Independent, Fee-Only Financial Advisor
Wednesday, December 21, 2016
Investing for the End of the World
If you are preparing for the end of the world, you might be buying gold, guns, canned food and remote property in the foothills of the Rocky Mountains. After all, you will need to be self reliant for food, shelter, water and defense. Hone your large scale gardening skills now, because the canned goods will run out eventually.
The Fear Trades
When the market gets weird (read: goes down sharply, or at least 10%) there are a few investments people tend to reach for: Gold and long term US Treasuries are two of them, the Swiss Franc is sometimes another one. US Treasuries are generally viewed as a risk free asset. They are bonds, so you can easily calculate the value and the cash flows, and they are backed by the US Government, which is generally believed to be a reliable credit - recent elections notwithstanding. After all, why would the US Government default when they could just print more money to pay the bond.
Of course there are risks with that US Treasury bond: if the government does just need to print money to pay obligations, inflation will likely erode the value of the dollars you will receive. To understand this relationship, think of supply and demand. If there are more dollars being printed to chase roughly the same amount of goods and services in the economy, each dollar will be worth less in comparison to the goods or service it is buying. Another risk is interest rate risk. If interest rates rise after you buy the bond, the market value of the bond will decline. After all, why would someone pay the $100 that a 3% yield cost you if they can go out in the market and buy a 4% yield for the same price? This is a bigger risk with longer term treasuries. If you are planning on holding the bond until maturity, this does not much matter, but it can look bad on your account statements in mean time.
Gold and Swiss Francs are both viewed as stable money. Historically, gold was a unit of money, and until recently, the value of our dollar was actually measured in gold. As long as nothing too exciting is happening in the world, gold typically tracks inflation. This means that it preserves its real world value - this is why it is considered a "real" asset. Since it preserves it's value in the real world, if you fear imminent collapse of your nation, economy and currency system, it might be a nice way to hedge that fear. Investors typically either love or hate gold. "Gold Bugs" as they are known like that gold will be there for them even during rampant inflation or societal collapse while the haters just think it is a dumb shiny thing that doesn't do anything fun. It is possible that both sides are right.
My main concern with gold as something to hold if the world collapses is that there is no guarantee that people will take your gold in exchange for necessities like food and drinking water. If they did take it, you would probably need plenty of small change in gold, and a scale for measuring your gold flakes and dust. Tricky stuff. There is also a practical tax consequence that gains on the sale of gold are taxed at a minimum tax rate of 28% - potentially higher than your marginal bracket, particularly if you lost your job as society and the economy crumbled. If you traded your gold for food or services, you have some flexibility in how you report the value, particularly in a situation where there is no ready market for the goods. However, faithful reporting of income and expenses is a cornerstone of our democracy (which may well be collapsed at this point) and transactions like this may invite a time consuming audit (time better spent out there growing your food, right?).
Swiss Francs are sometimes viewed as a safe haven trade in weird times too. Switzerland is known for it's policy of neutrality, excellent chocolate and building bunkers in the Alps. It can be easy to confuse the safety and homogeneity of the country for real world economic or financial security. Maybe you can hitchhike to Switzerland when the world ends. Maybe your local cafe will take Francs when you venture down from the Rockies for a morning pick-me-up after the apocalypse. I'm not totally sure about this one.
There is a breed of investor that is permanently bearish. They often sell stocks short on generalized worries or keep the fear trades going even when it isn't working. There is always a crisis just around the corner that they believe, to the contrary of the built up evidence, humankind just won't make it through. These investors are the ultimate contrarians.
But How Will The World End?
The problem is, we don't know exactly how the world will end. Will it be a mild end, with stock markets functioning as staff moves computers to higher and higher floors as the oceans rise? Will it be all at once with an asteroid that we only saw a few months in advance? Will it sneak up behind us, cutting off one piece of our economy at a time, leaving us only with Twitter to speculate about what is actually going on?
Maybe the end of the world will even be less of an event than we anticipate. Maybe governments will fall peacefully and after a few years of anarcho-libertarian communes someone will have the idea to build a highway to their cousin's commune and we will come together to figure out how to pay for it, accidentally forming a government in the process.
However it ends, it may be on your to-do list to prepare for it. Let's explore what you can do with your investments.
If you believe that some environmental disaster will end the world, consider companies that are working to fight that. Depending on how long this disaster takes to play out, your companies could have a string of profitable quarters as they try to clean up the mess we have made or stem the tide of rising waters. Ecology & Environment or Clean Harbors specialize in cleanup of disasters sites as well as providing environmentally sustainable solutions to polluting industries. Companies that make solar panels or operate wind farms may be of interest too.
Maybe global conflict will be the downfall of man. In this case, we have plenty of defense related stocks that will benefit from military spending. Don't forget your personal safety, a company like Ruger or Smith and Wesson also outfit private individuals, mercenaries and militia right in your neighborhood! The chart at the top of this article implies that general equity investments may be the way to go. The article notes that bonds may have underperformed as inflation picked up during times of war.
The end of the world could come in a variety of ways. It is important that you take the time to think deeply about what you are most afraid of, and position your investments to protect against those fears in an appropriate manner.
When The World Is Over - What Does Anything Mean?
