It's one thing for $1.2 billion to vanish into thin air through a series of complex trades, the well-publicized phenomenon at bankrupt MF Global.Jesse's Cafe and Market Ticker have additional thoughts, with which I agree completely. This completely violates the basic assumption that any financial assets you hold through a broker are legally yours and protected by law. You should immediately reassess ALL of your financial assets held through brokers. Here are a few steps I'd recommend:
It's something else for a bar of silver stashed in a vault to instantly shrink in size by more than 25%. That, in essence, is what's happening to investors whose bars of silver and gold were held through accounts with MF Global.
The trustee overseeing the liquidation of the failed brokerage has proposed dumping all remaining customer assets—gold, silver, cash, options, futures and commodities—into a single pool that would pay customers only 72% of the value ...
1) Immediately take your stock brokerage accounts out of "Type 2" (margin) and make them all "Type 1" (cash). If you have Type 2 accounts, your broker can lend out your securities to other banks (called "rehypothecation"), which is similar to what may have happened at MF Global. You don't need margin anyway unless you want to use risky leveraged stock and option strategies.
2) Consider taking your securities out of brokerage accounts entirely. You can request stock certificates be sent out to you, and you'll receive your dividend checks in the mail.
3) With respect to precious metals, there is no substitute for physical that you hold yourself or with a private storage firm such as Brinks that is not connected to a leveraged financial firm. We've warned before not to buy the ETFs, and that applies to futures and other derivatives. Just ask Gerald Celente or Bill Fleckenstein.
4) Don't hold any significant money in money market funds. Use FDIC-insured savings accounts or buy FDIC-insured short-term CDs instead. Many money market funds are invested in paper from European banks, and with funds paying essentially 0%, you are taking real risk without any compensation.
5) Where you must stay with a broker (for IRAs, for example), stick with independent, plain-vanilla firms like Schwab, e-Trade, Vanguard, or Fidelity. Avoid brokerages owned by the dirty, leveraged, global banks. See what Bank of America just did moving trillions of derivatives from its investment arm to its FDIC-insured bank arm? The global banks are ticking time bombs and they want to take their customers and the taxpayers down with them. Want to hide by going to 100% cash and Treasuries? Not so fast. Also in this week's Barron's, here is "Face-ripping inflation" from Lee Quaintance and Paul Brodsky of QB Asset Management:
The [trillions in systemic] bad debt could be restructured so that creditors get cents on the dollar. The QB partners doubt this will happen because it would cause too much pain.
The more likely outcome is that the central bankers print more base currency, reducing the buying power of the money already in circulation.Long-time W.C. Varones readers will recognize a familiar theme here. The unsustainable debt will be resolved either by inflation or default, and inflation is likely to be the political path of least resistance. I'm not as confident on the timing as Quaintance and Brodsky, as this has already taken longer to play out than I would have expected.
And voila! You have skin-peeling inflation.
"A full deleveraging of the banking system could mean that the dollar and other currencies will lose 70% to 80% of their purchasing power," Quaintance says, arguing that all major banks in developed lands will suffer because markets are so interconnected.
How should investors prepare if they buy into this Grinch-y world view? Buy gold and unlevered assets, says Quaintance. The losers in this scenario: holders of cash and "risk-free" Treasuries. Of course, cash and Treasuries are what risk-adverse investors favor right now.
Stay diversified out there.