Owning Gold Is The First Step To "Freedom Insurance"

Authored by Nick Giambruno via InternationalMan.com,

It’s predictable…

A government in need of cash will turn to destructive “solutions.”

Money printing, higher taxes, and more regulations often come first. Unfortunately, these are just the hors d’oeuvres before a 10-course meal.

As they become increasingly desperate, governments implement increasingly destructive policies. This might include capital controls, price controls, people controls, official currency devaluations, wealth confiscations, retirement account nationalizations, and more.

The same pattern has played out again and again around the world and throughout history. The worse a government’s fiscal health gets, the more destructive its policies become.

This is the root of political risk.

It’s no secret that political risk is snowballing in many parts of the world. This is especially true in the US and Europe, where welfare and warfare spending continues unabated. It doesn’t matter which party is in power.

But no matter where you live, international diversification can greatly reduce the threat your home government poses to your personal and financial wellbeing.

You know the benefits of diversifying your investment portfolio. If you put all of your asset eggs in one basket, you could lose your entire portfolio if that basket breaks.

The same idea applies to political risk. If your home country “breaks”—and turns to the destructive policies I just mentioned—you could lose everything.

Most people have medical, life, fire, and car insurance. You hope you never have to use these policies, but you have them anyway. They give you peace of mind and protect you if and when the worst does happen.

International diversification is the ultimate insurance policy against an out-of-control government. Think of it as “freedom insurance.”

It frees you from absolute dependence on any one country. Achieve that freedom, and it becomes very difficult for any group of bureaucrats to control you.

The results can be life changing.

The Easiest First Step

It’s crucial to place some of your savings beyond the easy reach of your home government. It keeps that government from trapping your money if and when it implements capital controls or outright asset seizures. Any government can do either without warning.

The ultimate way to diversify your savings is to transfer it out of the immediate reach of your home government and into something tangible.

Something that cannot be easily confiscated, nationalized, frozen, or devalued at the drop of a hat or with a couple of taps on the keyboard—while retaining as much privacy as legally possible.

Something whose value is recognized around the world and is not controlled by any government.

Gold (and silver) fit the bill perfectly.

There is nothing particularly American, Chinese, Russian, or European about gold. Different civilizations have used it as money for millennia. It’s always been an inherently international asset.

Buying gold is perhaps the easiest step you can take towards diversifying your savings.

When you buy gold, you trade in paper money—which the government can devalue and confiscate at will—for a hard asset that’s been a stable store of value for thousands of years.

Gold is universally valued. Its worth doesn’t depend on any government.

In other words, simply buying gold is the easiest way to lessen the political risk to your savings.

Freedom Insurance

Somehow, someway, your home government will keep squeezing your pocketbook harder. It will keep subjecting you to escalating, arbitrary, and burdensome regulations and restrictions.

Expect more government and less freedom all around.

With each passing week, the window to protect your personal and financial freedom closes a bit more.

Fortunately, you don’t need to be hostage to a desperate and out-of-control government.

International diversification is a time-tested route to freedom. Wealthy people around the world have used it for centuries to effectively protect their money and their families.

Buying gold is an important first step.

But there’s much more to do…

The US government gets bigger, more invasive, and more aggressive by the day. But you can take concrete steps to protect yourself from this hostile giant.

That’s why New York Times best-selling author Doug Casey and I just released an urgent guide, Surviving and Thriving During an Economic Collapse. Click here to download the PDF now.

Morgan Stanley: "We Haven't Seen A Shift This Severe In Over A Decade"

While the plunge in cross-asset correlations, which as recently as last fall was at all time highs, has been duly documented in recent weeks, nowhere is it more obvious than in the following chart from Morgan Stanley which shows the firm"s global correlation index.

Morgan Stanley"s Andrew Sheets summarizes the stunning move as follows: "Regional correlations, cross-asset correlations and individual stock and FX correlations have fallen simultaneously. That"s unusual; we haven"t seen a shift this severe in over a decade" and ultimately calls it for what it is: a "crash" in correlations unlike any seen before. 

He then concedes that while "crash" is not a term used lightly adding that "our editors here at Morgan Stanley won"t let us use it without a good reason" he "struggles to think of another word to describe just how much, and how sharply, cross-asset correlations have fallen. In just four months, we have gone from a market of unusually close linkages across markets, to one with usually divergent returns."

