How “Old Money” Prepares for Financial Collapse

Old Money

Stocks in the U.S. markets are trading at record highs again, despite many reasons to be skeptical. If you ignore the economic happy talk from Wall Street and the White House, the fact is that the global economy is slowing down.

The evidence for this comes from near recession conditions in the UK, Germany and Italy, and from steeply falling GDP results from the U.S. and China.

The most recent productivity statistics for the U.S. show an actual decline for the first time since 2015.

Meanwhile, it shouldn’t surprise you that global trade is contracting in lockstep with global growth.

These underlying trends include specifics on manufacturing data, external liabilities, world trade in relation to GDP, shrinkage in the supply of “safe assets,” changes in global reserve holdings and more.

Considering that virtually all economic growth is simply the output of two factors – population and productivity – these new productivity figures are disturbing. Millions of baby boomers are retiring and no longer expanding the economic pie.

Whether viewed as headline data or from down in the weeds, the combination of declining growth, increasing debt, reduced trade and liquidity stress is not reassuring.

Having said all that, my models show that there’s little chance of a recession in the short run.

No one will be happier than President Trump if the U.S. can stay out of recession before next year’s election. If the economy does steer clear of recession, Trump will in all likelihood be reelected.

My latest calculations give Trump close to 70% odds of winning, assuming he survives the entire impeachment brouhaha (which he will, barring some major revelation).

And, more importantly, if he can avoid recession.

The Fed has his back, whether or not it intends to. It’s already cut rates three times this year and may cut additionally heading into next year.

Meanwhile, it’s presently expanding its balance sheet at a greater pace than it did under QE 3 as it supports money markets with massive injections of liquidity.

It all started in September, when the “repo” market faced a liquidity crisis. The Fed responded but said it was just a temporary measure.

And yet it’s still pouring liquidity into the market and has announced plans to keep it going through the second quarter of next year.

If you want to know why the stock market is back at record highs despite all the economic uncertainty out there right now, there’s your answer.

But please, please don’t call it QE4. The Fed would be very upset. It’s just “open market operations.”

When you add it all up, recession is a low probability right now considering the Fed’s ongoing support.

But are we actually grappling with a depression? And how does “old money” prepare for a market collapse?

How “Old Money” Preserves Its Wealth

Could we be heading for a depression?

It’s a strange question, I know. After all, I just said the odds of a recession heading into next year’s election are low. Then I went and raised the issue of depression.

But here’s what you need to understand…

Something I point out in presentations and in writing is the difference between recession, depression and financial panic.

Financial panics are different than both recessions and depressions.

Panics are mainly psychological and represent a sudden desire for liquidity at all costs and widespread dumping of risk assets without regard to valuation metrics.

They emerge seemingly from nowhere. They can be brief, but also severe in the losses produced.

Panics can be cut short by private intervention (J. P. Morgan in 1907) public intervention (Ben Bernanke in 2008) or they simply run their course like an epidemic once the victims either die or recover.

Both panic and recession can arrive together, as happened in 1929 and 2008, but usually the conditions emerge separately and for different reasons.

A recession is a decline in output accompanied by rising unemployment. Recessions overall have been usually short, lasting two or three quarters, rarely longer.

They have also tended to be mild.

The recessions of 1990 and 2001 were mild, for example. It’s true, the recessions of 1974, 1980-1982 and 2008 were more severe, but they didn’t last particularly long.

Depressions are more rare. We had one from 1929-1940 and arguably have been in a new depression since 2007.

Many people might think that’s an absurd statement. After all, the economy’s been expanding for a decade now, which is a record expansion.

Unemployment is at 50-year lows. Where are the souplines?

So how can I call it a depression?

But the economy doesn’t have to be shrinking to qualify as a depression, as defined by John Maynard Keynes.

Keynes defined depression as a “chronic condition of subnormal activity for a considerable period without any marked tendency either toward recovery or toward complete collapse.”

In other words, a depression is not a mere business cycle blip, but represents a prolonged period of below-trend growth.

That essentially defines the current economic environment over the past decade.

The historic long-term growth trend for U.S. GDP since 1947 is just over 3%. But the economy hasn’t produced one single year of GDP above 3% for well over a decade now.

