What Form Will The Great Confiscation Take — And How Can We Prepare?
For what seems like decades, people have been warning that the next time some over-leveraged corner of the financial system implodes, bank and brokerage accounts will be either confiscated by desperate governments or lost during the resulting chaos.
Here, from 2012, is a representative warning from gold mining eminence grise Jim Sinclair:
My Dear Extended Family,
In bankruptcy of your bank, broker or fund, you can find your assets in the majority of cases are backing the liabilities of the entity in front of yourselves. This is why you must act to protect yourself.
No one in this financial world is going to do it for you, and few will have the courage to recommend you escape Street Name. You can wake up one day and find out that your investments are gone.
The insurance programs will function as long as the incidents of bankruptcy are isolated events.
In a systemic collapse the insurance funds are not capitalized to meet the potential obligations.
The guarantor you are relying on will have to be bailed out.
For securities there are only three ways to hold them:
1. Street name.
2. Direct registration.
3. Certificate form.
Anyone advising you to stay with the Street Name option is a babbling idiot not interested at all in your welfare.
In street name the inferred ownership is the broker or bank, not you. In Direct Registration and Certificate form, the distinct ownership is you.
In 99.9% of the cases of retirement accounts the answer is you are in Street Name.
How are your securities held? Do you even know? I dare you to ask!
Do you know what your broker’s capital ratio is? Find out as that number is the order of magnitude at which your broker is gambling on with primarily your money. I dare you to ask.
This time around those investors that are too lazy to consider protecting themselves will be demolished.
How would you like your gold shares at $3500 gold, outperforming gold, and one morning you wake up to having nothing anymore? You now are behind the back burner in a bankruptcy situation with any fiduciary.
The system and their minions will do everything to keep you trapped in Street Name. Articles will be published trying to put you back to sleep on this issue.
Wake up, please.
The fact that this mass confiscation hasn’t yet happened doesn’t mean it won’t, says Jim Rickards, whose previous bestsellers Currency Wars and The Death of Money were already pretty apocalyptic. He believes that a coordinated closure/restructuring/confiscation of the banking/brokerage industry is imminent. Here’s an excerpt from a recent column:
In that interim period between the crisis and the time the IMF can react, central banks will be paralyzed. They’re likely going to lock down the system.
When I say lock down, they’ll start with money market funds. I can’t think of a greater misnomer than the money market funds. People think that money market funds are money.
They’re not money; they’re mutual funds regulated by the SEC. People think they can just call up their broker, sell to the money market fund and the money’s in my bank the next day.
That will not be true in this crisis because everyone will be doing the same thing. That is what happened in 2008 when Ben Bernanke and Hank Paulson went to the White House and said to the President that the system’s melting down and he must act.
That was such a shock then, that when it happens again they’re not going to give you your money. They’re going to lock it down. The problem is that when it is spreading you can’t just lock down part of the system.
If you lock down money market funds, people are just going to take their money out of the banks. Then you’re going to have to close the banks. Then people are going to sell their stocks, then you’re going to have to close the stock market. Every time you shut one path to liquidity, people are going to turn to another path.
It happened in part in 1914, 1931, 1933 and to gold in 1971. There’s no precedent for a total freeze but we’re getting closer to that point.
The question is, how do you protect yourself against that? There’s only so much you can do.
I don’t recommend running down and pulling all your money out of the bank. I would not have more than the insured amount, which in the U.S. is $250,000. You can spread it between your selected banks so that each is backed and insured up to the limit.
Rickard’s solution is right out of the stacker playbook:
In the world described, the dollar price of gold will approach the $10,000-level if not much higher. But when all of this begins to play out, you’re not going to be able to get gold.
Because of this, gold and silver need to be in physical form, in safe storage, and a non-bank.
Putting it in a safety deposit box in a bank is troublesome because by the time you want it the most, that will be when the banks are going to be closed.
Charles Hugh Smith offers some other possible responses:
So what’s difficult to expropriate? It’s impossible to expropriate one’s skills, experience and social capital. These are intangible forms of capital and so they cannot be confiscated like gold, currency, land, etc.
Land and homes are difficult to expropriate for two reasons: private property is the backbone of capitalism and democracy, and the state confiscating private property would very likely spark a political insurrection that would diminish or threaten the power and wealth of the privileged Elites.
Secondly, it’s very costly for the state to maintain the productive output of real property it has confiscated. Guards must be posted, sabotage repaired, and the immense difficulties of coercing a rebellious populace to continue working what they once owned for the benefit of the state and its privileged Elites must be solved and paid for.
