July 21, 2016
The pending Brexit has,
not surprisingly, caused a shakeup in the investment world, particularly in the
UK. Of particular note is that, recently, asset management firms in Britain
began refusing their clients the right to cash out of their mutual funds. Of
£35 billion invested in such funds, just under £20
billion has been affected.
For those readers who live
in the UK, or are invested in UK mutual funds, this is reason to tremble at the
So, why have these
investors been refused the right to exit the funds? Well, it’s pretty simple.
The trouble is that quite a few of them made the request at about the same
time. Of course the management firms don’t keep enough money on hand to pay
them all off, so, rather than spend all their money paying off as many clients
as possible, then going out of business due to a lack of liquidity, they simply
announce a freeze on redemptions.
Those who are outraged may
read the fine print of their contracts and find that the fund managers have
every right to halt redemptions, should “extraordinary circumstances” occur. Who
defines “extraordinary circumstances?” The fund managers.
Across the pond in the US,
investors are reassured by the existence of the Securities and Exchange
Commission, which has the power to refuse this power to investment firms…or
not, should they feel that a possible run on redemptions might be destructive
to the economy.
Countries differ as to the
level of freedom they will allow mutual fund and hedge fund management firms to
have on their own, but all of them are likely to err on the side of the
protection of the firms rather than the rights of the investor, as the firms
will undoubtedly make a good case that a run on funds is unhealthy to the
The Brexit news has
created a downward spike in investor confidence in the UK – one that it will
recover from, but, nevertheless, one that has caused investors to have their
investment locked up. They
out, no matter how badly they may need the money for other purposes. This fact
Presently, the UK, EU, US,
et al, have created a level of debt that exceeds anything the world has ever
seen. Historically, extreme debt always ends in an economic collapse. The
odiferous effluvium hasn’t yet hit the fan, but we’re not far off from that
eventuality. Therefore, wherever you live and invest, a spike such as the one
presently occurring in the UK could result in you being refused redemption.
Should there then be a concurrent drop in the market that serves to gut the
fund’s investments, you can expect to sit by and watch as the fund heads south,
but be unable to exit the fund.
As stated above, excessive
debt results in an economic collapse, which results in a market crash. It’s a
time-tested scenario and the last really big one began in 1929, but the present
level of debt is far higher than in 1929, so we can anticipate a far bigger
crash this time around.
But the wise investor
will, of course diversify, assuring him that, if one investment fails, another
will save him. Let’s look at some of the most prominent ones and consider how
they might fare, at a time when the economy is teetering in the edge.
Presently, the stock
market is in an unprecedented bubble. The market has been artificially propped
up by banks and governments and grows shakier by the day. Bonds are in a worse
state – the greatest bubble they have ever been in. This bubble is just
awaiting a pin. We can’t know when it will arrive, but we can be confident that
it’s coming. Rosy today, crisis tomorrow.
Cyprus taught us in 2013
that a country can allow its banks to simply confiscate (steal) depositors’
funds, should they decide that there is an “emergency situation” – i.e., the
bank is in trouble. Unfortunately, the US (in 2010), Canada (in 2013) and the
EU (in 2014) have all passed laws allowing banks to decide if they’re “in
trouble”. If they so decide, they have a free rein in confiscating your
Banks in North America and
Europe have begun advising their clients that they cannot store money or jewelry
in safe deposit boxes. Some governments have passed legislation requiring those
who rent safe deposit boxes to register the location of the box, its number and
its contents with the government.
Each year, the storage of
valuables in a safe deposit box is becoming more dubious.
Pension plans tend to be
heavily invested in stocks and bonds, making them increasingly at risk in a
downturn. To make matters worse, some governments have begun to attack
pensions. Others, such as the US, have announced plans to force pensions to
invest in US Government Treasuries – which, in a major economic downturn could
go to zero.
These are amongst the most
preferred stores of wealth and are all very much at risk. In addition, there
are two choices that,
promise greater safety.
The Mutual funds in the UK
that are presently in trouble are heavily invested in real estate. But real
estate that you invest in
does not face the same risk. However, any real estate that’s located in a
country that’s presently preparing for an economic crisis, such as those
mentioned above, will be at risk. Real estate in offshore jurisdictions that
are not inclined to be at risk is a far better bet. (An additional advantage is
that real estate in offshore locations is not even reportable for tax purposes
in most countries, because it cannot be expatriated to another country.
Precious metals are a
highly liquid form of investment. They can be bought and sold quickly and can
be shipped anywhere in the world, or traded for metals in another location. Of
course, storage facilities in at-risk countries may find themselves at the
mercy of their governments. However, private storage facilities exist in Hong
Kong, Singapore, the Cayman Islands, Switzerland and other locations that do
not come under the control of the EU or US. Precious metals ownership provides
greater protection against rapacious governments, but storage
must be outside such countries.
The lesson to take away
here is that, if you can’t touch it, you don’t own it. Banks and fund
management firms can freeze your wealth, so that you can’t access it.
Governments and banks can confiscate your wealth. If you don’t have the power
to put your hands on your wealth on demand, you don’t own it.
This evening, take account
of all your deposits and investments and determine what percentage of them you
do truly own. If you decide that that percentage is too low for you to accept, you
may wish to implement some changes…before others do it for you.
Jeff Thomas is British and resides in the Caribbean. The son of an economist and historian, he learned early to be distrustful of governments as a general principle. Although he spent his career creating and developing businesses, for eight years, he penned a weekly newspaper column on the theme of limiting government. He began his study of economics around 1990, learning initially from Sir John Templeton, then Harry Schulz and Doug Casey and later others of an Austrian persuasion. He is now a regular feature writer for Casey Research’s International Man and Strategic Wealth Preservation in the Cayman Islands.
The author is not affiliated with, endorsed or sponsored by Sprott Money Ltd. The views and opinions expressed in this material are those of the author or guest speaker, are subject to change and may not necessarily reflect the opinions of Sprott Money Ltd. Sprott Money does not guarantee the accuracy, completeness, timeliness and reliability of the information or any results from its use.