1
Survive the Fed’s
War on Cash
© 2017. Phoenix Capital Research, Phoenix Capital Management Inc. All Rights Reserved. Protected by
copyrightlawsoftheUnitedStatesandinternationaltreaties.Thisnewslettermayonlybeusedpursuantto
the subscription agreement and any reproduction, copying, or redistribution (electronic or otherwise,
including on the worldwide web), in whole or in part, isstrictly prohibited without the express written
permissionofPhoenixCapitalManagementInc.·AllRightsReserved.
Disclaimer: The information contained on this newsletter is for marketing purposes only. Nothing contained in this newsletter is
intendedtobe,norshallitbeconstruedas,investmentadvicebyPhoenixCapitalResearchoranyofitsaffiliates,norisittoberelied
uponinmakinganyinvestmentorotherdecision.Neithertheinformationnoranyopinionexpressedonthisnewsletterconstitutes
andoffertobuyorsellanysecurityorinstrumentorparticipateinanyparticulartradingstrategy.Theinformationinthenewsletter
isnotacomplete descriptionofthesecurities,marketsordevelopmentsdiscussed.Informationandopinions regardingindividual
securitiesdonotmeanthatasecurityisrecommendedorsuitableforaparticularinvestor.Priortomakinganyinvestmentdecision,
youareadvisedtoconsultwithyourbroker,investmentadvisororotherappropriatetaxorfinancialprofessionaltodeterminethe
suitabilityofanyinvestment.OpinionsandestimatesexpressedonthisnewsletterconstitutePhoenixCapitalResearch'sjudgment
asofthedateappearingontheopinionorestimateandaresubjecttochangewithoutnotice.Thisinformationmaynotreflectevents
occurringafterthedateortimeofpublication.PhoenixCapitalResearchisnotobligatedtocontinuetoofferinformationoropinions
regardinganysecurity,instrumentorservice.Informationhasbeenobtainedfromsourcesconsideredreliable,butitsaccuracyand
completenessarenotguaranteed.PhoenixCapitalResearchanditsofficers,directors,employees,agentsand/oraffiliatesmayhave
executed, or may in the future execute, transactions in any of the securities or derivatives of any securities discussed on this
newsletter. Past performance is not necessarily a guide to future performance and is no guarantee of future results. Securities
productsarenotFDICinsured,arenotguaranteedbyanybankandinvolveinvestmentrisk,includingpossiblelossofentirevalue.
Phoenix Capital Research, OmniSans Publishing LLC and Graham Summers shall not be responsible or have any liability for
investment decisions based upon, or the results obtained from, the information provided. Phoenix Capital Research is not
responsibleforthecontentofothernewsletterstowhichthisonemaybelinkedandreservestherighttoremovesuchlinks.
OmniSansPublishingLLCandthePhoenixCapitalResearchLogoareregisteredtrademarksofPhoenixCapitalResearch.OmniSans
PublishingLLC.POBOX2912,Alexandria,VA22301
1
Surviving the Fed’s War on Cash
TheGlobalCentralBanks,leadbytheFederalReserve,havedeclaredofWaronCash.
Historically,oneofthesafestthingstododuringacrisisistomoveasignificantportionofyour
holdingstocash.Astheoldadagesays,duringtheseperiods,“cashisking.”
Thenotionhereisthatcashisasafehaven.Andwhileearning1-2%ininterestdoesn’tdo
muchintermsofgrowingyourwealth,itsurebeatslosing20%+byholdingontostocksor
bondsduringtheirrespectivebearmarkets.
However,intoday’sworldoffiat-basedCentralPlanning,cashrepresentsaREALproblemfor
theCentralBanks.
Thereasonforthisconcernstheactualstructureofthefinancialsystem.Thatstructureisas
follows:
1) Thetotalcurrency(actualcashintheformofbillsandcoins)intheUSfinancialsystem
isalittleover$1.36trillion.
2) Whenyouincludedigitalmoneysittinginshort-termaccountsandlong-termaccounts
thenyou’retalkingaboutroughly$10trillionin“money”inthefinancialsystem.
3) Incontrast,themoneyintheUSstockmarket(equitysharesinpubliclytraded
companies)isover$20trillioninsize.
4) TheUSbondmarket(moneythathasbeenlenttocorporations,municipal
Governments,StateGovernments,andtheFederalGovernment)isalmosttwicethisat
$38trillion.
