Opinion: How Much of Your Wealth Should be Portable?
It’s possible you’ve never thought about wealth portability. In dry discussions of portfolio allocation we hear mind-numbing terms like: growth, yield, risk-tolerance, hard-assets, liquidity, T-bills, long-term performance, fundamentals, P/E ratios, diversification, and the like. Unless you’re fascinated with wealth management (and not all of us are), it’s enough to put a person to sleep.
But rarely—if ever—do you hear talk of “portability.”
Well, pour a cup of coffee, because that’s our topic today. And given our current—and very unstable—global economy, this issue’s important.
Let’s start with today’s Wall Street Journal and their lead article about the Brits’ decision to back off from tax rate cuts. (“UK Says Tax Cut For High Earners Is Off Table,” 10/4/22)
When British Prime Minister Liz Truss was elected last month, disciples of Reagan were hoping she was a reincarnated version of Margaret Thatcher, who understood that only a serious dose of supply-side economics could rescue the Britain of her time. Thatcher administered that dose, and the British economy flourished—as of course it would.
Along comes Liz, determined to reprise that formula for success, with a strong break from the feckless, climate-mesmerized, bewildered policies of her predecessor Boris Johnson. She dips her toe into a reasonable supply-side tactic: lowering marginal tax rates at upper incomes—the one policy most proven to generate growth—and everyone has a case of the vapors.
Not surprisingly, that Keynesian-infested drag on the world economy known as the International Monetary Fund, took her out to the metaphorical woodshed and gave her a few swipes with a hickory stick. Why? Because—as Gerard Baker wrote later in today’s Journal— “The International Monetary Fund, an institution whose job was once to provide assistance to countries with external account difficulties…attacked the proposals for increasing inequality.”
So the IMF is now taking the same approach to a financial crisis as Kamala Harris takes to allocating hurricane relief: focusing on somehow making everyone “equal.” Didn’t they already try that in the Soviet Union?
And apparently Liz is no Maggie after all. The new prime minister caved, and the Bank of England (equivalent to our Fed) tossed in some Keynesian stimulus for good measure by buying more bonds—a benign way of saying “printing more money”—as a way to dampen Britain’s economic woes.
The larger point is that while conservative governments are trying to make a comeback, at least in the EU, the entrenched demand-siders, who only want to see government grow larger, won’t let them. And that’s a problem.
The economic cliff of low growth and high inflation from which Reagan rescued the U.S., and Thatcher rescued England, the world now seems determined to drive off, at high speed, in full Thelma and Louise style. (Spoiler alert: the two women in that film deliberately drove their car over a cliff at high speed—unwittingly creating the perfect metaphor for latter day Keynesian economists.)
What’s all this got to do with wealth portability? Just this. As economies become less stable, and move inexorably towards hyper-inflation and severe recession, what investors need to do to protect themselves necessarily changes. At some point yield and even growth need to give way to wealth preservation. And at some point, wealth-preservation needs to give way to wealth portability and concealment.
The chart below highlights this concept.
Healthy economies are good for equities and—depending on how healthy—you may not need diversification beyond equities.
In slightly less healthy—but still stable—economies, bonds become a good addition.
When truly uncertain times arrive, you’ll want to add metals and perhaps other hard assets that are proven to stand the test of time, despite currency depravities.
Eventually, when an economy becomes unstable, expect some combination of recession, high interest rates, high taxes, and dangerous inflation. Or even all of the above, if you remember Jimmy Carter.
Worse, this is the dangerous realm when governments start to focus on self-preservation. They become aggressive. Wars often begin, not just as a distraction but to rally voters to a single enemy. Successfully demonize some overseas ruler, blame all our problems on him (“Putin’s price hike!”), and citizens will ignore real causes of economic woes. Hitler did it with the Jews. George W. Bush, with Saddam Hussein. Today, it’s Vladimir Putin we’re all supposed to hate, and the Biden administration is pouring gasoline on the flames of the Ukraine war arguably for just this purpose
Also during unstable times, talk begins of more draconian solutions. It’s no coincidence that politicians are now talking about the need for a wealth tax, and higher marginal rates on income. We haven’t yet heard talk of capital controls on the U.S. dollar, but that time-tested means of depriving citizens of their savings is never far below the surface, when hyper-inflation approaches. Arguably worse, this time, it’s the growing enthusiasm for a digital currency controlled by a central bank. Gee, what could go wrong, when Uncle Sam is able to know everything you purchase, and begins to favor certain purchases over others. Will social credit scores be far behind, based on those purchases?
While such a parade of economic horribles might seem far-fetched today, is it? Did anyone predict how rapidly the government would expand its powers to control most all aspects of our lives, when the virus arrived? When we’re facing not a health crisis, but a currency crisis, or even a “climate crisis” what limiting principle will constrain the inevitable growth of the State “for the greater good.”
Somewhere during this process, investors need to focus not just on preserving wealth, but protecting it. At this point, all those things you’re used to caring about: yield, growth, liquidity and so forth, arguably give way to shielding your assets from an avaricious government determined to stay in power.
What asset class deserves your attention during this kind of economic uncertainty? Certainly not equities or bonds. Real estate? Very visible and not at all portable. Metals are almost always held in vaults, hundreds of miles away from the owner. And is there anything less portable than gold bullion?
This author will never advocate an investment strategy that involves breaking the law. But the key is to see the coming danger, before those laws are passed. Other than perhaps crypto, no wealth is more portable than diamonds. Several million dollars of value can be carried in a shirt pocket and none of it will show up on a radar scan when crossing borders. Plus, diamonds have reliably safeguarded wealth for thousands of years. They’ve stood the test of time that crypto has not. And no collapse of an electric grid will render them mute. That De Beers’ slogan about diamonds being forever has something to it.
Investors today need to consider where on the “Economic Continuum” we are, and where we’re going. Having a percentage of one’s portfolio in a truly portable and concealable asset makes more sense the further towards unstable and confiscatory times we move.
DISCLAIMER: The author, Jacques Voorhees, is CEO of Icecap.Diamonds, a company that operates a diamond trading platform for hard asset investors. Nothing in this article is meant to provide investment advice.