An Unwanted Holiday
Tuesday, November 25th, 2008
“Holiday” is a word with generally positive connotations. But with all things great and good, there are some unfortunate exceptions. A holiday with Miss Purzelmouse on Blowfly Island might be one of them.
But as you know we are pretending to be a financial column and that’s why we are talking today about Bank Holidays. And what we have in mind is not a harmless fun day for branch bankers, but a situation where you won’t be able to get to your money.
See, at present we are experiencing one of the greatest wealth destructions in history. Over 30 trillion USD have already been lost in international equity markets. Add to that another quadrillion of losses being suffered by banks loaded with toxic assets nobody understands and is able to value properly. How does our bank holiday connect to that?
Well, it is entirely conceivable that the whole western banking system is in fact bankrupt.
This despite desperate efforts to prop up tumbling banks and insurance companies with emergency cash injections, deposit guarantees and all kinds of balance sheet hocus pocus. Just remember the 500 trillion of derivatives still hanging around like a pestilential cloud, and the dimensions a comprehensive bank rescue would have to reach to make us all safe. For perspective: the annual GDP of all the world’s countries is only 50 trillion USD.
One worst case scenario would therefore be that the US and perhaps other governments declare a “bank holiday”, meaning banks close down for a certain period of time. When they reopen, depositors might have only access to a fraction of their money. Withdrawals could be rationed, penalized or delayed. Have we got your attention now?
Of course, the above disaster scenario is not very likely to happen, but it can’t be ruled out either. And therefore we now recommend to increase the share of hard assets in your portfolio.
Gold is obviously a possibility, perhaps the best available right now. Other hard assets like commodities, oil, real estate etc. are also advisable. How big a share such hard assets should occupy in your asset tableau, is a personal choice. If it’s more than half of your total worth, you will sleep better.
We are not saying the end of the world is near, and you should retreat to a farm or cave. In fact, we are still taking advantage of the huge swings in equity markets to trade our book - which is mostly in commodity companies. But overall caution is necessary, as bombs are exploding in places near you.