A week ago, Zero Hedge first presented the now viral presentation by Raoul Pal titled "The End Game." We dubbed the presentation scary because it was: in very frank terms it laid out the reality of the current absolutely unsustainable situation while pulling no punches. Yet some may have misread the underlying narrative: Pal did not predict armageddon. Far from it: he forecast the end of the current broken economic, monetary, and fiat system... which following its collapse will be replaced with something different, something stable. Which, incidentally, is why the presentation was called a big "reset", not the big "end." But what does that mean, and how does one protect from such an event? Luckily, we have another presentation to share with readers, this time from Eidesis Capital, given at the Grant's April 11 conference, which picks up where Pal left off. Because if the Big Reset told us what is coming, Eidesis tells us how to get from there to the other side...
First of all, what is systemic risk?
Typical Systemic Risks:
- Wide-spread defaults, sovereign debt crises, devaluations, capital controls, bank holidays, etc.
How it usually happens:
- No warning;
- Emergency announcement over a weekend;
- Drastic measures to “protect the public” against [insert suitable culprits];
- Outcome- someone’s value gets expropriated.
Yes, it can happen here –it has in the past.
Usually, the best warning indicator of a major systemic "event" are soaring cross-asset correlations: something we are experiencing right now.
- Crisis of 2007-2009 was a “High Correlation” disruption:
- Multiple institutions and majority of the population were affected.
- Reducing systemic risk called for lowering correlation, i.e. “firebreaks”, de-coupling, etc.
- Instead, governments’actions since 2008 have been increasing correlation:
- Fiscal Policies –sovereign debts are higher than ever and still growing fast;
- Monetary Policies –broken price mechanism = system-wide misallocations and mispricings;
- Too-Big-To-Fail –bigger than before the crisis;
- Euro Zone Crisis –“solutions” keep increasing interconnectedness – a “mutual suicide” pact;
- Financial Regulation –was supposed to reduce the risk but stalled through stiff opposition:
- A single JP Morgan trader is reported to run $100 bln CDS book?!?!?!?!?! [ZH: now confirmed, and we all know the story since]
- Lack of Transparency –more opacity since the crisis; mark-to-market remains suspended.
Everyone knows this but only few are willing to accept the implications; fewer still are willing to act.
What are the key systemic risks:
- The already unfolding crises:
- The Euro zone, Argentina.
- Redistribution of wealth:
- ZIRP –Taking from net savers for the benefit of net debtors.
- Inflation targeting –Debasing debts at the expense of savers and bond holders.
- Pending tax hikes for top earners.
- Financial Marshall law:
- FBAR and FATCA raise penalties and tighten reporting on all financial assets held offshore.
- Argentina –Currency controls; “Dollar-sniffing”dogs at the airports and border crossings.
- Governments co opt banks to police the assets within the system:
- FATCA - all foreign financial institutions to report on all US customers or face 30% withholding.
- Swiss banks have been firing US clients; deal on reporting is inthe works.
- Swiss banks have agreed to report on their German and UK customers’accounts.
FINANCIAL REPRESSION IS AN ARRAY OF POLICY TOOLS THAT PRECLUDE CAPITAL FLIGHT AND ENABLE WEALTH TRANSFER FROM THE SAVERS TO THE DEBTORS
What to look for:
- There are always losers and winners –many more losers than winners.
- Majority has “normalcy bias” – tendency to underestimate risk of disaster.
- Only a few heed the risks and make proper contingency arrangements.
- Historically, financial disaster preparedness has enabled accelerated wealth creation.
Systemic Insurance is the only way to protect wealth from “High Correlation” events.
But more than anything, the one biggest giveaway is near endless complacency: the more the pros exhibit it, the closer we are:
- Western economies have enjoyed V-shaped recoveries and domestic peace for over 65 years.
- Mainstream investors have never experienced a “reset” or repression, financial or political.
- Disdain for history and post-WWII Western exceptionalismunderpin collective hubris:
- "There can be few fields of human endeavor in which history counts for so little as in the world of finance.Past experience, to the extent that it is part of memory at all, is dismissed as the primitive refuge of the those who do not have insight to appreciate the incredible wonders of the present.” - John K. Galbraith
Complacency is misplaced – despite apparent normality, the risks are high and growing.
One simple example of the true cost of systemic risks in vitro:
- Analyze This: Crisis of September 2008 Without The Bailouts = ? $$,$$$,$$$,$$$,$$$
What's the big deal: they bailed us out before, they will do it again.
