Foible Combat

money

Unfortunately your brain is hardwired to perform badly under certain conditions. The good news is that you are not alone – everyone else has exactly the same issues – so whilst it’s not a personal criticism I’m afraid it is still relevant. Now I’m not going to expose all of your mental foibles here, you can delve into OUCH! for a more comprehensive list of those but let’s highlight a couple.

Firstly, we suffer availability bias. The easier it is to recall examples, the more common or likely that thing is judged to be. This is a tendency to over-estimate probabilities of events associated with memorable or vivid occurrences (and conversely under-estimate those that are difficult to recall). Secondly we have recency bias which is very similar but here more importance is attached to the most recent event not necessarily the most vivid (but they are obviously not mutually exclusive). So for example, it has been shown few people will take out house insurance prior to an earthquake even when clear warnings have been issued in advance but many will subsequently apply after it happens. In short, if it hasn’t happened to us, or we don’t have any recent meaningful examples, we don’t react. The consequences of this can of course be devastating as we saw with the Asian Tsunami in 2004. The authorities were advised to install an early warning system, it was easy to implement and the cost was cheap but as no-one could recall anything bad ever happening in the region (despite technically knowing that it could) no action was taken. Over 230,000 people lost their lives on the back of that decision – of course soon afterwards an early warning system was put in place.

So here is today’s conundrum. It is reasonably likely that there is a financial tsunami coming but as you have never truly experienced one (the implosion in 2008 was put on hold but has not gone away) how on earth do I get you to react – despite history suggesting you should? Well the truthful answer is 99% of you won’t – you will just go about your daily business and end up being a victim of the system and your own brain, but hey at least you will be safe in the knowledge that you were in the majority. So the rest of the post is for the 1% still interested in protecting themselves.

‘Let it be emphasised once more … the financial memory should be assumed to last, at a maximum, no more than 20 years. This is normally the time it takes for the recollection of one disaster to be erased and for some variant of the previous dementia to come forward to capture the financial mind.’ – J.K. Galbraith

Now the future is not written in stone, timing is notoriously difficult and I am not a financial advisor (so what you do with your money is you own responsibility) but if we return to my 2nd post on the problems of paper currency here is what we face. Most of the west is bankrupt and when countries overspend and have a paper currency that has no restrictions it usually ends rather badly:

“Whether ancient or modern…each nation descends pretty much the same slippery slope, expanding government to address perceived needs, accumulating too much debt, and then repudiating its obligations by destroying its currency”. – James Turk

If bankruptcy was the only problem it would be bad, but it gets worse, the system is also rotten to the core. Here is what Birgitta Jonsdottir, a newer member of the Icelandic parliament (so she knows a good deal about financial crises) had to say about that little episode: “It wasn’t just the bankers who were corrupt … it was also the Icelandic politicians, media, academia … all of the people in a position of power”. She then goes on to point out what quite a few others have i.e. that America is essentially the same. The ‘land of the free’, is currently looking anything but. Fascism isn’t on its way, it’s already arrived

If you are blissfully unaware of any of this then you really are sucking too hard on the propaganda nipple of the mainstream media. It matters because it has some potential lifestyle consequences…

But don’t worry about good old ‘Blighty’ because there’s been no sign of any corruption here… oh wait a second… bankers – check, politicians – check, media –check, academics – check, police – check. Oh and let’s not forget covert monitoring and the rule of law no longer being appliedhere or in the US and if you haven’t watched this then it should be your top priority http://www.guardian.co.uk/world/2013/jun/09/edward-snowden-nsa-whistleblower-surveillance

Wake up; your freedoms are being stolen.

Anyway back to the money. As Herbert Stein once said: “If something cannot go on forever, it will stop.”  The UK’s real debt to GDP ratio is over 500% (no-one in the history of planet earth has ever got out of that – although we do hold the world record at 250% of GDP) and you won’t be told how bad it is – you will just suffer the consequences and be told no-one could have seen it coming. At least one politician isn’t afraid to tell the partial truth…

“When it gets serious you have to lie” & “We all know what to do but we don’t know how to get re-elected once we have done it”.  Jean-Claude Juncker, Prime Minister, Luxembourg

If you care to remove the blinkers, this is a problem where there is no solution – there is only an outcome. It’s a bit like throwing yourself out of a 10 storey building. You can either choose to land on your front and break all your limbs or land on your back and suffer worse consequences. The ‘how does this all end nicely’ option disappeared when you exited through the square window. So the solution to the problem was not to have jumped in the first place but that advice is not much use when you are in the middle of your own personal gravity party is it?

Put simply we have had the boom…now comes the bust, regardless of any policy decisions made by anyone. And guess what, the size of the bust bears some resemblance to the size of the prior party – and the financial system is leveraged so much that if and when we have a systemic collapse… well let’s just say it ain’t going to be pretty. You have a choice, either wake up or get wiped out.

When it comes to money, history would indicate that under current circumstances it is wise to hold precious metals i.e. gold and silver. It would probably take another 4 posts to properly cover this topic so those interested might want to pick up a copy of OUCH! as it focuses on the why part. But let’s do a quick summary for you.

There are a lot of misconceptions around gold. However the best way to think of gold is that it is money and it’s a form of money that can’t be easily debased unlike ‘paper’ currencies. It is therefore not an investment as such as it doesn’t generate any returns, it just sits there and its critics often refer to it as a ‘barbarous relic’. Probably the funniest description is…

‘Gold gets dug out of the ground in Africa, or someplace. Then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility. Anyone watching from mars would be scratching their head’ – Warren Buffett, Harvard, 1998

I’m not interested in winning an intellectual argument with a proven financial guru. But whilst I’m willing to acknowledge genius, I’m not willing to bet against government mismanagement and mathematics. Gold has been used as money for over 5000 years. Now that’s what I call a track record. There is also one other reason to be holding gold:

“Gold is a speculation, but a speculation on a certainty: the debasement of the currency”

– James Grant

I would point out I don’t quite agree with James either as I don’t consider gold as a true speculation under the current circumstances. It isn’t ‘high risk, high return’ as some claim, in this environment its ‘low risk, no return’. You won’t get a return on it as such but when measured in paper currencies its likely going a lot higher. So relatively speaking it should do very well indeed. The next point to make is that volatility doesn’t equal risk. The price as measured in paper currency can fluctuate. For Gold it’s shorter term down side can be up to 30% -50% and silver is up to 70%! That level of volatility is too much for many people. But if we look at where gold and silver should be priced you might want to ignore the short term price fluctuations measured in Fiat currency and jump in now that it is probably close to its low point. The estimated full cost to the mining industry just to get gold out of the ground is approx $1200 and for silver around $23. At the time of writing the prices are $1225 and $18.47. Silver is trading on the paper markets for less than the average it costs to produce! How long can that go on? Well for the miners whose break even cost is $30 per Oz they are already ceasing activities

Next up is the old adage, don’t listen to what people say, look at what they do.

Continued on 8th July 2013.

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