There are three direct implications from the move:

1. Lower correlation should mean a better "macro" trading environment (since each market isn"t the "same" trade). It is a mixed blessing for diversification, lowering overall portfolio volatility, but also making hedging through "proxies" harder.


2. Lower cross-asset correlation is common in "late cycle" environments, fitting our preference for equities > credit. Meanwhile, USDKRW remains our favourite "proxy" hedge in a lower correlation world, given its linkages to several macro risks.


3. We"d expected correlations to rise again if growth data disappointed. Since lower correlation has helped to depress volatility, hedges that benefit from both correlation and vol moving benefit from unusually good pricing now. Our favourites are AUDUSD, gold and EURUSD.

Sheets then says that the sharp drop in cross-asset correlation is not a fluke. It represents a decline in correlations at each of the three key "levels" that we care about – cross-asset, crossmarket and intra-market. Our correlation indices (Exhibit 2) focus on the first two of these, while the last is an important addition.

• Cross-asset correlation (50% of our index): This refers to how closely prices in different assets are moving relative to each other (credit vs. equities, equities vs. rates, equities vs. FX, etc.). Declines here have been driven by a more ambiguous relationship of rates to equity and credit in recent months. Rates-equity correlation has been this poor only during the taper tantrum and then before that in 2006/07. The dollar has decoupled from stocks, commodities and yields, which have rallied in a rising dollar environment.


• Cross-region correlation (50% of our index): This refers to how closely prices in different regions of the same asset class are moving relative to each other (i.e., US vs. EM equities, European vs. Japanese rates, EUR vs. GBP). Declines here have been sharp as well, as monetary policy and political risks have an impact. Intra-fx correlations have also changed – notably, USDJPY correlations to a number of risk currencies have become weaker.


• Intra-market correlation: This refers to how closely prices of different securities within an index are moving (i.e., are the stocks within the S&P 500 all moving together, or not). We use different indices to measure this, which we plot in Exhibit 2.

From an economic perspective, the dramatic move is troubling because such a decline is common in "late cycle" environments, as "idiosyncratic" stories (company-specific M&A, tweets) are larger drivers than economic or earnings fears MS adds. The decline is directly linked to the lower realised volatility seen in credit and equity markets; when underlying components are moving in different directions, it is harder to get large shifts overall.

How does the transition come about? Unusually accommodative monetary policy helped to raise linkages between global asset classes. As this policy tightens, it"s reasonable that these linkages should decline. But there"s another, more "normal" force at work here: late in the cycle, we"ve often seen lower correlations.

There are several reasons for this. Deep into an expansion, higher economic confidence reduces the likelihood that many markets will panic at the same time, and means market-specific stories are often bigger drivers than the more binary question of "recession, or not?"

Sheets then points out that a correlation of this magnitude both helps and hurts investors, and notes that "Any market with diverse drivers has positives and negatives."

On the plus side, it should be a better backdrop for "macro" trading. The last six years have seen unusually bad performance of macro hedge funds relative to a 60:40 portfolio. There are several explanations, including simply that these funds have made bad calls. But it seems reasonable that it"s hard to extract alpha from macro trends when all markets are moving together. With that shifting, the backdrop should be better. Over nearly two decades, hedge fund returns have outperformed a 60/40 portfolio more often in a low correlation environment than a high correlation environment (see Exhibit 6). Lower cross-asset correlations are also good for any globally diversified portfolio, reducing its volatility all else being equal.

And then there is the question of volatility. In an amusing note earlier today, Bernstein strategist Inigo Fraser-Jenkins writes to "prepare for higher idiosyncratic stock-level volatility under a Trump presidency due to “off-the-cuff” tweeting." However, for now the risk of a volatility spike appears remote, as it appears to trail equity correlation.

Ultimately, what happens to cross-asset correlations next will depend on Trump: should his fiscal policy plan disappoint, and the market revert back to the "monetary stimulus" mindset, correlations will spike back up. On the other hand, if the status quo persists, the index may drop even more as all legacy cross-asset linkages are broken. Whether that finally results in some long overdue alpha creation for hedge funds, many of whom recently flipflopped in their outlook of trump, remains to be seen.