Puts and Hard Assets

We may be witnessing the greatest gamble in the history of finance.

The Federal Reserve has had 15 different policies since 2009. There has been forward guidance first for 2012, then 2013 and now 2015. We’ve had QE1, QE2, QE3 of which there was part (a) and part (b), operation twist and then currency wars. “When you have fifteen policies in five years you don't know what you are doing,” said James Rickards an industry insider turned whistle-blower. Rickards has an impressive Curriculum Vitae. He worked on Wall Street for 35 years, was a principal negotiator of the1998 bailout of the Long Term Capital Management (LTCM) by the Fed, he previously used his financial expertise to aid the US national security community and is now the senior managing director for market intelligence at Omnis Inc, a consulting firm.

Rickards latest book entitled, “The Death of Money,” which predicts an imminent collapse of the International Monetary System is raising hairs on the back of the necks of the monetary authorities.

But the book's title isn't provocative, since within the last 100 years the monetary system has already collapsed three times. The first collapse occurred in 1914 and then again in 1929. The last collapse of the Monetary system was in 1971. So perhaps there is a 30 or 40 year pattern emerging here. If so, the next collapse of the monetary system maybe three of four years overdue. “That doesn't mean it’s going to happen tomorrow but no one should be surprised when it does,” said Rickards.

The central bankers have been entrusted with godlike tasks of saving us from a financial collapse and an economic meltdown. In many instances finance ministers have washed their hands of the situation and delegated monetary authority to the central bankers. Central bankers, with limited tools at their disposal, are being told by their finance ministers that they are now our only hope and not to mess it up. Publicly, the central bankers are putting on a brave face, they have to; the rational being that despite the common belief that the fiat currencies arn't backed by anything, that is not entirely true. While gold is not backing fiat currencies it does have something very important backing it, which is trust. When confidence evaporates in a fiat currency it then collapses like a pack of cards.

“Privately the central bankers will tell you that they don't know what they are doing, they are making it up as they go along, if it works fine, they will do a bit more, if it doesn't they'll pull back,” said Rickards. Perhaps this explains why there have been 15 different polices in the last five years. But having a captain improvising at the helm in stormy waters doesn't inspire investor confidence.

So what is the bottom line then?

“The bottom line is that a crash is coming,” said Rickards. It would look like a collapse in confidence in the US dollar, added Rickards. People will keep using the US dollar, while they believe it is a good store of value, but the moment they stop doing so, then the currency could collapse like a house of cards. Confidence, or trust in a fiat currency shouldn't be taken for granted, but the Fed is doing just that, added Rickards.

What should investors do and how can they protect themselves from a crash?

Watch what the top players are doing. With respect to Warren Buffet and the other billionaires it is always more prudent to analyse their actions, rather than their words. So let's examine some recent investments made by Buffet . A few years ago Buffet bought Burlington Northern Railroad , these are hard fixed assets consisting of rails, right of way rolling stock, switches, signals etc. Buffet didn't buy a few shares, he bought the whole shebang. The rail road makes money by moving hard assets, freight, such as coal, wheat, steel. It is the ultimate hard asset and it makes money by moving hard assets. Buffets next big purchase was oil and gas natural resources. So now he can move his own oil on his own rail-road. “Buffet is dumping dollars as fast as he can and investing into hard assets,” said Rickards. So in essence it doesn't matter what happens to the dollar or other currencies because he still owns a rail-road oil and natural gas,these are things that people need.

So Buffet is getting out of paper assets and moving into hard assets.

These moves have been seen before. For example, Rickards likens the period we are in to that of the Weimar republic back in the 1922/23 with hyper inflation we all know who the losers were, the middle class with savings in the bank, annuities and pensions. But there were a lot of winners too, such as industrialists, people who had factories, people who had gold in Switzerland etc, they were not wiped out. They then were in position to buy up all the losers and consolidated their industrial holdings.

The recent stock market rally is being driven on at high octane with a combination of heavy leveraging and low volumes. The billionaire investors are buying put options, betting that the market is going down. The “Soros Put,” has risen to a record high and other billionaire investors are following suit.

These money masterminds can't just pull the plug on their billion dollar stock portfolio investments. If they start exiting the market they could be the snow flake that creates the avalanche/they don't want that to happen. After all, they have made tidy profits in this rally. How do they play then? They enter another market, the derivatives markets and buy put options. So even if the market were to crash these investors high up the food chain will make money on the fall on their puts, which offsets the losses on their stock portfolio. In other words, these guys have hedged their portfolios and they are in essence protected from a crash.