Daily Archives: July 7, 2021

Jack Cranston, writing from San Miguel de Allende

Editor’s Note: Cyprus has had one of the fastest-growing economies in the European Union during the past several years. However, it doesn’t seem that long ago when Europe looked on in despair as the island appeared on the brink of financial collapse.

In March 2013, Jack Cranston wrote about the “Cyprus Solution” as panic spread through the Cyprus financial system. Fast forward to March 2016, after a three-year, €10 million financial aid package, a raft of reforms, and austerity measures, the country exited as one of the more robust eurozone economies, albeit at the expense of those who had invested their hard-earned money in Cyprus banks.

The COVID-19 pandemic has interrupted Cyprus’s strong economic growth. To cushion the impact of the crisis, however, authorities seemingly learned from mistakes of the past, rapidly introducing a targeted set of fiscal and financial policy support measures that have helped limit loan defaults and job losses, enabling a rapid, albeit uneven, recovery.

Given how quickly we moved on from Cyprus being a unique “one-off” event to the Cyprus solution being the basis for a new model for rescuing collapsing banks, investors the world over need to realize that the world has changed.  The banking industry will never be the same, and bank customers now have to worry about ravenous governments inventing new justifications for confiscating their deposits.

The new mantra for rescuing troubled banks and bailing-out bankrupt countries is “deposit to equity conversion.”  This is where government authorities forcibly convert bank depositors’ funds into equity in a troubled bank, with no guarantee that the equity will have any value in the future.   From now on, a good rule of thumb will be when you deposit money in a bank, think of it as if you invested in the bank’s stock.  If you wouldn’t buy a bank’s stock, then you should be leery of depositing money in that bank. 

A potential safe harbor, at least for the near term, is that the confiscating authorities seem to respect the concept of deposit insurance.  Yesterday, in an incredibly revealing quote that lifted the curtain on the true plans of political authorities, Jeroen Dijsselbloem, the Dutch Finance Minister and President of the Eurogroup of eurozone finance ministers, in an interview with Reuters, said, “If there is a risk in a bank, our first question should be ‘Okay, what are you in the bank going to do about that? What can you do to recapitalize yourself?’ If the bank can’t do it, then we’ll talk to the shareholders and the bondholders, we’ll ask them to contribute in recapitalizing the bank, and if necessary, the uninsured deposit holders.”

In addition to this being the first admission that the Cyprus solution is the new model for dealing with failing banks, notice the reference to “uninsured deposit holders.”  Because of populist political pressure, the EU caved on taxing Cyprus deposits under €100,000, which was the threshold for Cypriot deposit insurance. Don’t count on this as your primary line of defense, but because it is evident that those with more than €100,000 on deposit don’t have sufficient political clout, holding more than that amount in a risky bank (undercapitalized) or in a potentially desperate jurisdiction is not advisable.

This leads to several takeaways from the Cyprus crisis that can serve as guidelines for what to do now.

• If you are a foreigner, especially one perceived to be taking advantage of “offshore” banking in a jurisdiction under the influence of bankrupt nation-states, your funds on deposit will now be a target.

• When selecting a bank, country risk has suddenly become a much greater concern.  If possible, you should consider stable countries with solid banking traditions such as Singapore, Hong Kong, Switzerland (as long as you are not hiding money), and Austria, as well as off-the-radar places such as Andorra and Norway.

• Although it is not as much to bank on as it used to be, a decent Plan A is that if you can’t open a bank account in a first-tier secure jurisdiction, then at least don’t hold deposits above the local deposit insurance limit.

• Holding assets in harder-to-confiscate forms is also a good idea. These include income-producing real estate (not in your home country) and precious metals.  Holdings of precious metals would ideally be in physical form (bullion coins and bars), with some in your physical possession, and some in offshore secure storage (not stored a bank!).

The downsides to holding assets in real estate and in precious metals are increased price volatility and illiquidity.  Real estate can be especially illiquid, and metals can be especially volatile.  So this presents a challenge for investors with a low-risk tolerance and who don’t want to hold the cash in a form, and in a place, where it could be easily confiscated.

That’s why we stick with the tried-and-true Permanent Portfolio approach developed by the late, great Harry Browne.  As a refresher, Browne recommended a simple 25% allocation of your core portfolio in the following asset classes: gold, cash, bonds, and stocks.  Even with the volatility of metals, and the risk that a particular asset class will produce no return, or even a loss, the balanced and non-correlated allocation of assets reduces overall portfolio volatility, and over time the portfolio has produced consistent and good returns.  The trick is to find the appropriate investments in each class. 

We prefer a mix of metals rather than just gold, being especially enamored of silver.  And for current income and risk reduction, you could hold a portion of your precious metals allocation in paper assets and then sell options against your holdings.  This is a good idea over the near term but be prepared to liquidate and convert the proceeds into physical metals if brokerage accounts come under attack.

Even better would be to use a separate entity that you control to hold those assets, or use a self-directed retirement plan, or a combination of both.  These add additional layers between your assets and the long arms of confiscating authorities.

Cash is not King these days, at the artificially low rates of interest manipulated by the Federal Reserve, but there are short-duration non-dollar fixed income investments that are almost as liquid as cash but generate better returns with less dollar risk. U.S. Treasury bonds are in the mother-of-all-bubbles so we would stay away from them, but there are many opportunities for reduced risk fixed-income investments that fit the bill.  And high-quality dividend stocks are a good bet for equity allocation. 

Now more than ever there is an urgent need to act.  It is quite clear that governments believe your private property is something to be confiscated to solve the problems that they created.  Get yourself and your assets out of harm’s way, or at least lay the foundation for a good escape plan.  Smart, international diversification is the key.

