Investors are trapped via their pension schemes in a financial system now wholly dependent upon the government printing press. The legitimacy of the $44 trillion pension fund industry is at risk.
Why would investors want out?
In the words of Guggenheim's Scott Minerd :
The Fed has made it clear that it will not tolerate prudent and responsible investing.
The overwhelming majority of assets in pension schemes including most equities, bonds and deposits depend for their value upon the fiat system. What once looked like a diversified portfolio has in many cases become an investor’s nightmare due to the loss of diversification in what is now a highly centralised socialist system.
The Death of Diversification
The prudent investor seeks sound risk adjusted return on their capital. They achieve this through a portfolio of genuinely diversified assets
Within the fiat system diversification is now dead.
The scale of government intervention, including the effective nationalisation of the US bond market last Friday ended capitalism. Price movement in equity, bond and indeed all markets has become a function of government money printing. Losses are socialised, gains privatised.
In this new environment ANY fiat based asset is essentially a bet on government and the fiat system. Equities, bonds or ETFs are not multiple bets that aid diversification. There is just ONE bet that governments can sustain markets through ever increasing supplies of new money.
Whether you believe that bet is right or wrong from the point of view of asset diversification is irrelevant. The fact that there is just one bet has ended the foundation of prudent investing.
The principles of prudent investing have not changed but the financial markets have.
Pension funds have a fiduciary responsibility to manage their portfolios in a prudent manner on behalf of beneficiaries. This has become synonymous with running a diversified portfolio. If any allocation to fiat based assets is now one bet irrespective of the asset, are funds in compliance with their mandate?
Lessons from History - The Inevitability of Fiat Collapse
No experiment with fiat money over the last 2,700 years has ended well. For example starting with the Emperor Nero (54-68) the Western Roman Empire systematically debased its currency. It ended in 476 when the barbarian Odoacer deposed the final Western Roman Emperor Romulus. In contrast the hard-money Eastern Roman Empire continued for another thousand years to 1453. (Nathan Lewis, Gold the Final Standard, page 30)
Lewis summarises (pp 36-37):
The notion of over issuing and thus devaluing a currency (often obscured as “lowering interest rates” or “increasing the money supply”) as a remedy for some sort of economic difficulty must be nearly as old as devaluation itself, which is as old as coinage itself. No demonstrable track record of success has ever been achieved. No empire ever rose above its neighbors and expanded its realm through the mastery of currency devaluation, or some sort of artful floating fiat currency management, or any other form of currency manipulation.
History is all the other way: the states that maintained the highest currency quality, whose coins contained the same quantities of gold or silver over generations and centuries, were the most successful. Governments that debased their coinage soon found that their borders were retreating under the pressure of foreign invaders, while the domestic economy languished and civil unrest grew more strident. To meet these challenges, they debased the currency still further, and got the same results with greater intensity. As is the case for any official government policy that seems to be working, a chorus of courtiers can be found to sing its praises, and no doubt such a chorus existed then too. Monetary decline tends to coincide with the decline of governments and dynasties. Those who claim “this time is different” simply have no idea how much it is the same.
Loss of Trust?
In Australia more than 600,000 have applied for the release of funds from their superannuation schemes to help deal with financial stress caused by the coronavirus. Although the maximum is just AU$20,000 superannuation “experts” are warning investors not to withdraw:
“There are potentially long-lasting and damaging effects to accessing your super early. Withdrawing super early will affect your super balance and may affect the amount you have to retire on. “
Compare this advice with the comments of Bob Rodriguez, the only fund manager in the United States to win the Morningstar Manager of the Year award for both an equity and a fixed income fund:
When everything is essentially socialized as to risk, a return vs risk evaluation is essentially meaningless since the risk side of the equation has been truncated.
Adding more context he says:
With the events of the past three weeks, the perversion and conversion to a dystopian capital market and economic system is virtually complete.
As for me, with the Fed's announcement of unlimited QE and its “will buy or support almost anything,” along with the pending passage of a $2-2.5 trillion stimulus package, this is the end of the capital markets as we have known them.
We have now entered unlimited QE and MMT where there is no escape.
What Rodriguez means is no escape from the inevitability of fiat collapse. However the words equally apply for the majority of investors that are unable to exit their pension schemes.
For those with control over their capital Rodriguez’s solution is to return to hard assets such as rare commodities and collectibles. I have suggested a similar approach called Robust Finance. The tragedy for most investors is that their combined $44 trillion of assets are locked into pension funds whose asset allocation now violates the first principle of prudent investing. If funds refuse to diversify beyond fiat assets they also lose the legitimacy enshrined in their fiduciary responsibilities.