5) TotalCreditMarketInstruments(mortgages,collateralizeddebtobligations,junkbonds,
commercialpaperandotherdigitally-based“money”thatisbasedondebt)iseven
larger$58.7trillion.
6) Unregulatedoverthecounterderivativestradedbetweenthebigbanksand
corporationsisnorthof$220trillion.
Whenlookingoverthesedatapoints,thefirstthingthatjumpsoutisthatthevastbulkof
“money”inthesystemisintheformofdigitalloansorcredit(non-physicaldebt).Putanother
way,actualphysicalmoneyorcash(asinbillsorcoinsyoucanholdinyourhand)comprises
lessthan1%ofthe“money”inthefinancialsystem.
3
2
Hereisthefinancialsysteminpictureform.I’mnotincludinghardassetssuchasgold,real
estate,orthelike.We’reonlytalkingaboutrelativelyliquidfinancialassetsitemsthatcanbe
sold(turnedintocash)quickly.
Ofcourse,WallStreetwillarguethatthederivativesmarketisnotionalinvalue(meaningvery
littleofthisisactually“atrisk”).However,evenifweremovederivativesfromthemix,the
systemisstillveryclearlybasedoncredit,withonlyasmallsliverofactualphysicalcash
outstanding:
4
3
Putsimply,thevastmajorityofwealthintheUSisinfactdigitalwealththatmovesfrombank
tobankwithouteverbeingconvertedintoactualphysicalcash.
AsfarastheCentralBanksareconcerned,thisisagoodthingbecauseifinvestors/depositors
wereevertotryandconvertevenasmallportionofthis“wealth”intoactualphysicalbills,the
systemwouldimplode(theresimplyisnotenoughactualcash).
Remember,thecurrentfinancialsystemisbasedondebt.Thebenchmarkfor“riskfree”
moneyinthissystemisnotactualcashbutUSTreasuries.
Inthisscenario,whenthe2008Crisishit,oneofthebiggestproblemsfortheCentralBankswas
tostopinvestorsfromfleeingdigitalwealthforthecomfortofphysicalcash.Indeed,theactual
“thing”thatalmostcausedthefinancialsystemtocollapsewaswhendepositorsattemptedto
pull$500billionoutofmoneymarketfunds.
Amoneymarketfundtakesinvestors’cashandplunksitintoshort-termhighlyliquiddebtand
creditsecurities.Thesefundsaremeanttoofferinvestorsareturnontheircash,whilebeing
extremelyliquid(meaninginvestorscanpulltheirmoneyatanytime).
Thisworksgreatintheory…butwhen$500billioninmoneywasbeingpulled(roughly24%of
theentiremarket)inthespanoffourweeks,thetruthofthefinancialsystemwasquicklylaid
bare:thatdigitalmoneyisnotinfactsafe.
Touseametaphor,whenthemoneymarketfundandcommercialpapermarketscollapsed,the
oilthatkeptthefinancialsystemworkingdriedup.Almostimmediately,thegearsofthesystem
begantogrindtoahalt.
Whenallofthishappened,theglobalCentralBanksrealizedthattheirworstnightmarecouldin
factbecomeareality:thatifasignificantpercentageofinvestors/depositorsevertriedto
converttheir“wealth”intocash(particularlyphysicalcash)thewholesystemwould
implode.
Asaresultofthis,virtuallyeverymonetaryactiontakenbytheFedsincethistimehasbeen
devotedtoforcinginvestorsawayfromcashandintoriskassets.Themostobviousmovewas
tocutinterestratesto0.25%,renderingthereturnoncashtoalmostnothing.
However,intheirownways,thevariousQEprogramsandOperationTwisthaveallhadsimilar
aims:toforceinvestorsawayfromcash,particularlyphysicalcash.
Afterall,ifcashreturnsnexttonothing,anyonewhodoesn’twanttolosetheirpurchasing
powerisforcedtoseekhigheryieldsinbondsorstocks.
5
4
TheFed’seconomicmodelspredictedthatbydoingthis,theUSeconomywouldcomeroaring
back.Theonlyproblemisthatithasn’t.Infact,bymostmetrics,theUSeconomyhasflat-lined
forseveralyearsnow,despitetheFedhavingheldZIRPfor5-6yearsandengagedinthree
roundsofQE.
Letmeputthisverybluntly.TheFedandotherCentralBanksliterallytookthenuclear
optionindealingwiththe2008bust.Theyhavedoneeverythingtheycantotrashcash
andforceinvestors/depositorsintoriskassets.Butthesepoliceshavefailedtogenerate
growth.
Ratherthanadmittheyarecompletelywrong,CentralBanksarerevertingtomoreandmore
extrememeasurestodestroycashandforceinvestorstomoveintoriskagainsttheirwill.Even
moredisturbingisthefactthatwearebeginningtoseeeconomistswithclosetiestothe
CentralBankscallingfortheabolishmentofcashentirely!
…ashashappenedacrosstheworldinrecentyears,therecomesapointwherethose
centralbanksrunoutofroomtocut—theycanbringinterestratestozero,but
reducingthemfurtherbelowthatisfraughtwithproblems,thebiggestofwhichis
cashintheeconomy.
Inanewpiece,Citi'sWillemBuiterlooksatthisproblem,whichisknownastheeffective
lowerbound(ELB)onnominalinterestrates.
Fundamentally,theELBproblemcomesdowntocash.AccordingtoBuiter,theELBonly
existsatallduetotheexistenceofcash,whichisabearerinstrumentthatpayszero
nominalrates.Whyhaveyourmoneyondepositatanegativeratethatreducesyour
wealthwhenyoucanhaveitincashandsuffernoreduction?
…Buiter'snotesuggeststhreewaystoaddressthisproblem:
1) Abolishcurrency.
2) Taxcurrency.
3) Removethefixedexchangeratebetweencurrencyandcentralbankreserves/deposits.
Yes,Buiter'ssolutiontocash'sabilitytoallowpeopletoavoidnegativedepositrates
istoabolishcashaltogether.(Notethathe'sfarfrombeingthefirsttofloatthisidea.
KenRogoffhasgivenhisendorsementtotheideaaswell,ashaveothers.)
http://www.bloomberg.com/news/articles/2015-04-10/citi-economist-says-it-might-betime-to-abolish-cash
6
5
ItwouldbeeasytoscoffatCiti’sproposalascompletelyinsaneiftheFedhadn’t
publishedapaperbackin1999suggestingtheimplementationofa“carrytax”ortaxing
actualphysicalcashusinganexpirationdateifdepositorsaren’twillingtospendthe
money.
Thepaper,suggestedthatiftheFedweretofindthatzerointerestratesdidn’tinduceeconomic
growth,itcouldtryoneofthreethings:
1) Acarrytax(meaningtaxthevalueofactualphysicalcashthatistakenoutofthesystem)
2) Buyassets(QE)
3) Moneytransfers(literallyHANDOUTmoneythroughvariousvehicles)
Regarding#1,theideahereisthatsinceitcostsrelativelylittletostorephysicalcash
(thecostofbuyingasafe),theFedshouldbepermittedto“tax”physicalcashtoforce
cashholderstospendit(putitbackintothebankingsystem)orinvestit.
Thewaythiswouldworkisthatthecashwouldhavesomekindofmagneticstripthatwould
recordthedatethatitwaswithdrawn.Wheneverthebillwasfinallydepositedinabankagain,
thereceivingbankwouldusethisdatatodeductacertainpercentageofthebill’svalueasa
“tax”forholdingit.
Forinstance,iftheratewas5%permonthandyoutookouta$100billfortwomonths
andthendepositedit,thereceivingbankwouldonlyregisterthebillasbeingworth
$90.25($100*0.95=$95orthefirstmonth,andthen$95*0.95=$90.25forthesecond
month).
Itsoundslikeabsoluteinsanity,butIcanassureyouthatCentralBankstakethesesortsof
proposalsveryseriously.Indeed,JPMorganhasalreadybegunimplementingasimilarscheme
byforbiddingthestorageofcashinitssafedepositboxes.
AsofMarch,Chasebeganrestrictingtheuseofcashinselectedmarkets,including
GreaterCleveland.Thenewpolicyrestrictsborrowersfromusingcashtomake
paymentsoncreditcards,mortgages,equitylines,andautoloans.Chaseevengoes
asfarastoprohibitthestorageofcashinitssafedepositboxes.