Wrong: "Due to massive new debts and politics governments’ capacity for future bailouts is limited."
Which means that systemic hedges should be used by everyone. At what cost though:
- Price of Systemic Insurance = Probability of Disruption X Potential Loss Severity
As Eidesis notes: Insurance is cheap whenever consensus under?estimates the Probability of Disruption.
Or, worse, when the status quo is artificially keeping the price of systemic insurance low to prevent the general public from realizing just how precarious reality truly is. Remember:
- "When it becomes serious, you have to lie" Jean-Claude Junker
So if we are handed cheap insurance options, where should we be looking? Long-time Zero Hedge readers likely already know the answer:
SAFE HAVEN ASSETS –KEY REQUIREMENTS
- Ideal Attributes – Valuable, uniform, divisible, portable, storable.
- No One’s Liability–Physical form, unlevered, non-financial custody; no reliance on capital markets.
- Multiple Exit Strategies – Diversity of buyers; ability to exit via different currencies.
- Geographic Diversification ? The only feasible way to manage sovereign risks.
- Flexibility – Ownership arrangements must be actively managed to address evolving conditions
Exposure to Safe Haven assets via financial instruments IS NOT Systemic Insurance
SAFE HAVEN ASSETS –DEFENSIVE, LONG TERM STRATEGY
- Proven Safe Havens for preserving value through the “trough” of a crisis:
- Real Estate – “Real” but immovable; not uniform, usually owned with leverage; easily taxable.
- Diamonds – Valuable, portable and storable but neither uniform nor divisible.
- Art, Antiques, Collectables – Issues with subjective valuations, authenticity and provenance.
ART, ANTIQUES AND COLLECTABLES HAVE BEEN PROVEN HIGHLY EFFECTIVE IN PRESERVING VALUE OVER TIME. HOWEVER, ABILITY TO OBTAIN FAIR VALUE IN TIMES OF DISTRESS IS OFTEN LIMITED.
- Precious Metals can preserve value through a crisis AND provide liquidity during a crisis:
- Silver–“Poor Man’s Gold” but impractical for large sums.
- Platinum –The bullion is not as readily available as gold.
- Palladium –Somewhat esoteric.
GOLD –Always liquid, widely available, universally accepted, deepest markets, global pricing
Gold – 2,500-year unbroken track record of liquidity and “Safe Haven” performance.
But don't take our word for it... Or that of Eidesis. How about that of... the Federal Reserve:
Here is the FRBNY explaining why people own gold:
- “For centuries, gold had a profound impact on history, as a symbol and a storehouse of wealth accepted universally around the world.“
- “When people are worried about political instability, war or inflation, they often put their savings into gold.”
- “Gold functions as a medium of exchange, particularly in areas where currencies are distrusted.”
Why the US government nationalized gold:
- The 1933 prohibition against gold ownership “prevented hoarders from profiting after Congress devalued the dollar (in terms of gold)”by 41%.
ACCORDING TO THE NY FED –GOLD IS A “PHENOMENAL ASSET” AND AN “IMPORTANT STORE OF VALUE”
GOLD NATIONALIZATION OF 1933 PRECLUDED THE SAVERS FROM PROTECTING THE VALUE OF THEIR ASSETS
What else does the Fed tell us:
THE FED –WE STORE FOR OTHERS; OUR OWN IS OUTSIDE THE BANKS!
- “As of early 2008, the Fed’s vault contained roughly 216 million troy ounces of gold“–“about 22 percent of the world’s official monetary gold reserves.”
- “The United States owns approximately 27 percentof the monetary gold”–“262 million troy ounces as of 2007.”
- “A majority of [the U.S.] reserves is held <…> at Fort Knox, Kentucky, and West Point, New York. Most of the remainder is at the Denver and Philadelphia Mints and the San Francisco Assay Office.”
WATCH WHAT THEY DO; NOT WHAT THEY SAY:
THE U.S. GOVERNMENT STORES ITS GOLD WITH THE MILITARY, NOT THE BANKS.
APPROXIMATELY 49% OF ALL MONETARY GOLD IS PHYSICALLY LOCATED ON THE U.S. SOIL.
Which means that as we approach the date with the Grand Reset which Raoul Pal predicted could come as soon as the end of the year, and which Soros has as under 3 months and counting, there is only one question:
Do You Have Systemic Insurance?
Full Eidesis Presentation: