Risk-Free Investing – Is It For Real?

March 29th, 2012 → 9:29 pm @ // No Comments

Posted by SilverBombSquad

What you need to know before investing in anything

Risk versus reward.

This is the underlying fundamental dynamic behind every willful decision in life.  Every time a choice in direction is made, it is a trade-off between the benefit to be gained and the potential for bad consequences.  Disproportionate potential for a negative outcome of a decision can equate to a cost that exceeds whatever reward, or potential reward may have resulted.  Alternatively, if the potential for gain is high enough, greater risk becomes more tolerable in trade.  Most often, choices that offer the highest potential for reward are accompanied by correspondingly higher potential for risk.  For some, any risk is too great and neutralizes any reward potential, for others it is just the opposite.  Everyone has their own level of toleration of risk.  Multitudes of influences, including background and present circumstances, combine within each individual to form their threshold of risk tolerance at any given time.  It must be considered.

In practice, the only risks that can be considered are those that are perceptible in some way, be it from historical precedent, mathematical probability, discernible influence of known variables, or simply the laws of nature.  The entire concept of insurance of every type is essentially intended to moderate risk.    Making a “good” decision, that is where the reward mitigates the risk, boils down to possessing accurate information about all of these factors as it pertains to the decision.  Since the goal of investing is to save and grow wealth, the risk factor is always an important element.  A methodical investment plan can be undone by the losses resulting from unconsidered risk.  Simplified, a diversified portfolio is often divided so that most of the funds are held in lower risk, even if lower potential yield, wealth preservation investments or assets and a smaller part of the funds are used as “risk-capital” and may be more freely “gambled” with in higher risk investments that have the potential to produce a positive return on investment and grow wealth.

It is primarily the first part…the wealth preservation part…the savings part of any portfolio that must be most carefully managed.  Money is saved so it can be there when needed later, such as for realization of future plans, for retirement, or even provision for off-spring.  Many investors and retirement savers were promised that their funds would be safe if they would trust in the security of blue-chip stocks, big-name brokerages and in various government assurances of full faith and credit, financial stability, and deposit insurance.  Many investors and retirement savers have been obliterated in the aftermath of the evaporation of this investment security mythology.

Some retirement savers and investors were completely sheared as their Individual Retirement Accounts, which had been bundled in the hoppers of diversified mutual fund management firms and then sunk into high-risk “derivative” investments.  They are derived from the bundling together of multiple debt instruments, such as mortgages, and sold as Mortgage-Backed Securities.  They were given the highest credit ratings based upon the companies that offered them.  The investors and retirement savers were assured by their brokers that these were the strongest and most secure places they could put their money.  After all they were backed by mortgages, which are backed by real estate, so there was little or no risk and on top of that, they would see their money grow as the mutual fund realized a profit at the maturity of the “securities.”

The problem was that these were not secure at all.  They instead were toxic assets composed of upside-down mortgages, where due to the plummeting real estate prices, the properties no longer represented an asset that could cover the mortgage, and of “liar” loans where little or no down payment equity was taken in from unqualified borrowers to offset their inability to realistically swing their payments.  The savers and investors believed they were making a safe move by opting for the sure and secure world of mutual funds.  In reality, their portfolios were gambled on toxic junk.  They were sold bad paper.  They were told it was good, but it was bad.  They were lied to.

The ones selling the paper knew it was bad and in the most despicable examples such as Goldman Sachs, made bets that it was bad paper.  In the infamous Abacus Collateralized Debt Obligations (CDO) scandal, Goldman Sachs pushed through its brokers and affiliates the sale of risky CDOs, then bet short against them, through the purchase of Credit Default Swaps (CDS) which amount to credit insurance policies.  If the insured security which had been bought with the hard-earned capital of the investors and savers were to tank, the credit default swap would pay off…big time.  That is, it would pay off for the holders of the defaults swaps (read Goldman Sachs), not for the investors whose funds had just imploded. These are usually bought as a hedge against loss by the owners of the referenced debt-based security.  They can also be bought by speculators who do not own any of the “investment” that is being covered from loss by the CDS and are essentially gambling that the referenced security will experience a “credit event” such as default.  These CDS derivatives are usually offered by one company and are referenced to the offerings of other companies.  In a legendary example of a total bankruptcy of ethics, marked by greed, corruption, and conflict of interest, Goldman Sachs bought credit default swaps on its own mortgage-backed securities or CDO products.  The Credit Default Swaps would have made a mountain of money for Goldman Sachs.  When charges were brought by the Securities and Exchange Commission, Goldman Sachs simply “settled out of court” without admitting any wrongdoing and paid $550 million in fines which were only a tiny fraction of what they had made on the deals.  Except for the public relations black eye, it was very good business for Goldman Sachs.  Meanwhile, the critical life savings of millions of American retirees are destroyed in a pit of corruption.