InalettertoitscustomersdatedApril1,2015pertainingtoits"UpdatedSafeDepositBox
LeaseAgreement,"oneofthehighlighteditemsreads:"Youagreenottostoreanycash
orcoinsotherthanthosefoundtohaveacollectiblevalue."Whetherornotthis
pertainstogoldandsilvercoinswithnonumismaticvalueisnotexplained.
https://mises.org/blog/chase-joins-war-cash
7
6
HereisthesinglelargestbankintheUS,forbiddingdepositorsfromstoringcashina
storageboxorsafedepositboxattheirbank.Andvirtuallynooneevenrespondedin
outrage.
Here’salinktotheFed’spaper.TheauthorofthislunacyisavisitingscholarwiththeECB,
theFed,theIMF,andtheSwissNationalBank.Thefactthattwoofthosegroupshave
alreadyimposednegativeinterestrates(ECBandSNB)shouldgivewarningthatthesesortsof
ideasareactuallytakenveryseriouslybyCentralBanks.
https://www.phoenixcapitalmarketing.com/feddoc.pdf
Again,theFedhasdeclaredaWaronCash,anda“carrytax”iscoming.Inlightofthis,itis
imperativethatyoutakestepstopreserveyourwealthfromthis.
OneofthesimplestwaystodosoistomoveaportionofyourwealthintoGoldorSilverbullion.
Strategy#1:BuySomeBullion
Whatisbullion?
Bullionissimplyanothertermforactual,physicalGoldorSilverasopposedto“paper”Goldor
Silver,whichtradesviaeitherthefuturesmarketorinoneofthevariousGoldorSilver-based
ExchangeTradedFunds(ETFs).
Bullioncomesinoneoftwoforms:coinsorbars.CoinstypicallycontainanounceofpureGold
orSilver.Barsrangeinsizefromoneounceupto400+ounces.Youcanbuyeitherforasmall
premiumover“spot”priceorthecurrentmarketvalueofGoldorSilver.
Whatarethemostcommonformsofbullion?
Intermsofgoldcoins,therearethreecoinsthatcomprisethebulkofthebullionmarket.They
areKruggerands,CanadianMapleLeafs,andAmericanGoldEagles.WesuggestavoidingMaple
Leafsbecausetheycaneasilybescratchedwhichdamagesthegoldandreducesthecoin’s
value.
IntermsofSilvercoins,theeasiestwaytogetitisviapre-1965coins(oftentermed“junk”
silver).However,youcanalsogetsilverone-ouncerounds(coin-likemedallions)orSilver
EaglescoinswhichalsocontainoneounceofSilver.
Intermsofbars,youcanbuyeitherGoldorSilverbarsinavarietyforforms.However,theyare
muchbulkier,usuallyweighconsiderablymore,andarehardertomovearound.
8
7
WhyshouldIownbullion?
Historically,manyinvestorshavearguedthattherewasnopointtoowningbullionsinceit
didn’tproduceanycashflow.However,withthemajorityofGovernmentbondsnowyielding
lessthan1%andover$5trillionsportingnegativeyields…thisargumentisnolongervalid.
Owningbullionisameansofsecuringyourwealthoutsideof“papermoney”orthecashthat
theCentralBankswanttotax.Providedyoustoreitsecurely,it’sameansofpreservingyour
capitalandkeepingitunderyourcontrol.
WhyshouldIownbullioninsteadofanExchangeTradedFund(ETF)thatownsbullion?
ThereisconsiderableevidencetosuggestthattheGoldandSilverETFsdonotactuallyhaveall
theGoldorSilvertheyclaimto.However,regardlessofwhetherthisiscompletelytrue,atthe
endofthedayitismuchsafertohaveyourownphysicalGoldorSilverinhandasopposedto
buyingapaper-basedETFrunbyabankorotherfinancialentitythatclaimsitownsGoldand
Silver.
Afterall,ifthefirmthatownstheGoldgoesbankrupt,there’snoguaranteethatyou’llgetyour
handsonyourshareofthebullionanytimesoonifatall.Thiscompletelydefeatsthepurpose
ofbuyingGoldorSilver:tostoreyourwealthsafely.
HowmuchGoldorSilverbullionshouldIbuy?
Howmuchyoupurchaseisuptoyou.Wesuggesthavingatleastseveralmonths’worthof
expensesinGoldandSilverbullion.Someinvestinglegendshaveasmuch
WhyshouldIbuybothGoldandSilver?