Jack Cranston is a partner of Sovereign X and resides in San Miguel de Allende.

Jack Cranston, writing from New York __________________________________________________________________________________________

Editor’s Note: According to an exposé in The Atlantic earlier this year, the U.S. government “maintains a kill list of people whom it condemns to die in secret and kills with drones.” Yet drone killings, which include American citizens, mete out death to individuals who have never been charged, tried, or convicted. Sound familiar? This is part 2 of a three-part series from Jack Cranston’s archives which illuminated this practice in 2012.

Unfortunately, the United States’ actions have only escalated during the past decade. These killings began under President George W. Bush, exploded under President Barack Obama, and accelerated under President Trump. According to Rolling Stone, reports estimate that Trump upped the pace of drone attacks by about four to five times the Obama rate, which itself was 10 times the rate of Bush. In a stunning development, NBC News published details of a confidential U.S. Department of Justice memo detailing the protocol for dispatching drones to kill U.S. citizens. Beyond its revolting subject matter, the memo is frightening because the justification is so broad for targeting an American to be killed by a drone attack.  The memo presents the case that only one of two conditions must be met:  1) the target must be a “senior operational leader” of Al-Qa’ida or 2) an “associated force.”We can leave it up to the CIA or military intelligence to classify someone as a “senior operational leader,” but what exactly is an “associated force?” According to the memo, anyone who “present[s] an ‘imminent’ threat of violent attack against the United States” qualifies for “a lawful killing in self-defense.” The assassination order “does not require the United States to have clear evidence that a specific attack on U.S. persons and interests will take place in the immediate future.” No requirement to have “clear evidence?” The Obama administration promotes the position that an American citizen can be assassinated if they were “recently” involved in threatening “activities.” What’s recent?  What’s the definition of threatening? What specific “interests” justify killing?” The definition of “associated force” is so broad that I could drive a super tanker through it. In the past, administration representatives such as John Brennan (White House Counterterrorism Adviser, current Director of the CIA, and progenitor of the drone assassination program) and Attorney General Eric Holder have misleadingly claimed that targeted killings are “consistent with the inherent right of (national) self-defense,” and can be justified when the target poses “an imminent threat of violent attack.” But the leaked memo, which goes by the ungainly title of “Lawfulness of a Lethal Operation Directed Against a U.S. Citizen Who Is a Senior Operational Leader of Al-Qa’ida or an Associated Force,” includes much broader definitions of self-defense and imminence. For example, the memo refers to a “broader concept of imminence” than any actual intelligence about a specific ongoing plot against the U.S. No need for “specific” or “actual” intelligence?  I’m beginning to doubt the intelligence of the people who dreamed-up this nightmare.  And Brennan has stated that the U.S. uses “a flexible understanding of ‘imminence’.”  Supertanker anyone? The memo goes on to state that a drone strike must be conducted according to “law of war principles.”  But here’s the rub: we’re not in a state of war.  Only the U.S. Congress can issue a formal declaration of war.  It’s a common misconception that the U.S. is engaged in a formal war on terrorism.  That’s just a catchphrase first used by President Bush after the 9/11 attacks. The U.S. is not even conducting a Congressionally approved “military engagement.”  The last one of those was “Operation Iraqi Freedom,” informally referred to as the Iraq War. And the U.S. is not even participating in a military engagement authorized by the United Nations Security Council.  The only one of those in the post-9/11 world is the 2011 military intervention in Libya. The Obama administration refers to its actions by the sanitized title of “Overseas Contingency Operation.”  It claims that the authority for its extra-judicial killings of American citizens is a law known as the 2001 Authorization for Use of Military Force (AUMF), now more than 11-years old.  The law was intended to authorize the President to use all “necessary and appropriate force” against anyone connected to the 9/11 attacks.  But it is now being used to cover the administration’s activities in what the White House press secretary has called a “new phase” of conflict with Al-Qa’ida. Obama, and Bush before him, claims the law as the legal basis of authority to kill “associated forces.”  But the original Congressional authorization was directed at those who planned and carried out the 9/11 attacks, or those who aided them, not any and all terrorists ad infinitum. And it’s not a formal declaration of war or a Congressionally-approved “military engagement.”  Once again, we have definitions wide enough for a supertanker.  Are all suspected terrorists and “associated forces” connected to Al-Qa’ida? And exactly what is “necessary and appropriate force?”  Does that mean war? The administration is hiding behind “war principles” to justify unconstitutional killing orders of Americans on American soil rather than have them classified as illegal assassinations.  Based on a series of executive orders, assassinations by the U.S. Government have been prohibited since the 1970s.  But the Obama administration claims that the prohibition doesn’t apply during wartime, even though war has not been formally declared. The circular logic makes me dizzy. In summary, you, as a U.S. citizen, could be targeted for assassination if you are considered to be an “associated force.”  No due process is involved.  The order to assassinate you does not require clear evidence.  It requires only that an administration official deems you to be an “imminent” threat, with the test of imminence being a “broader concept” or a “flexible understanding of imminence” rather than any actual intelligence regarding a specific plot against a vague concept of “interests.” And the administration claims that its unconstitutional killings are justified because of “wartime” conditions.  However, despite the fact that we are not formally at war, we are in a virtual and perpetual war that apparently will never end.  A war that works to the benefit of the administration so that it can expand its power owing to “emergency” conditions.  Thus, the exception to the assassination prohibition is permanently temporary. Get it? Remember when America was referred to as “the land of the free?” 

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Jack Cranston is a partner of Sovereign X and resides in San Miguel de Allende.