The Changing Definition of Safe Investments

So Shylock has collected his pound of flesh from Cyprus’ depositors. Some percentage of deposits above 100,000 euros is going to the Cypriot government to bail out the island’s banks. Nobody can agree how much will be taken. But the point is, even depositors aren’t safe during a financial crisis.

It’s not just depositors. People who rely on the banks for services are suffering in more direct ways. One German retiree living in Cyprus has been living off rice for days because ATMs are shut down.

So what do you do with your investment money now? Suddenly, stuffing it under the mattress seems a lot less ridiculous. There are all sorts of other answers floating around. To be honest, we’re not sure whose ideas are best. But what is clear is that you need to sit up and take notice of your options.

Here are a few:

 1. Stocks

Financial guru Marc Faber often points out that quality shares preserve wealth during tough times. After Germany’s world wars, occupations and hyperinflation, shareholders in companies like Siemens came out with something of value.

Sure, the shares may not have been worth as much after the economy was decimated, but at least some wealth survived. Most other assets were trashed. Cash devalued, property bombed, valuables confiscated.

Dan Denning refers to the kind of shares you’d want to own as ‘Citadel Stocks’. You could also think of them as a kind of city state. They can survive political turmoil by being big, flexible and important. There aren’t many of them in Australia, though.

 2. Tangibles

Governments are much better at confiscating financial wealth than physical wealth. Also, financial wealth is reliant on a stable currency. Tangible assets have an inherent, or intrinsic, value. A house is a house, whether its valued at $100,000 of $1,000,000.

But it’s tough to hide your house from the government. In Europe, many countries are looking to bring in property taxes to fill up government coffers.

Gold is a much better option, but it’s also a little quaint for many people. So how about something that serves a great purpose both during good and bad times? Art, fine wine, agricultural assets, and much more could be great ways to diversify your wealth, keep it government-proof and benefit in the meantime.

But beware. Many tangible investments are financial ones in disguise. Gold investors are repeatedly finding out they’re not invested in physical gold like they thought.

 3. Safe haven countries

In the end, the best form of diversification is international. It’s also the most expensive and inconvenient. But it can be a bundle of fun too.

Our parent company began with the publication International Living, which is all about how to diversify your life overseas. One of our first special reports in The Money for Life Letter was about the very same idea.

But which countries are safe? The answer is none. And that’s why you need to diversify in the first place. We’re sceptical the usual countries will stand up to their touted ‘safe haven’ status. Switzerland, Norway, the Caribbean and many tax havens will struggle financially themselves eventually.

At some point, locals will want in on all the wealth parked in their back yard by foreigners. And the government will be happy to claim it for them. For an investment that combines international diversification, tangible assets and shares, check out Dr. Alex Cowie’s latest research here.

 Institutions Scrambling for Safety Too

Private investors aren’t the only ones struggling with what’s safe. The Financial Times reports that the pool of AAA rated assets shrunk 60% since the onset of the global financial crisis. That is a far more important point than it seems.

AAA rated assets are accepted as collateral in agreements. If you are willing to pledge a AAA rated asset as a guarantee you’ll repay a loan, your lender won’t care much about your credit history.

But if there aren’t enough AAA rated assets around, suddenly people’s ability to repay becomes paramount in lending decisions. All of a sudden, bankers start making enquiries. And they’re horrified by what they find. Entire banks are effectively insolvent.

This is the cancer that’s spreading through Europe. The continent’s governments are really bankrupt because the banks are bankrupt. As bailouts come due, the governments fold. Meanwhile, the real economy shrivels.

 A Return to Normality

But there is one crucial point you need to understand to understand the Euro crisis. It’s something nobody has the political incorrectness to mention. But, being half German half English, we’re politically incorrect by nature. So here goes:

The European countries in strife are usually in strife. This is a return to normality for them. Take a look at the unemployment rates for the PIIGS countries. They’re back to the levels seen in the 80s and 90s. We’re in the biggest crisis since the Great Depression and you only have to go back 20 years to find a similar level of unemployment.

Click here to enlarge

What’s unusual here isn’t the European crisis. It’s the Eurozone and the false stability it gave…for a while.  That’s the abnormality the world should be focusing on, not the recent crisis.

So should countries leave the euro? Would that solve their problems? Well, if you’re running out of space in your house, why not cut the end of your measuring stick off? It will make every room a little bigger. Problem solved!

Prices and currencies are measurements. Messing about with them doesn’t change reality, only our perception of it. And if you have a distorted perception of reality, you are more likely to make mistakes. The euro is all that’s keeping Europe’s countries from having a currency crisis along with their debt crisis. Not that it’s reliable…

Nickolai Hubble.
Markets and Money Weekend Edition

Join me on Google+
ALSO THIS WEEK in Markets and Money

The Global Property Obsession Continues
By Nick Hubble

Signs of stress are already emerging. Banks have had to target people who can’t afford loans to keep the lending machine going. That’s what caused all the problems in America. Fortunately, all this has presented an incredible opportunity for Australians. Because of some bankers’ dodgy practices, all sorts of mortgages could be extinguished. Could yours? There’s one way to find out. Click here.

Why Watching Europe is Paramount
By Murray Dawes

The unintended consequences of this deal could be a sharp rise in withdrawals from the weak and overleveraged banks in the periphery of Europe. It just doesn’t make any sense to leave uninsured funds in European banks now. Anyone who loses money from this point in a bank restructuring will only have themselves to blame after this loud and clear warning.

The Case of Cyprus – Another European ‘One-Off’!
By Satyajit Das

The 1931 collapse of the small Austrian bank Creditanstalt precipitated a major financial panic. Cyprus, one the smallest countries in Europe with little over 1 million people and about 0.5% of the European Union economically, may prove a key inflexion point in the crisis.

Invest in Gold or Your Bank Account Could be ‘Cyprused’
By Bill Bonner

Gold pays no dividends. Nor does it invent new things or open up new markets…or do any of the other things that make stocks go up. And now, most people seem to think that there is a recovery underway…and that the authorities have everything under control. So who needs gold?

Having gained degrees in Finance, Economics and Law from the prestigious Bond University, Nick completed an internship at probably the most famous investment bank in the world, where he discovered what the financial world was really like.

Leave a Reply

Your email address will not be published. Required fields are marked *

Markets & Money