Becauseifabankholidayiseverdeclared…orifpapermoneyisworthless,youdon’twantto
bewalkingaroundwithanounceofgold(worth$1k+)tobuygroceries.
Instead,youwillwantsomepreciousmetalsofsmallerdenominationtopurchasegoodsor
barterwith,hencetheneedforsomeSilver.
HowdoIbuyGoldorSilverbullion?
Thesafestwaytobuybullionisfromadealer.Thereareliterallyhundredsofdealerstochoose
from.TheUSmintprovidesalistofauthorizedcoindealersonitswebsite:
http://www.usmint.gov/mint_programs/american_eagles/?action=lookup
9
8
Wecannottellyouwhichdealertogowith,butlookforsomeonewho’sbeendealingforyears
(notanewbie).YoushouldALWAYSaskforreferencesfromthedealer(formerclientsyoucan
talktoabouttheirpurchases/experiences).
Besuretotalktothedealerforsometimeandaskhimorhernumerousquestionsaboutthe
industry,thecoins,etc.(feelfreetotesthimorherontheinformationwe’veprovidedyouwith
abovee.g.thethreemostliquidGoldcoins,etc.).Iftheycananswereverythingyouaskina
knowledgeablefashion,theirreferencescheckout,andyouverifyeverythingtheysaywitha3rd
party,youshouldbeOK.
Somewarningsignstoavoidaredealerswhotrytostoreyourbullion.Never,everEVERstore
yourbullionwithsomeoneelse.Alwaysstoreityourself.
HowshouldIstoremybullion?
Intermsofstoringyourbullion,youcanstoreitinasafedepositboxatabankorbuyahome
safefromTargetorWal-Mart(oraspecificsafestore).Personally,wedistrustsafedeposit
boxesbecausepartofthereasonforhavingGoldorSilveronhandisincasethere’sarunonthe
banksorabankholidayisdeclared.Forthatreason,wepreferhavingatleastsomebullionina
personalsafe.
Youcangetadecentsafeforanywherebetween$100and$1,000.BothTargetandWal-Mart
selldecentmodelsfor$50-$300.However,thereareplentyofothermoresophisticatedsafes
outthere.
OnasidenoteDONOTtellpeopleaboutyourbullionstashORyoursafe.TrustvirtuallyNO
ONEwiththisinformationexceptyourclosestlovedones(andwemeanCLOSEST).
Strategy#2:ConsiderOwningRealEstate
Overthelast30+years,therehavebeenalittleover20housingbustsindevelopedcountries.
Historically,thesebustsareusually6-7yearslongfrompeaktotrough;meaningfromthetime
thebustbeginsuntilthemarketbottoms.
TheUShousingbustbeganinearly2006.Withthatinmind,itissomewhatlikelythatthebust
endedin2013orso.Thisisnottosaythatpriceswillbegintosoaragain.Nordowesuggest
thathousingpriceswon’tfallagain.Butthelikelihoodofanotherfull-blownhousingcrashis
relativelylow.Andprovidedyoudon’tquickaccesstoyourcapital,realestatecanbean
excellentmeansofescapingtheWaronCash…whilealsoprovidingsignificantcashflows.
Withthatinmind,thereareampleopportunitiesintheUSrealestatemarkettogeneratesolid
10
9
cashflows.Investorstodaycanoftentimespurchaseadistressedorforeclosedpropertyat
pricesthatcancreatesubstantialreturnsbasedontheirrentpotential.
Forinstance,insomemarketstoday,youcanpurchaseadistressedorforeclosedhomefor
$100-$120K.Atthispricing,ifyoucanrentthehomefor$800ormorepermonth,you’re
lookingatacashyieldrangingfrom8%-11%.ComparedtotheyieldsofferedbySavings,
Stocks,orBonds,thisisanincrediblereturnforanassetthatisunlikelytocollapseifthestock
marketcrashes.
Home
Monthly
Cash
Price
Rent
AnnualRent
Yield
$120,000
$800
$9,600
8.00%
$120,000
$900
$10,800
9.00%
$120,000
$1,000
$12,000 10.00%
$120,000
$1,100
$13,200 11.00%
Savings
Accounts
0.25%
StockDividends
2.30%
10-Year
+orTreasury
3.00%
Obviously,noteveryonecanbuyadistressedpropertyincash.But,asthebelowchart
indicates,providedyoucanmakeadownpaymentof20%ormore,you’restilllookingata
returnoncapitalfargreaterthanwhatthemarketsofferyouwithlowerrisk(again,the
likelihoodofhomepricesfallinganother15%isrelativelysmallcomparedtothelikelihoodof
stocksdoingso).