The state can expropriate farms, orchards and workshops for back taxes (or some similar extra-legal methodology), but how do you force people to work these properties productively?
As a general rule, whatever the super-wealthy own will be protected from expropriation.
Private real property is the foundation of the Elites’ wealth, and while the land of debt-serfs may well be confiscated for back taxes (the wealthy will buy exemptions from rising taxes), those who own land and buildings free and clear constitute a political force to be reckoned with.
The state will also have difficulty confiscating assets that are outside its reach.This explains the popularity of owning assets in other nations, and the debate over cryptocurrencies: will states be able to confiscate all cryptocurrencies at will, or is that technically unfeasible?
The main takeaway is this: your skills, knowledge and social capital will emerge unscathed on the other side of the re-set wormhole. Land and real property you own free and clear (no debt) is likely to remain in your possession, as long as you can pay soaring taxes/junk fees during the crisis phase. Your financial assets held in centrally controlled institutions will not make it through unscathed; they are simply too easy for central authorities to expropriate.
It’s easy, as the world’s zombie economies just keep shuffling along, to start assuming that the current system will endure forever. That would be wrong, and almost certainly the above warnings will someday seem prescient. All the more reason to forget about timing, and keep buying real assets.
What’s a word worth? If the word is “phenomenal” and it’s uttered by Donald Trump, apparently $175 billion.
That’s how much the value of U.S. stocks increased on Thursday, according to Wilshire Associates’ calculations, after the president used that word to describe the tax plan that, he said, his administration would bring forth “ahead of schedule.” The ascent continued on Friday, adding another $100 billion to shareholders’ paper wealth and a total of $225 billion for the week, as the Standard & Poor’s 500 index, the Dow Jones Industrial Average, and the Nasdaq Composite all ended at records.
For the financial markets, the week’s swirl of bad news for the Trump administration, from the rejection of the reinstatement of its travel ban from seven mainly Muslim nations to Kellyanne Conway’s ethics gaffe in touting Ivanka Trump’s “stuff” after Nordstrom in Your Value Your Change Short position (ticker: JWN) decided to discontinue carrying the latter’s fashion items, hardly mattered.
The devil is, of course, in the details, and they involve some hellish trade-offs. “Will [the tax proposal] be the Ryan plan that includes a border adjustment tax, or will that be left out and we’ll get clean tax cuts at the expense of a much higher deficit?” wonders Peter Boockvar, chief market analyst at the Lindsey Group.
“That distinction is very important because if it’s the former, it won’t be so ‘phenomenal’ for those companies that import a large portion of the cost of goods sold if the dollar doesn’t rally by the same extent as the tax,” he continues. That would hit retailers especially hard, but the strength of those stocks suggest there won’t be a border adjustment tax, or BAT. However, Boockvar believes that Trump backs the plan from House Speaker Paul Ryan, with some tweaks.
Whatever the details, the president’s tax proposals face “a very long slog” on Capitol Hill, observes Greg Valliere, chief strategist at Horizon Investments. The House may move quickly, despite possible quibbles over the price tag, but “the problem, as usual, will be in the glacial Senate.”
Orrin Hatch, the octogenarian Finance Committee chairman, “has made it clear that there are huge unresolved issues,” says Valliere, including the BAT, debt deductibility, caps on individual exemptions, and abolishing the estate tax. While tax reform is definitely coming, a final bill is still a long way off, and a 2017 effective date is looking less likely, he concludes.
Yet, as the action late last week suggests, the equity markets are more than willing to give the new administration the benefit of the doubt. Something’s coming, even if we don’t know what or when. And that seems good enough to bid stocks higher, especially compared with the competition.
Particularly when part of that competition is what is called in polite company high-yield bonds—or junk bonds by anybody else. Last week, the iShares iBoxx $ High Yield Corporate HYG in Your Value Your Change Short position exchange-traded fund (HYG) hovered near its 52-week high. At that price, the popular junk ETF yielded a hair under 5.25%, which, as I recall, is what my grandmother’s passbook savings account paid way back when (though without a free toaster).
While the markets mull the matter of future fiscal policy this week, they will ponder the course of monetary policy. Federal Reserve Chair Janet Yellen makes her semiannual trek to Capitol Hill to testify on the state of the economy, starting with the Senate on Tuesday, Valentine’s Day.
There is little love lost between the Republican-led Congress and Yellen, whom Trump has said he’d like to replace when her term expires early next year. There already are two vacancies on the Fed’s Board of Governors, with a third opening looming, after Gov. Dan Tarullo on Friday announced plans to step down in April.
