Diversification

The Investment Triangle

The principle of financial diversification is wise counsel and dates back to King Solomon. “Divide your portion to seven, even eight, for you do not know what misfortune may occur on the earth” (Eccl. 11:2). In today’s global economy, the potential for financial misfortune is very great, and this means that we must be careful in our own financial decisions and personal risk analysis in these uncertain times.
 
It should go without saying that the greatest risk posed to investors today is the imminent collapse of the U.S. dollar and U.S. Treasury bond complex and a move towards a new reserve currency for international trade settlement. We are, of course, talking about the need to hedge against the U.S. economy and U.S. dollar-denominated assets. Since 1970, the U.S. started importing crude oil and running up deficits in the billions. Today our nation is faced with trillions of dollars of national debt and unfunded liabilities, and our nation’s politicians and bankers are literally pushing us over the edge.

In September 2008, the Fed launched a process known as “quantitative easing” (QE) in order to stimulate the economy, and this amounts to little more than printing money to purchase U.S. Treasury bonds and toxic debt. By late 2010, the net increase on the Fed’s balance sheet was $2.4 trillion. In November 2010, the Fed allocated $600 billion (QE2) to purchase more U.S. Treasury bonds and it is now estimated that the Fed is buying 90% of our own debt issuance. In fact, the Fed now owns more U.S. Treasury bonds than China and Japan combined! As if this is not bad enough, in January 2011 the U.S. Treasury sent an emergency letter to members of Congress urging an immediate increase in our national debt ceiling to nearly $15 trillion in order to prevent our government from defaulting on our U.S. security obligations for the first time in U.S. history.

What does all this mean? It means that we are now flying blind into a financial storm and government authorities do not want economists and the American people to know how bad the situation really is. The U.S. government is risking a sovereign debt default and the Fed’s monetary policy is producing an unprecedented amount of raw inflation that is both devaluing our currency and fueling a rise in commodity prices. In 2006, the Fed officially suspended the broad money report (M-3) that reflects the U.S. money supply. Why did they do this? Many believe it was an effort to conceal just how much our central bank is expanding the money supply – 70% of which is offshore! This kind of reckless spending, deception, and monetary inflation makes it nearly impossible for investors to keep pace, and eventually this will lead to hyperinflation and a financial catastrophe.

In his book Empire of Debt: The Rise of an Epic Financial Crisis, Bill Bonner writes, “A great empire is to the world of geopolitics what a great bubble is to the world of economics. It’s attractive at the outset but a catastrophe eventually.” It was Russian economist Nikolai Kondratieff (1892-1938) who proposed that Western capitalist societies experience long-term cycles of boom followed by bust. These business cycles, or grand supercycles, generally run 50-60 years with the present cycle beginning in 1949. This Kondratieff wave proved to be right on course as our financial and monetary crisis began in 2008. A similar analysis was made by Ralph Nelson Elliott in the 1920s, which measures investor psychology and other probabilities (www.elliottwave.com). So what investors need today is a defensive strategy for capital preservation, liquidity, and growth to minimize risk, and this is best illustrated in the following investment triangle.

At the foundation of this investment triangle is the precious metals complex that has stood the test of time for preserving wealth along with tangible assets. It is also necessary to have cash and liquidity in addition to growth and income strategies which do not require extensive market timing. Although it can be profitable to chart market trends and follow hot tips it requires a considerable amount of attention. “One must know precisely when to buy, when to sell, and at what price,” notes financial analyst and author G. Edward Griffin. “To know all that, the investor must become an expert on the nature of the industries involved and must monitor the daily shifts in market forces.”

For this reason we recommend various sectors and asset classes that represent a good buy-and-hold position for diversification and safety. As King Solomon advised 3,000 years ago, "Sow your seed in the morning, and do not be idle in the evening, for you do not know whether morning or evening sowing will succeed, or whether both of them alike will be good" (Eccl. 11:6). This is still good advice today. Due to the extreme dangers that exist in capital markets, equity funds, and fixed income assets we strongly recommend that investors consider moving 30% to 50% of their liquid assets into precious metals for safekeeping and this should include a high percentage in silver.

IDP Client Worksheet