Home
Down
Loan
Monthly
Annual
Returnon
Price
Payment Amount
Mortgage Rent
Profit
Capital
$120,000 $50,000
$70,000
$500 $600
$1,200
2.40%
$120,000 $40,000
$80,000
$554 $665
$1,330
3.32%
$120,000 $30,000
$90,000
$610 $732
$1,464
4.88%
$120,000 $20,000
$100,000
$660 $792
$1,584
7.92%
Again,thepointhereisthathousingoffersyoufargreaterreturnthatmostbonds…whichare
currentlyyieldingnexttonothing.
11
10
Strategy#3:AssessYourCustodyRisk
Thefinalstepmightbethemostimportant.Thatstepistoassessthe“custodyrisk”ofyour
variousholdings.
Custodyriskisalegalphraseusedtoconvey“whatdoyoureallyownwhenyoubuyan
investment.”
Intoday’sfinancialworld,virtuallynoonehastheactualphysicalsharecertificatesofthe
stockstheyownorotherassetsheldbytheirvariousaccounts/trusts/etc.Instead,theirshares
andotherassetsareelectronically“parked”attheirbrokeragefirmorsomeotherfinancial
institution.
Custodyriskassesseswhathappenstothosesharesorotherassetsintheeventthatthe
brokeragefirmgoesunderduetoinsolvency,negligenceorfraudulentaction.Itisessentiallya
legalframeworkthroughwhichyoumaintainownershipeveniftheentityholdingyourshares
orassetsforyou(thecustodian)goesoutofbusiness.
ThisisaHUGEissuethatisboilingjustbeneaththesurfaceofthefinancialsystem.TheSEC
recentlyperformedastudyofsome400-investmentadvisorfirms.AstheSECitselfstatedinits
reportapproximatelyone-thirdofthem(over140)failedtomeetcustodyrule
requirements.
Theissuesherearetoomyriadtolist,butsomeoftheminclude:
1) Alackofawarenessbyadvisorsconcerningthecustodyrule(read:theadvisorisn’teven
sureofwhetherheorshehascustodyoftheirclients’accounts)
2) Failurebytheadvisortohavetheassetsorsecuritiesplacedwithaqualifiedcustodian
firm(aqualifiedfinancialfirm)
3) Failurebytheadvisortohaveanindependentaccountantauditthefirm’sholdings(so
whoiskeepingtrackofwhatyourassetsareactuallyworthorwheretheyareforthat
matter)?
4) FailuretoprovideGAAPapprovedauditsofclientaccounts(read:thebalancesheetsof
theclientsfundstheyprovideddidnotmeetGenerallyAcceptedAuditingStandardsor
GAAP).
Mypointwithallofthisisthatmostinvestmentprofessionalsdon’tevenconsidertheseissues.
AgainroughlyONETHIRDoftheadvisoryfirmstheSECexaminedfailedtomeetcustody
rulerequirements.
Insimpleterms:thesefolkswerenotkeepingtrackofwheretheassetswere,weren’tproviding
12
11
theirclientswithtimelyupdatesofwheretheassetswhere,failedtopassspecialexams
concerningissuesofcustodyruleANDfailedtohaveindependentauditsoftheirclients’funds
performed.
Inotherwords…theydidn’treallyknowwheretheirclientsfundswere,howbigorhow
smalltheywere…infact,manyofthemdidn’tevenrealizethattheythemselveswere
legalcustodiansoftheirclients’funds.
Custodyriskgoesbeyondinvestmentadvisors.Indeed,theseissuesareendemictothefinancial
systemtoday.
Let’ssaythefinancialfirmwhichisactuallykeepingcustodyofyourassets(yourstockshares,
moneymarketaccount,etc.)goesbelly-up.Whathappensthen?Howquicklycanyouaccess
youraccounts?Howsooncantheybetransferredoutofthefirmtoanothercustodian?
YouseewhereI’mgoingwiththis.
Evenifanappropriatelegalframeworkisinplacetoeliminatetheriskoflossofvalueofthe
securitiesheldbythecustodianintheeventofitsfailure,itcantakeweeksorevenmonthsto
transferthesecuritiestoanewcustodian.Duringthattime,youcannotcloseoutopen
positions…theyareeffectivelyfrozen.