At the last “live” Federal Open Market Committee meeting in December, the Fed indicated that it expected three increases—each of one-quarter point—in its federal-funds target rate over the course of 2017.
Assuming that the panel stands pat at the March 14-15 meeting, as the fed-funds futures market expects, that points to hikes at the June, September, and December confabs. But the futures market has priced in only two moves, the first in June and the second in December (unless the FOMC breaks precedent and imposes an increase at the November meeting, which isn’t supposed to be a “live” one with a scheduled press conference).
The Trump fiscal package surely will be a subject of the Capitol Hill inquisition this week, even though neither Yellen nor her questioners will know what’s in it or when it’s coming. The possible impact of the president’s proposals also enters into the formulation of monetary policy, even though it remains imponderable at this point.
A more esoteric matter for Fed watchers will be the central bank’s balance sheet, which has become the subject of increased discussion of late. The Fed’s assets ballooned to $4 trillion in the wake of the financial crisis, nearly five times its pre-crisis size. Critics had contended that this expansion would result in hyperinflation. Instead, it has mainly pumped up asset prices.
The Fed had planned to normalize its balance sheet whenever the crisis had passed, which it surely has, with the stock market setting records. And then the plan was to let maturing securities run off, rather than selling them outright.
“We believe that there is a sense of apprehension within the Fed with regard to moving too quickly to start reducing the size of the balance sheet, given that markets have shown much greater sensitivity to that process—judging by the infamous taper tantrum in the summer of 2013—than for the more orderly and tightly scripted process of gradual rate increases so far,” says Anthony Karydakis, chief economic strategist at Miller Tabak.
Markets are supposed to climb a wall of worry. Now, however, they continue to levitate on expectations of positive, pro-growth fiscal policies and continued accommodative monetary policies. As for the Fed, the uncertainties are relatively slight. But as “phenomenal” as the Trump tax plan may turn out to be, it’s a long way off at best.
Stop me if you’ve heard this one before. After a long spate of easy money, seemingly high-returning investments burgeon in popularity. Even if they’re rather opaque, their credulous but happy investors don’t mind, as long as the returns keep coming. Then, as the tide of easy money recedes, it’s apparent who has been swimming naked, to use Warren Buffett’s famous metaphor, and—to cite George Costanza’s equally famous observation—who has been subject to shrinkage.
It was after the financial crisis burst open that Bernie Madoff’s Ponzi scheme fell apart. Prior to that, many eminent financial institutions eagerly fed clients’ cash into Madoff’s funds without asking too many questions, as long as the returns came like clockwork. And those returns were just too regular to be true, coming without fail as the Fed steadily tightened policy from 2004 to 2007 and even after the mortgage bubble went bust afterward.
A similar scenario appears to be building again in China, according to J Capital Research’s Anne Stevenson-Yang. While there have been defaults of peer-to-peer lending and so-called wealth management products, the underpinning of these schemes—the property market—looks increasingly vulnerable, she writes in a report titled “Before the Deluge.”
In one case she cites, rising defaults are obscured by increasing loan volumes, in a manner reminiscent of LendingClub (LC), whose plunge followed presciently negative stories in Barron’s in 2015. Stevenson-Yang calls another a “straight-up loan-sharking company.”
Meanwhile, the biggest and best-run of the lot features all kinds of curious accounting, including earnings up just 2.9% in the third quarter while assets soared 49% from a year earlier. Its business includes sales of bundles of real estate loans, with 40% to 50% going to related entities, which typically raises red flags.
Disclosure is vague and shifting, and the luxury property ventures aren’t selling, but relationships matter more—as was the case with many of Madoff’s investors.
The Wild West atmosphere of Chinese investing is nothing new, of course. What’s different now is that the People’s Bank of China has been tightening its monetary policy, including engineering an uptick in its key money-market rate.
Research firm BCA notes that repurchase-agreement transaction volumes in the interbank market also have dropped since late last year. Along with regulators’ curbing of banks’ wealth management products and off-balance-sheet items, these actions “underscore the determination to rein in excesses in the banking sector,” BCA adds.
That could be viewed as the domestic counterpart to the PBOC’s actions to prop up the yuan in the face of capital flight. As Kopin Tan writes in the Streetwise column, that has drained China’s foreign-exchange reserves to below the $3 trillion mark. The capital outflow has slowed as Chinese authorities have stiffened restrictions on taking money out of the country. But it seems that rich Chinese want to move their funds before the deluge, as the title of Stevenson-Yang’s report suggests.