident about the promises of FDIC.  The only protection we have is Congress continuing to remember the bank runs of the Great Depression, and they're not known for having good memories.

I kind of wonder how much "stuff" really buys votes.

A vote, unless in a small town electon, can almost always be looked at as a personal waste of time.  You are 99.99% likely to be poorer for having made the decision to take the time to vote.  So voting in almost all cases is an act of principal, not calculating benefit.  So if someone who's poor takes the time and money to go vote, and votes for someone who will redistribute wealth to them, by definition, they are doing so out of the same principal as someone who is voting for some other action that may  or may not benefit them, whether that's limiting or expanding government.

I've never really 100% bought the idea of "buying someone's vote" even though it appears to be intuitive... if you work through the logic of it, it's very unlikely true.  It's probably just that some people fundamentally believe that a government action (or inaction) is more fair than some other action.  I certainly don't think that the idea that government places a floor on how poverty-stricken a human being can be, as well as engage in industry regulation, infrastructure, and protection, are completely without merit and just results of "buying votes."

However, when it comes to lobbying, this can be a whole other story, since large industry or labor can in and of themselves direct policy.

I like MT's observation that rather than voting, a more useful use of your time would likely be to contribute some nominal amount to a politician in your district, no matter his party, and when it comes time for your favorite issues to be decided on, you mail him a letter referring to your contribution and voicing your opinion.

I tend to think of this as the "WWHBD" (What Would Harry Browne Do) approach to most efficiently trying to engage yourself in the public sphere without allowing yourself to get too tied up in something you can't control.

WiseOne wrote:
The US did default briefly in 2011 when the Republicans tried to hold the debt ceiling hostage. 

Default in 2011? How so...all debt payments (Treasury coupons) were made. No? Don't know what you refer to.

However, you are right...the US has defaulted at least two times in the 20th century.

-FDR devalued currency from roughly $20 / oz Au    to  $35 / oz Au
-Nixon closed gold window

OK guys, this Cyprus thing has gotten me into an all-out panic.

I had very little faith in the financial system before, and now I have not one iota.  I love the principles behind the Permanent Portfolio, and I think it's the best way to allocate one's savings in normal times (whatever that means).

But I'm worried that this thing in Cyprus could be the modern equivalent of the assassination of Archduke Ferdinand.

I'm seriously considering reducing my 401(k) contribution to 5% (to keep the employer match) and buying as much physical gold as possible.

(So basically I'd have a small PP based on my 401(k) [stocks/bonds] plus some cash, and have a larger Variable Portfolio based on gold).

I know that it's a bad idea to make decisions under emotional duress, but I am seriously freaking out right now. 

(To add flavor to the mix, my husband has all of his investments -- which is much more than what I have saved up -- in stocks, bonds, and TIPS.  No gold.  He has utter faith in institutions and governments, and even this business in Cyprus has left him unfazed.  I worry that his savings, which represent years of hard work and frugality, could evaporate like a shallow puddle on a sunny day.  We both manage our own investments, but I'm thinking I should invest in more physical gold just to balance his out.)

Thoughts?  Advice?

Xtal wrote:Thoughts?  Advice?

Don't panic.

Have some gold, but also know that Cyprus and the Eurozone is in a much different place than the U.S.

Kshartle wrote:

Pointedstick wrote: money alone doesn't buy votes.

How about we just use the word stuff? Stuff buys votes. Other people's stuff works best.

Deja Vu -- for the 2nd time today I'm posting the same quote on this forum:

A democracy cannot exist as a permanent form of government. It can only exist until a majority of voters discover that they can vote themselves largess out of the public treasury. After that, the majority always votes for the candidate promising the most benefits with the result the democracy collapses because of the loose fiscal policy ensuing, always to be followed by a dictatorship, then a monarchy.
– Alexander Tytler