Effective immunity of this kind simply has to go. If a firm commits a great wrong, its management must suffer proportionately. Its members need to be hit in the pocketbook and, if necessary, denied their liberty. It’s crazy that we live in a world where poor, badly educated kids get incarcerated for relatively minor crimes against property, but Masters of the Universe are glossily untouched, no matter how grave their financial misdemeanors. Indeed, I’d like to propose that future enforcement actions are based on the Feierstein Scale. For every $1 million that a firm steals or conceals or mis-sells or misrepresents, it should pay a $1 million fine and someone from that firm should have to spend a year in jail. That’s soft-hearted of me, I know: ordinary Americans who commit property crimes can generally expect much fiercer punishment. But that’s me all over. Soft-hearted Mitch, all gooey on the inside.
One last word too, an important one. Anyone who deals with Wall Street—who trades foreign exchange, bonds, stocks, commodities, derivatives, or ETFs, or who buys M&A or due diligence advice, anything at all—needs to become a tougher, nastier customer. It’s astonishingly rare for customers to drive a hard bargain with the major firms. To haggle on price and to go on haggling till the terms improve. A huge part of the reason why Wall Street makes the excess profits it does is that its customers are somehow cowed from beating relentlessly down on the terms they’re offered. I’ve seen large companies, famed for their ability to wring the best possible prices from their suppliers, go all wobbly-kneed when it comes to Wall Street. That’s crazy. My own firm, Glacier Environmental, has a consultancy arm through which we offer to help clients negotiate terms with Wall Street. We don’t charge a single penny in fees, just take a share of what they save. It’s easy for me to make that promise because I know that we’ll be able to achieve excellent savings with every client we work with.1 A price-competitive Wall Street would be a leaner, more efficient one.
*
I have worked in the financial markets for thirty years now and have been fortunate—or unforunate?—enough to have watched the evolution of Planet Ponzi from a front row seat. I have likewise been in a position to see its implosion in every awful, lingering , destructive detail. So I’ll close this chapter by repeating what I said at the start. Change is possible. The last thirty years have been exceptional in American history. The country managed for two hundred years with finances that were, by and large, prudently managed, and a financial system which, by and large, did what it was meant to do. Other countries have been the same. Britain’s history of public finance is almost a hundred years longer than America’s and it too did fine for three hundred years.
Naturally, times change—but changing times don’t mean you have to change your principles. Even now, there are countries that manage to handle their affairs—to educate their kids, provide health care to their sick, pay pensions to their elderly—without creating some tottering Ponzi scheme of debt. The British government is seeking to creep back to sound finances and sound banking right now. These things are possible today. They’re possible in America. Possible in Italy, Spain, and France. And they need to happen.
25
Gold, wheat, and shotgun shells
Whether or not politicians will grapple in a timely way with the ‘to do’ list in the previous chapter is a moot point. Personally I doubt it. But whether they do or not, the next few years are going to be rocky, and you need to protect yourself and your family from the fallout. This chapter, therefore, contains your own personal ‘to do’ list. I’ve taken a safety first approach, because most people will want to ensure their safety before they start to consider more extravagant plays on the markets, but each investor will need to find their own balance. Do note, however, that my advice has, of necessity, to be somewhat generic. In part, that’s because I’m a regulated investment professional and there are rules around what I can and can’t say to individuals. I am very happy to share my own investment philosophy and to share my thoughts on how I expect to manage my own portfolio, but these comments are intended to stimulate thought and provoke discussion, not to act as personalized investment advice.
Also, you need to be aware that I’m writing this book a while before it will be published. I can’t know the future state of the markets, nor do I know the status of your own portfolio, what your investment goals are, or what your investment horizon may be. Those things are of crucial importance in shaping your strategy and you cannot neglect them. You must figure these things out carefully for yourself before taking action. Indeed, unless you are already a sophisticated investor, I would urge you to take good, professional, and impartial advice before committing to any major decision. Such advice can be invaluable.
And in that spirit, I’ll share with you two stories that encapsulate my own philosophy—and, I’m sure, the philosophy of any investor who has made money over the long term. Back in the late 1990s, when the NASDAQ was trading around 5000, I remember standing on the first tee of the Hills Course at Jupiter Hills Golf Club. There were three of us present that day. Myself, an investment banking friend of mine, and someone else who was joining us for that round of golf. He started talking about Yahoo’s incredible stock market ascent from trading at a few bucks a share to several hundred dollars per share. ‘All you Wall Street guys must have made a fortune on that,’ he said. My friend smiled and shook his head. ‘Nope. I do not own any Yahoo.’ I said the same, adding that I never invested in things I didn’t understand. A company with no earnings whose stock price rises like a spaceship blasting off for Mars was not a company I wanted any part of. Sure enough, that spaceship plunged back into the atmosphere in the course of the year that followed that conversation, leaving precious few survivors.
