Oxstones Investment Club™By Dennis Miller Miller’s Money,
My boyhood friend Tom G. has been a member of our hometown Citizens Corps for many years. The Federal Emergency Management Agency (FEMA) sponsors it and trains volunteers in emergency preparedness. When emergency responders become so swamped that fire, police, and medical personnel cannot handle things, these volunteers step in.
Thousands of hours and millions of taxpayer dollars are spent training citizens in case some unforeseen catastrophe overwhelms the system. They work and train hard, and fortunately they haven’t been called on to any major degree.
We live in Central Florida. Having ridden out a few hurricanes in my life, we’re as well prepared as we can be. We have a generator, food, batteries, candles, a water purification kit, and much more.
My wife and I visited Punta Gorda after it suffered the brunt of a hurricane in 2004. After driving one block to the grocery store, we raced out of there with burning eyes and handkerchiefs covering our noses and mouths. We immediately drove back to the motel, changed our clothes, and put what we were wearing in a plastic bag. We’d never seen anything like that before—and it left quite an impression.
Honestly, what’s the chance of a hurricane doing that kind of damage to us? We’re over 50 miles inland from both coasts and 70 feet above sea level. In 2004, the eye of three hurricanes passed right over our little town for the first time in recorded history. Even if the probability is less than 1% (similar to a fire), the fallout would be so bad that we prepare anyway.
What about a financial catastrophe? Folks near my age have lived through a few bubble bursts and recoveries. Most of us, however, did not experience the big one like our parents did in the 1930s. Though one thing’s for sure: It was bad, and it shaped the attitudes and values of a couple generations.
What does a full-blown financial crisis look like? It’s when your world collapses financially. It might come on the heels of medical problems and the resulting high bills and lost income, or it might come in tandem with runaway inflation or a political meltdown.
Financial Preparation
The goal of preparation is adequate protection. When the crisis comes, it may affect everyone. Those who prepared well are likely to fare much better and avoid catastrophic consequences… which brings us to core holdings.
Core holdings are, quite literally, survival insurance. They are assets we sock away and then hope, pray, and plead with the gods that we never have to sell. They should make up 10% of your overall net worth and be diversified in form and location.
In light of the warning signs, now is a good time to review your own core holdings. They form the base of our investment pyramid, which I outlined in my book Retirement Reboot (complimentary with a subscription to Miller’s Money Forever, wink, wink).
While we’re proud of how well the Money Forever portfolio is performing, we want to re-emphasize that the first step in any financial plan is building your core holdings. The investments in our portfolio risk some capital with the intention of profiting down the road. Core holdings are a different animal altogether.
What types of investments should be in your core holdings? Well, that depends on the risk you’re trying to protect against.
Protecting against inflation. Start with precious metals—gold and silver in particular. I recommend starting with “junk” silver, which you should be able to buy locally. Then add gold, silver, and platinum coins. One of the best ways to buy competitively is to go to a coin show. You will find several dealers displaying their wares and can quickly determine the market price.
As you increase your holdings, consider holding some metal internationally. The Hard Assets Alliance (a Casey Research affiliate) makes that very easy. When you place your order, it garners bids from several dealers throughout the world so you get minute-by-minute competitive pricing. Jo and I have an account with it, and it’s easy and convenient. You can have the metals stored internationally, here in the US, or have it shipped to you.
Don’t confuse these holdings with gold stocks or exchange-traded funds. Those are not core holdings. They’re paper investments purchased with the intention of selling for a profit at a later date. While they may move consistently with metal prices, unless you have a huge account, your paper is not redeemable for metal. You may want to own these in your portfolio, just like any other asset you think will go up in value.
Your core holdings, however, need not be limited to metals. We hold foreign currency-denominated CDs from EverBank that are FDIC-insured. While their yield is currently low, we hold them as a hedge against inflation.
When the US dollar buys less, certain foreign currencies increase in value and will buy more. By way of example, I have held Swiss francs for years. They used to be worth $0.80 on the dollar; now they are worth more than $1.10.
Farmland is another great hedge against inflation. It’s a valuable asset and is in limited supply. There’s no new land growing in Kansas.
Protecting against confiscation. Historically, governments resort to extreme measures like confiscation when inflation gets out of hand. Confiscation can take more than one form.
President Roosevelt, by Executive Order 6102, made it illegal to own gold. Once people surrendered their gold, the government raised its official price from $20.67 to $35.00 per troy ounce. Think about that for a minute… One day you’re forced to sell 100 ounces of gold coins to the government and receive $2,067.00 in paper for it. The next day they revalue it and decree that it would cost $3,500.00 to buy it back, but they’re not going to sell it to you. Gold didn’t go up in value overnight; the value of the dollar went down.
A second form of confiscation results in taxes, sometimes marketed as “emergency taxes.” A government that’s spending more than it takes in will eventually have its day of reckoning. Fearing a collapse, they’ll resort to extreme measures. I wrote about the confiscation in Cyprus last year, and we’re seeing similar things happening in Argentina. Who are the targets? Anyone with money.
While no one can predict for sure what our government will do, prudent investors diversify some of their investment capital offshore.
The recently passed Foreign Account Tax Compliance Act (FATCA) highlights how the government is taking great measures to harass any prudent investor moving his money out of harm’s way. Citizens of Cyprus have made it quite clear that those who moved some of their money offshore were spared. Once the government shut the currency window, however, it was too late for the others.
How bad could things get? I have no idea. Argentina has already confiscated much of its citizens’ retirement plans and forced them to invest in the government’s debt.
Can we say for sure that inflation of this magnitude will or won’t happen in the United States? No. I am neither a prophet nor a soothsayer. Though I can tell you this: the Federal Reserve had been in business for around 100 years and had $800 billion on its balance sheet as recently as 2007. Now it has $4 trillion, which is somewhere between a 400- and 500-year money supply. What will happen if it tries to sell that debt?
The minute the world loses confidence in the dollar or it loses the status of being the world’s reserve currency, the decline in purchasing power could be horrendous.
Even if the probability is a fraction of 1%, our biological clocks are ticking. Most of you are close to leaving the workforce or already out. The adverse consequences of high inflation and/or outright government confiscation of wealth are so catastrophic that an unprepared investor may never be able to recover. Even the Citizens Corps will not be able to help; we’ll be left to fend for ourselves, which could mean bunking in your adult child’s guest room instead of doing the million other fun things you’d planned for retirement.
It’s time to make sure your core holdings are where they need to be, just in case. Jo and I review our financial holdings each year at tax time. That reminds me… We store our emergency food and mark the expiration date on the cases. About a month before expiration, we load the cases in the van and take them to the local food bank, then head to Sam’s Club to reload. Hurricane season will be here before we know it. It’s time to check our inventory. I hope we never have to open a can and can continue to help feed the homeless. That helps me sleep better at night.
Tags: Argentina, CD's, Citizens Corps, confiscation, core holdings, Cyprus, FDIC-insured, FEMA, financial catastrophe, financial crisis, Hard Assets Alliance, loses confidence in dollar, precious metals, protection against inflation, Punta Gorda, taxes, training citizens