Others lost their assets when they were simply stolen by the brokerage house that they had entrusted them to.  Corruption and cover up were the hallmarks of the MF Global Holdings scandal when the company allegedly raided customer accounts just before filing bankruptcy.  it increasingly appears that instructions came right from the top as former Senator and Governor of New Jersey MF Global CEO : Jon Corzine gave orders to use $200,000,000 (200 million dollars) of investor funds to pay off an overdraft fee owed to the London offices of JP Morgan.  There are laws in the U.S. against the comingling, or mixing together of the funds of a brokerage house and those of its investors.  In the international mega-corporate world that MF Global is used to, these quaint national law isolationistic trade barriers can be ignored by moving money around internationally.  Mf Global put the investment funds of its American clientele into accounts in London, where there are no such restrictions requiring the segregation of funds.

MF Global had overdrawn one of its accounts at the London Branch of JP Morgan, so they transferred the money from their customers’ accounts to pay up.  It was the combined money of investors, which did not belong to MF Global that JPM received.  Cash-strapped Mf Global had been up for sale to Interactive Brokers and had certainly wanted to keep up the appearance of being a salable, solvent , going concern.  The “borrowed” funds probably would have been returned to customer accounts , had the deal gone through, but a few days before the sale, evidence of the missing customer “segregated” funds began to surface and the buy-out fell through.  MF Global filed for bankruptcy Oct. 31, 2011.  $1.6 billion in customer’s funds are still believed to be missing, as if they had vanished into thin air.

The money had, of course, been stolen to pay off MF Global’s gambling debts to the JPM grand casino-London Branch.  Upon the dissolution of MF Global, the Bankruptcy trustee Judge Louis Freeh planned to use the amount of funds that could be recovered for MF Global’s creditors (but not their customers) to determine the size of the massive “golden parachute” bonuses that its corporate executives would be paid.  A letter bearing the names of 21 members of the Senate Agricultural Committee and calling the plan ”offensive on its face” was sent to Judge Freeh pleading with him to not pay the bonuses.  The letter points out that,

“It is difficult to understand why you would even consider paying anyone a bonus while nearly $1.6 billion in customer money is still missing. And it is absolutely outrageous to propose paying bonuses to the very people who were responsible for the firm’s operational, legal, and financial management at the time customer money disappeared.

A fundamental principle of commodities trading is that the firm’s money must be accounted for separately and segregated from customer money. Throughout the long history of futures markets, no firm has ever lost customer money of this magnitude – until MF Global. The failure of senior management in this case is truly unprecedented.”

–Letter to MF Global Holdings Bankruptcy Trustee Judge Louis Freeh from the Members of the Senate Agricultural Committee

Defunct MF Global has bilked thousands of its customers out of their money, and if the bankruptcy Trustee says so, the very perpetrators will be handsomely paid from the proceeds of the ensuing fire sale.  The damage to the creditability of the entire commodities trading industry is indelible and is cited as the reason that many foreign investors now want nothing to do with U.S. equity and commodity trading houses.  Even for the risk adverse investors who had trusted a major trader to wisely use and protect their money, this turned out to be the riskiest investment possible.

If preservation of value is the intended goal for a saver or investor then neither the bond market offerings of non-interest paying T-bills, nor the anemic interest rates of bank-offered Certificates of Deposit are anywhere close to keeping up with inflation.  Even cash in hand is not safe, as the value of it is frittering away by the second through the hidden tax of inflation, as millions of dollars per minute are added to the money supply.  When the inflation/deflation of the 2008-09 debt-based equities bubble burst, many saw how their carefully picked financial stocks could suddenly wither and die.  All other equities classes including energy, real estate, the resources sector, and the short and long term bond markets and others all took unfathomable hits in value. Stocks are inherently risky.  These are high-risk portfolio growth investments, not preservation of value investments.

Bank accounts, trade accounts, indeed all electronic accounts are as vulnerable as the power grid to innumerable forms of catastrophe, including the small but real possibility of Electro-Magnetic Pulse (EMP).  Even NASA has warned of the real potential threat and is studying the sun’s activity with the aim to be able to predict, or at least give some advance warning of Coronal Mass Ejection (CME) or solar flare events that may inflict damage to the electrical infrastructure due to EMP.  Even human caused EMPs, resulting from a high altitude nuclear burst could potentially throw the affected areas back to a pre-electrified age.  If such an event were to occur it would be years if not decades in normal circumstances to obtain the electrical replacement components, particularly transformers, to rebuild.  With the exodus of heavy industry from the United States, none of these components are made in the U.S.  The time it would take to rebuild the grid all depends upon the assumption that any manufacturing facilities are still in operation, and that if they are, that they are going to be willing to sell the parts needed to repair an EMP-disabled America.  In line with the maxim that “If you can’t touch it, then you don’t really own it”, money in an electronic account can disappear in a millisecond.

As the dollar and all other fiat currencies have plummeted in value, it has reflected in the “rising” price of gold which has averaged nearly 20% per year gain against the dollar for over a decade.  The price of gold has not really gone anywhere; the value of the dollar in gold has gone down.  Real, physical gold and silver, in one’s tangible possession, is the only guarantee against loss due to inflation, liability, failure of fiduciary responsibility, or downright criminal misappropriation.  CDs, Mutual Funds, stocks, bonds, or paper cash, all of which are denominated in dollars, cannot hold or preserve value in the long term.  Only precious metal can do that.


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