Most Popular
1. It’s a New Macro, the Gold Market Knows It, But Dead Men Walking Do Not (yet)- Gary_Tanashian
2.Stock Market Presidential Election Cycle Seasonal Trend Analysis - Nadeem_Walayat
3. Bitcoin S&P Pattern - Nadeem_Walayat
4.Nvidia Blow Off Top - Flying High like the Phoenix too Close to the Sun - Nadeem_Walayat
4.U.S. financial market’s “Weimar phase” impact to your fiat and digital assets - Raymond_Matison
5. How to Profit from the Global Warming ClImate Change Mega Death Trend - Part1 - Nadeem_Walayat
7.Bitcoin Gravy Train Trend Forecast 2024 - - Nadeem_Walayat
8.The Bond Trade and Interest Rates - Nadeem_Walayat
9.It’s Easy to Scream Stocks Bubble! - Stephen_McBride
10.Fed’s Next Intertest Rate Move might not align with popular consensus - Richard_Mills
Last 7 days
Stocks, Bitcoin and Crypto Markets Breaking Bad on Donald Trump Pump - 21st Nov 24
Gold Price To Re-Test $2,700 - 21st Nov 24
Stock Market Sentiment Speaks: This Is My Strong Warning To You - 21st Nov 24
Financial Crisis 2025 - This is Going to Shock People! - 21st Nov 24
Dubai Deluge - AI Tech Stocks Earnings Correction Opportunities - 18th Nov 24
Why President Trump Has NO Real Power - Deep State Military Industrial Complex - 8th Nov 24
Social Grant Increases and Serge Belamant Amid South Africa's New Political Landscape - 8th Nov 24
Is Forex Worth It? - 8th Nov 24
Nvidia Numero Uno in Count Down to President Donald Pump Election Victory - 5th Nov 24
Trump or Harris - Who Wins US Presidential Election 2024 Forecast Prediction - 5th Nov 24
Stock Market Brief in Count Down to US Election Result 2024 - 3rd Nov 24
Gold Stocks’ Winter Rally 2024 - 3rd Nov 24
Why Countdown to U.S. Recession is Underway - 3rd Nov 24
Stock Market Trend Forecast to Jan 2025 - 2nd Nov 24
President Donald PUMP Forecast to Win US Presidential Election 2024 - 1st Nov 24
At These Levels, Buying Silver Is Like Getting It At $5 In 2003 - 28th Oct 24
Nvidia Numero Uno Selling Shovels in the AI Gold Rush - 28th Oct 24
The Future of Online Casinos - 28th Oct 24
Panic in the Air As Stock Market Correction Delivers Deep Opps in AI Tech Stocks - 27th Oct 24
Stocks, Bitcoin, Crypto's Counting Down to President Donald Pump! - 27th Oct 24
UK Budget 2024 - What to do Before 30th Oct - Pensions and ISA's - 27th Oct 24
7 Days of Crypto Opportunities Starts NOW - 27th Oct 24
The Power Law in Venture Capital: How Visionary Investors Like Yuri Milner Have Shaped the Future - 27th Oct 24
This Points To Significantly Higher Silver Prices - 27th Oct 24

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Financial System Collapsing- Three Steps To Protect Your Funds Now!

Personal_Finance / Financial Crash Sep 17, 2008 - 02:12 PM GMT

By: Paul_Lamont

Personal_Finance Best Financial Markets Analysis ArticleAs we stated last November : “In A Short History of Financial Euphoria , John Kenneth Galbraith observes: “All crises have involved debt that, in one fashion or another, has become dangerously out of scale in relation to the underlying means of payment.” We have now reached this ‘ Minsky Moment .' According to Morgan Stanley, the risk is now greater than 50% that the financial system “will come to a grinding halt.” In this Bloomberg video , Gregory Peters, head of Credit Strategy for Morgan Stanley, describes the process of securitization, which “has created this cheap financing environment,” as “broken.”