On another occasion, at another golf club on Eastern Long Island, a few of the members were discussing their investments with Bernie Madoff. One of the group said to me: ‘You work on Wall Street. What do you think of this?’ I had a listen and was interested enough to dig into Madoff’s fund in a little more detail. I was baffled. I didn’t get it. So I called the guy back and said, ‘Sorry, I’m just not sure how Madoff operates and if I don’t understand it, I don’t invest.’ I didn’t think Madoff was a crook, I just didn’t know how he made his money. That was enough to keep me away from what looked like a goldmine and was a beartrap. If you don’t understand something, don’t invest in it. It’s a rule that has protected me for thirty years. It’s a rule I urge you to follow yourself.
That said, the first and biggest moral of this book is that you need to throw out all the assumptions you’ll have lived with to this point. Sovereign debt is no longer so safe you don’t have to think about it. (Truth is, it never was.) Banks might fail, including large ones. Money market funds may ‘break the buck’—that is, lose money. Equally, you need to shed some of your Ponzi-ish optimism. House prices have fallen, but they may fall further. Stock market prices have fallen, but they may fall further. Some bond prices have already collapsed, but they could collapse further. The dollar has collapsed against the yen (falling by a third, from $1 = ¥120 in 2007 to less than ¥80 at the time of writing). It could fall further. We may, indeed, be entering a period where the average investor will struggle to ensure that their money keeps pace with inflation. With inflation high, bond yields low, and equities suffering, there is no certainty that you can safely store your money in any way that will even preserve its value, let alone increase it. I’m sorry to say that nothing you assumed in the past should be considered certain knowledge today. Times have changed.
The moral that follows immediately from this one is that you need to rethink what it means to keep your money safe. Personally, if safety were my priority, I’d play it very safe. I’d mostly avoid having money on deposit at banks, but to the extent I kept my money there, I would make sure that I held no account exceeding the FDIC insurance limits, using multiple bank accounts if necessary. Capital preservation needs to be your mantra.
I’d a
lso check the creditworthiness of the banks I was investing in. Even if your deposits are government-insured, you don’t want to go through the pain of watching your bank fold, particularly as the government insurance agencies may get overwhelmed at some point, in which case the settlement of claims may become slow and uncertain. It’s easy enough to check credit ratings: you can simply go online. You’ll need to register separately with the S&P, Moody’s, and Fitch websites to gain direct access to their ratings, but registration is free, it takes just a few moments, and we are talking about your life savings here. It’s worth a few moments. You also need to be very careful about taking internet shortcuts: looking at lists of credit ratings compiled by other internet sites. I’ve just looked at one list which showed ratings as much as twenty-seven months out of date and chock-full of dead links. Given how fast things are moving, you have to make absolutely certain you get the most up-to-date possible information, and that means going direct to the agencies themselves. And not just one; you need to check all of them, because a downgrade by one agency is likely to be followed by one or both of the others before too many months are out.
Do also be careful that you check the right credit rating. Any large bank will have numerous debt-issuing subsidiaries, each of which has its own specific credit ratings. If you are considering placing some savings in a particular bank, make sure you know which legal entity is going to be taking care of your money and check the ratings of that specific entity. If you’re unsure, call the bank and ask. (You should also confirm the government insurance limits that apply to your intended account.) Don’t be embarrassed to ask these things. It’s your money. You have every right to look after it. Indeed, I’d advocate getting key information in writing and in language that you understand. In terms of what credit rating you should find acceptable—well, it’s hard to say. Personally, I’d want to see ratings as close to that AAA gold standard as possible, but these days that gold standard is essentially unattainable. I’d say that AA− should be the lowest rating worth accepting, perhaps A+ if you have some strong reason for choosing a particular bank.
Under no circumstances accept a rating of BBB or below, especially if the bank in question is offering you a wonderful interest rate. In the current climate, a wonderful interest rate is a beacon, flashing danger: a strong signal that the bank is encountering funding problems and is scrabbling cash any place it can. Don’t let that bank scrabble yours.