It might strike you as prudent to avoid investing in stocks. After all, stock markets can close for a variety of reasons, after the terrorist attacks of September 11, 2001 in New York, American markets closed for 4 days. If the market is closed, you may have a hard time selling your stocks so its best to just avoid them, right? Not so fast, your broker will still hold your stocks and may make valiant (or not so valiant) efforts to calculate their value and help you with trades. There is a robust over the counter network in the US and we are not so old that we have forgotten how to use phones (getting there, though). Transfer agents will be there to help brokerages affect trades on your behalf. In fact, when the global stock markets shut down at the beginning of WWI, brokerages continued to trade and quote securities prices, though clearly liquidity and price discovery were affected.
What if your brokerage is insolvent? A general financial crisis might bring down a couple of brokerages, but if you keep a paper copy of your latest statements you'll have a starting place if your brokerage disappears. SIPC insurance covers the first $500,000 of your cash and securities if your broker is insolvent. It is fairly common for larger brokerages to cover the next $49,500,000 of your account with private insurance. If you are concerned about this, you should take note of that insurer in fas you need to file a claim. It is important to note that SIPC does not protect against fraud if you never actually held the securities, or against the loss of value. They really just protect the custody function - the safekeeping and access to your securities.
If brokerage insolvency or exchange shutdown is the specific risk you are trying to protect against, try keeping your stocks all in paper certificate form. While a burglary is probably more likely to strike your home than an exchange outage, fear is not rational. I generally do not advise that people keep paper certificates. Not only are they more likely to get stolen, but they are much harder to trade and generally have much higher fee structures than an account at a discount broker. If worse comes to worse, however, you can trade your Mondelez shares hand to hand for packets of crackers and a bit of peanut butter. You would just need the certificates though a notarized bill of sale might come in handy. If you're the one receiving the shares, check with the transfer agent to make sure that you are doing the transaction correctly because you will want to ensure you receive the shares when the ledger opens back up (usually the first Monday after Judgement Day).
You might not want bonds either. Depending on the state of the legal system during and after the end of the world (let us not forget that the end of the world may be a prolonged, nine step process as outlined by Dante) companies may decide to default on their debt obligations, and bankruptcy proceedings in the afterlife could well favor equity owners if sufficient time has elapsed for you to make a claim on the assets of the company. This is a weird situation to be in, but the end of the world might have weird quirks.
An alternative to regular, registered bonds may be to look up some bearer bonds. Bearer bonds are bonds which neither the company nor any transfer agent or bank keep a record of who the owner is. Interest is paid literally to whoever holds (bears) the bond. Generally you clip off a coupon and mail it in for the interest (this is why interest payments on bonds are called coupons). You still have the risk that someone steals the bond, but at least they won't hack your account password. Bearer bonds are a little bit frowned upon these days, but they do still exist. If you find some from a company or government with excellent credit, and good chances of surviving the apocalypse, you may be able to get them at a good price in the turmoil. If people don't put a premium on tax evasion, yet haven't realized that the bonds are still money-good, you might get a good deal on them! Keep in mind you will have a small window between the realized apocalypse and the next coupon payment, which will be a reminder to the owner that they still have something of value. Act fast to get the best deals. Try eBay.
So securities are a mixed bag and you can't trust your broker to hold GLD for you as you are raptured. How are you supposed to invest in the the most fearful of investments - gold? We've already discussed the tax implications but maybe you are counting on the IRS being out of commission as well. That is fortunate for you, just watch out for the marauding charms of magpies.
Practical Tips On How To Prepare For Huge Change
Several years ago I had the opportunity to hear from a fund manager about his vision of the end of the world. It was a combination of financial and societal collapse, peppered with cute anecdotes about him darning his socks on the flight over. It was all a bit surreal, looking back. In the event of huge shifts in society, government or economy, self reliance was the most valuable thing. He was impressed that I was an avid cyclist and gardener and a little taken aback that I (at the time) had chickens in my backyard. I think this put me in an elite tier of those who were truly ready for the worst.
He did give me an interesting way of looking at crisis. His vision was one where inflation made financial transactions difficult, eroded trust and decaying infrastructure limited the use of online shopping or use of credit. Self reliance was indeed the investment to make.
Part of self reliance is frugality - if you spend most of your time, money and effort eating out and paying other people to perform tasks around your home, you are ill prepared for a time when those services aren't available. While you don't necessarily need to move to the foothills of the rockies and stock your bunker with canned goods, learning to take care of a home you own and grow and prepare your own food has value in itself. Physical skills are not only useful in a pinch, but are imminently traceable in the current economy and possibly the next economy.
A collapse of the financial and economic order does not mean that you need to have alternative methods of payment handy. Your bitcoin will do you little good if there is no electricity or internet. Instead, build your social capital and help others build theirs. Knowing people who have resources or skills you may need will be valuable. Don't just network to build your professional prospects - strengthen your useful social network. Befriend a handyman or an expert food preserver or someone who has had so enough outdoor adventures that surviving while lost in the woods is second nature. In countries where persecution of individuals based on some belief is more common, strong social connections are useful when seeking refuge from a monstrous government. Where goods and services are hard to get, tight knit communities must provide for each other.
People often put an over-emphasis on real assets, but the choicest bit of land or the shiniest gold coin will not save you if there is no rule of law. Having useful skills and a community that you contribute to will serve you well when your house, or country, burns down.
I don't know what the end of the world will look like, and I haven't bothered to calculate how likely it is to end, but preparing for it, by bettering yourself and others around you, should pay dividends in the current economy anyway.
Posted by Ryder Taff, CFA