Goldman Sachs chief, U.S. economist Jan Hatzius, estimates that lending will be curbed by $2 Trillion (Ed Note: Reuters link from original not found, replaced with Business Week article). The last time the economy had to endure this kind of systemic shock was 1930:

“Several brokerage houses tumbled; blue-sky investment companies formed during the happy bull market days went to smash, disclosing miserable tales of rascality; over a thousand banks caved in during 1930, as a result of marking down both of real estate and of securities; and in December occurred the largest bank failure in American financial history, the fall of the ill-named Bank of the United States in New York.” (Only Yesterday: An Informal History of the 1920's by Fredrick Lewis Allen)

Here's what investors should do:

First: Protect Principal

To protect against investment losses, investors should sell assets and hold cash. As credit tightens, cash rises against leveraged assets (or assets fall). This occurred dramatically in the credit busts of the 1930s, 1880s and 1840s. When we state 'cash' we specifically mean U.S. Treasury Bills. There are many other financial alternatives touted as cash but these should be avoided. No private insurer, corporation, or institution can compete with the full faith and credit of the United States Government. Investors should especially stay clear of money market funds which include asset-backed commercial paper .

Second: Reduce Barriers To Ownership

Complex arrangements weaken ownership claim. Remember with any fund, investors own shares of the fund not the underlying asset. Theoretically, even money market funds labeled 'U.S. Government-only' can halt share redemptions if the fund family is having problems.

Third: Be Very Discriminating Where Funds Are Kept

Investors should select brokerage firms that are financially healthy, have historically few customer legal disputes, and have no investment banking department. Using these criteria, it is now becoming evident that Wall Street firms and online brokerages are ill-prepared to act as a haven during a bear market.

It's Better NOT To Need Insurance

The Securities Investor Protection Corporation insures accounts up to $500,000 ($400,000 securities, $100,000 cash). However, its reserve fund is only $1.4Billion. The SIPC also has the ability to borrow $1B from a consortium of banks (assuming they aren't the ones in trouble!) and $1B from the Treasury department. Compare $3.4B in total SIPC insurance to the Royal Bank of Scotland's estimate of $250B to $500B in losses from this credit crisis . Is this an apple to oranges comparison? Not hardly, both customer securities and Level 3 assets are the financial institution's assets (Clarification- 9/17/2008: The client pool is segregated from the other assets of the firm. But the client does not retain full ownership of the securities.). It's no wonder that when we spoke with the SIPC's legal department they are warning ‘over-the-limit' investors to “do their due diligence when selecting a brokerage.”

Some brokerage firms have additional account insurance from the Customer Asset Protection Company (“CAPCO”). According to Standard and Poor's rating service, CAPCO “relies on highly rated reinsurers for remotely possible extremely large losses.” In the latest S&P report , ‘remotely possible' and ‘extremely remote' are used quite frequently in describing a probable maximum loss (PML) or “when one brokerage firm loses 0.20% of customer assets.” But how much is really held in reserve or arranged through reinsurers to back accounts if the worst were to occur? “CAPCO's management maintains the confidentiality of its financial statements.” Even worse, questions for more information are directed to ‘participants' or the brokerages themselves. What we do know is that reinsurers are dealing with losses of their own. Our conclusion is that investors should not rely on bailouts from insurance companies and should instead move funds immediately to more secure financial institutions. Even if an insurance company was able to pay, who wants the headache of dealing with the claims process?”

(End of the Investment Analysis Report From November)

Addendum

To this report from last November, we can add this summer's search for a smarter alternative to money market funds , as well as a description of a more secure financial institution . With the first money market fund ‘ breaking the buck ' since 1994, we expect nervous investors to be looking for alternatives. We will publish the sequel to Crash Opportunities, Part One (published two weeks ago), when the meltdown pauses. In the meantime, if you are interested in principal protection for your portfolio, please contact us .

By Paul Lamont
www.LTAdvisors.net

At Lamont Trading Advisors, we provide wealth preservation strategies for our clients. For more information, contact us . Our monthly Investment Analysis Report requires a subscription fee of $40 a month. Current subscribers are allowed to freely distribute this report with proper attribution.

***No graph, chart, formula or other device offered can in and of itself be used to make trading decisions.

Copyright © 2008Lamont Trading Advisors, Inc. Paul J. Lamont is President of Lamont Trading Advisors, Inc., a registered investment advisor in the State of Alabama . Persons in states outside of Alabama should be aware that we are relying on de minimis contact rules within their respective home state. For more information about our firm, or to receive a copy of our disclosure form ADV, please email us at advrequest@ltadvisors.net, or call (256) 850-4161.

Paul Lamont Archive

© 2005-2022 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in