InthecaseofMFGlobal,someinvestorswerelockedoutoftheiraccountsandcouldn’ttrade
theirpositionsforweeks.Asaresultmanyofthemincurredmassivelosses(imagineowning
stocksandnotbeingabletosellthemduringacrash).
Ibringallofthisisupbecausecustodyriskisoneofthebiggest,mostimportantissues
toconsiderifyouwanttomaintainyourwealthwhenthenextroundofsystemicrisk
hits.RememberfromthecaseofCyprus…oncethingsgetbad,theydosoinahurry.
Withthatinmind,nowisthetimetobeassessingthecustodyriskforyourvariousassets.
Reviewthecustodyriskclausesforthefirmsthathavecustodyofyourportfolioandaccount.
Findoutwhatwouldhappenintheeventhatthefirmfailed.AndbyallmeansMAKESUREyour
moneyisactuallythere.
Thisgoesforyourstockholdings,bondholdings,moneymarketaccounts,evenyourGold.Ican
assureyouthatlarge-scaleinvestorshavebegunthisprocessalready.
Ifyouareforcedforwhateverreasontomaintainasignificantpercentageofyourwealthin
actualcash,assessthebanks’systemicimportance.Icannotprovidedetailedinformationhere
becauseIamnotataxorlegalexpert.HoweverICANsuggestthefollowing:
13
12
1) Donotkeeplargedepositswithanyofthe“systemicallyimportant”banks(anybank
toobigfortheFDICtopropup).
2) Donotkeeplargedepositsinanypubliclytradedbanksastheyareexposedtoanything
thathappensinthestockmarket.
3) Donotkeeplargedepositsinanybanksthathavelargederivativeexposure(seethe
graphbelowforalistofthetop25intheUS).
4) Putyourmoneyinabankthathaslowleverageandalowriskloanportfolio.
Belowisalistofthetop25“systemicallyimportant”banksbasedonderivativeexposures.
Theseareallbanksthatwillhavesignificantcustodialriskintheevenofacrisis.Indeed,asI
notedbefore,JPMorganisalreadyforbiddingclientsfromstoringcashinsafedepositboxesat
itsbranches.
Top25USbanksbyderivativeexposure:
Bank
JP Morgan
Citibank
Bank of America
Goldman Sachs
HSBC
Wells Fargo
Morgan Stanley
Bank of NY mellon
State Street Bank
PNC Bank
Suntrust Bank
Northern Trust
US Bank National
Regions Bank
BB&T
Keybank National
Fifth Third
TD Bank USA
Union Bank
RBS Citizens
BOKF National
Capital One
Flagstar Bank
Ally Bank
Huntington National Bank
Total Assets (in
Billions)
$1,850
$1,365
$1,448
$120
$196
$1,218
$71
$264
$200
$292
$168
$93
$342
$120
$176
$84
$114
$200
$87
$107
$26
$161
$14
$92
$56
14
Derivatives (in Billions)
$71,076
$55,510
$43,790
$41,230
$4,710
$3,755
$2,531
$1,264
$978
$383
$275
$213
$126
$109
$81
$78
$76
$69
$62
$38
$37
$32
$29
$27
$27
13
Somecommentatorshavesuggestedmovingmoneyabroadtoprotectyourcapital.However,
accordingtoUStaxcode,anyforeignbankaccountorownershipofaforeignfinancialasset
greaterthan$10,000mustbereportedtotheIRS.Failuretodosocanresultinfinesofupto
$250,000(or50%oftheamount)whicheverisgreateranduptoFIVEYEARSjail-time.
Again,Iamnotataxorlegalexpert.Ifyou’replanningonmovingmoneyoutoftheUStokeepit
safe(orwhereveryouarelocated)youNEEDtotalktoalawyeraboutwhathastobereported
andwhatdoesn’t.AndIdefinitelysuggestreviewingthecustodyriskofyourfinancialholdings
withanattorney.
Thisconcludesthisreport.Wecannotprovideveryspecificrecommendationsbecause
everyone’sindividualsituationisdifferent.However,theabovestrategieswillgoalongwaysto
helpingyoupreparefortheWaronCash.
GoodInvesting,
GrahamSummers
ChiefMarketStrategist
PhoenixCapitalResearch
15