Yes, depressions can be much more severe than the current version. From 1929 to 1933 the Dow Jones index fell over 80% and unemployment reached 20%, for example.

Depressions may begin with panics or recessions, but are extended due to policy uncertainty and liquidity constraints.

And given today’s exceedingly stretched stock market valuations, the recession-depression-panic distinction, something like a panic followed by a depression, is highly likely.

It’s a recipe for reduced liquidity and the inability of central banks to end a crisis as they did in 2008. They’re now low on “dry powder” to fight the next crisis, which wasn’t the case after the previous one, when central banks had the space to massively expand their balance sheets.

But you don’t have to agree completely with my depression hypothesis in order to take heed and make at least some preparation for the worst.

Investors who don’t prepare now for another liquidity crisis or financial collapse may regret it sooner than later.

But how do you prepare?

You might want to start by looking at how “old money” preserves its wealth.

In the United States, the “old money” is generally about 150 years old with fortunes dating to the mid-nineteenth century. Families in this category include the Vanderbilts, Rockefellers and Carnegies.

More fortunes were created about 100 years ago including the Fords and Firestones. Some U.S. family fortunes are almost 200 years old, like the Astors, Girards and Biddles.

But most of the great wealth today is not old at all.

It comes from success in the past 30 to 50 years including Mark Zuckerberg, Jeff Bezos and Warren Buffett.

What about family fortunes that are 300 years old or even older?

Fortunes that old are unheard of in the U.S., but can be found in Europe. In the past, I’ve written about the Colonna family in Rome who have preserved their wealth for 800 years.

This family fortune has survived the Black Plague, the Thirty Years War, the Wars of Louis XIV, the Napoleonic Wars, World War I, World War II and more.

My interest in the Colonna family began when I was a guest in their palazzo in Rome and learned the secrets of long-term wealth preservation from a member of the extended family.

My dinner companion at Palazzo Colonna told me that the secret was, “a third, a third and a third.”

By this, she meant that wealth should be allocated one-third to land, one-third to gold, and one-third to fine art; (of course, some cash in needed for operating costs and some business investment is fine also).

The Torlonia family, also of Rome, is another example…

The Torlonias followed the same strategy as the Colonnas with allocations to land, fine art and gold.

The Villa Torlonia in Rome is so impressive that it was temporarily expropriated by Italian Dictator Benito Mussolini as his personal residence during World War II.

The Torlonia dynasty has preserved its vast wealth through their collection of Greek and Roman marble statuary worth over $2.3 billion. The family collection is considered to rival the collections in the Louvre and British Museum.

Of course, not everyone can afford to collect 2,300 year old Greek statutes. But, museum quality twentieth-century art is well within reach for many wealthy families.

The “old money” shows that true wealth preservation comes from art, gold and land rather than stocks and bonds.

Let’s stick to fine art for a minute. I believe fine art has a place in investors portfolio.

I’ve done a lot of work for the U.S. intelligence community, trying to thwart terrorist finance and transnational actors, as we call them. This includes money laundering, smuggling and arms dealing. This work has made me very familiar with the weight of different forms of wealth.

Assuming you have $100s in a briefcase, you’re going to have to carry a 22-pound briefcase if you want to move $1 million paper in $100 bills.

Gold actually weighs more than that. I like gold as an investment, obviously, but as a store of wealth it’s heavy. Art isn’t.

That’s the funny thing about art, if you think of it in terms of weight. If you have a $100 million painting that weighs a couple pounds, and if you take it out of the frame, roll it up and put it in a backpack, it could be worth $500,000 per ounce.

And it won’t set off metal detectors. So fine art is a a very mobile form of wealth. You get very good weight for value, much more than cash, much more than gold, and it’s easy to move around.

Besides, most people don’t like to think about what would happen if they have to pack up and leave their home. But just ask the people of California who are in the way of the latest fires.

But if they do have to pack up and leave, a valuable, recognisable museum-quality painting is a much easier way to move wealth around than gold or cash.

If for whatever reason the banking system shuts down, or if there’s a power grid outage, and you’ve got to get on the move, art is a good way to take a lot of money with you in the palm of your hand.

That’s one good reason why I think of art as a good store of wealth.

Who knows more about holding onto wealth over time – the new money trying to get rich in the stock market right now – or the old money who’s held onto its money for centuries outside of the stock market?

 

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