Finally—because I’m cautious and because I don’t choose to put too much trust in the ratings agencies—I’d advise that you run a quick check on what the market at large thinks of the bank you’ve selected. Go to an online source such as Google Finance and look up your selected bank. For example, at the time of writing, the Royal Bank of Scotland—a very large British lender—enjoys credit ratings of AA− (Fitch), A (S&P), and A1 (Moody’s).1 That S&P rating should sound a note of alarm, I trust, but perhaps you feel reassured by Fitch’s vote of confidence. So go over to Google Finance, or whatever other financial website you prefer, and enter the name of the bank, in this case RBS. You’ll get a view of the stock price and various news stories, but you should also come across a section called ‘Key stats and ratios’ or something similar. Click through to that information and look for a ratio called ‘price to book,’ or something similar.2 That ratio measures the value the stock market places on the firm as compared with the value that shows up in the company accounts. In happier times, you’d expect that ratio to be greater than 1.00—that is, the bank should be creating value, not destroying it. In these times, however, it’s rare to find any bank in that position, so I can’t advise you to seek out such banks, much as I’d like to. Nevertheless, you should treat any bank with a price to book ratio of less than 0.60 as being under siege, any bank with a price to book ratio of less than 0.40 as in real trouble. The price to book ratio for RBS is currently 0.17 and there are rumors afoot of another possible government bailout.3
All this may sound like a lot of trouble: but if I’m even half right about the true financial status of the world’s banks, then we are heading for one heck of a banking crisis and you would be insane not to spend an hour or so doing your homework. It could easily be the single most profitable hour you spend in your entire life. Get serious about it: it’s your family’s wealth at stake.
That, then, is one really strong option. You parcel your money out across several banks, choosing only the strongest, and making sure that no individual account exceeds the relevant government insurance limit. If you do that, you’ll be fine. Or at least, if you do all that and you’re not fine, the world will be so bombed out that you should probably just buy some canned food and some shotgun shells and take yourself off to a cave until the world has found its sanity again. And it will. Just take plenty of food.
Another option—for readers in America, Canada, Britain, Germany, the Netherlands, and Scandinavia—is to buy government bonds. Personally, I’d avoid buying longer-term government bonds: the ten- or thirty-year maturities. The United States government is not about to default on its debt today (aside from, maybe, a technical default the next time our politicians behave like idiots). The same goes for the other countries on that list. All the same, the future is unknowable and we live at a time of unprecedented turmoil. That simple fact argues in favor of caution. Why commit yourself to a ten-year loan to a government, when you could lend for just a year or even less? If everything looks fine in a year, you can reinvest your money without difficulty. If things look worse, you have an opportunity to reconsider your options.
As soon as we start to step away from these super-safe options, risks multiply; but so too do your chances of making some money. Investment in currency is speculative and can incur losses. The same goes for everything that else we’re about to talk about. Buyer beware!
Let’s start by thinking about currency movements. Over the last five years, the value of the dollar has declined sharply against the yen. Over the same period, the value of the pound sterling has declined against the euro. The scale of these movements often dwarfs any interest rate differentials. (That is, you normally earn a higher rate of interest in the currency that’s depreciating; the higher interest rates don’t necessarily make up for the depreciation, however.) As a rough guide, I’d expect currency movements to become one of the major investment themes of the next few years. A currency is likely to decline if its government operates with unsound finances, if its central bank is printing money like crazy, if its has a large and vulnerable banking system, if it has a housing market that is declining from bubble-era levels, and if it is closely connected with countries that are in a similarly bad way. That, in effect, is the position of the United States and most other countries we’ve spoken about in this book. A currency is likely to appreciate in value if its government operates sound finances and sound money; if it has a strong economy with good growth prospects, a strong and stable housing market, and perhaps especially if it has abundant natural resources. Those things are not, alas, true of very many countries today, but exceptions do exist: Canada and the Scandinavian states, for example.
A natural diversification for American investors would be to switch some US dollar assets into Canadian dollars. North of the border, you have a government with sound money, untroubled banks, and huge natural resources. That’s a wonderful recipe for a steadily appreciating currency. The Australian and New Zealand dollars look attractive for similar reasons. Hong Kong dollars and the Brazilian real also offer strong possibilities for currency gains.
Germany has a strong economy, but has tied itself into the euro. As a result, anyone investing in German government bonds is likely to get the worst of both worlds—low bond yields and a declining currency. It’s certainly not an investment I’d choose to make at the moment.
Climbing upwards on the ladder of risk, we get to gold. I like gold. My two favorite objects at the moment are my $100 trillion Zimbabwean banknote and a gold Krugerrand
—the coin being worth vastly more than the note. The underlying economic reality is that you can trash a currency simply by printing too much of it. It’s a heck of a lot harder for a central bank to destroy the value of gold. If you review the graphs presented in chapter 13, ‘A brief flash of reality,’ you’ll see why I like it so much. In times of grotesque debt accumulation and asset destruction, gold is the one investment buddy you can really trust. I have plenty of gold in my current portfolio and I can’t see that changing while conditions remain as uncertain as they are.
Having said that, the price of gold isn’t anchored by interest rates or dividend payments, or any of the other things which normally anchor the price of a security or physical commodity. That makes the gold price more than normally susceptible to swings of sentiment. So if you like gold, then buy carefully. Buy on the dips. Don’t get suckered into buying when the gold is on one of its periodic upsurges. And don’t, of course, be stupid enough to plunge all your assets into gold. That’s not responsible investing, no matter what asset you’re investing in.
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