What kinds of catastrophes would you hope to survive? Is preparing for an economic meltdown even on your To Do list?
Can you protect yourself from extreme events with judicious investment decisions? Is it even worth trying?
If it’s a giant meteor heading towards Slough then you’d want to go in the first impact. Slough might gain something aesthetically, but it wouldn’t leave a future to relish.
But what about a more modest society-rattling scenario? Some kind of economic collapse, say.
How might such a scenario unfold and what will it do to your investments?
My experience of economic meltdowns is modest. So rather than making up my own scenario, I’ll lean on someone else’s imagination.
The Mandibles
In her book, The Mandibles [1]*, Lionel Shriver follows the plight of one family in their attempts to survive the mother of all economic meltdowns. It’s based in the US but it’s not too hard to imagine a UK parallel.
In the novel, runaway US debt turns international investors sour on Treasuries. The dollar loses its privileged position in favour of a new international reserve currency, the bancor [2]. The US is excluded from the new currency bloc, however, and in a fit of presidential pique the US defaults on its debt.
Further beset by a wide-scale cyber failure, a flailing government turns to money printing and capital controls. The ensuing hyperinflation leads to nationwide economic and social breakdown.
Sounds plausible.
The permanent portfolio?
Faced with such a situation how would you like your investment portfolio to be positioned? Is there any mix [3] of asset types that would help?
Who knows. But let’s look at what happened to the Mandibles.
Equity and Bonds
Mr Mandible senior started the book with a vast equity and bond portfolio, the inheritance of which had his offspring jockeying for position.
Unfortunately, the entire US finance system ground to a halt after the debt default. It never recovered in its original form. The value of the Mandible’s portfolio dropped to zero before the end of chapter one.
A complete and permanent failure of stock markets has happened before. The clearest examples required a communist revolution, as in Russia in 1917 and China in 1949.
Other examples often followed war. For example in Germany in the aftermath of WWII, where hyperinflation followed by currency reform effectively wiped-out pre-war investors.
In short, equity and bonds may not be the rock to cling to in a catastrophe.
Cash
Real-world examples of hyperinflation making cash next to meaningless are plentiful.
In post-WW1 Germany, workers were paid twice a day because cash was losing value so quickly. The price of bread went from 250 marks to 200 billion marks over the course of 1923, with subsequent (possibly apocryphal) tales of people taking wheelbarrows of cash to the bakers.
In 2009, after an intense bout of hyperinflation, the government of Zimbabwe released a 100 trillion-dollar note. Hopefully the wheelbarrows could be left at home for a few days.
The Mandibles suffered a similar fate. In the early stages of the crisis, the one remaining family member with any cash coming in needed to spend it on food the same day, as it wouldn’t be worth much a day later.
By the end of the book the dollar had disappeared entirely, to be replaced by the bancor.
Gold
For the Mandibles, gold [4] was still very highly valued but that led to its own problems.
Any gold held by a nominee financial institution disappeared overnight, along with the equities and bonds.
Beyond that though, the US government outlawed the private ownership of gold. Enforcers went door to door to confiscate all gold items, from jewellery to gold teeth. Houses were ransacked and residents subjected to vigorous interrogations. Only those with the most secret hiding places, nerves of steel, and an impenetrable poker face managed to hold on to something.
Again, history suggests this is a credible response to currency and debt crises.
Whilst not quite the same brutal confiscation suffered by the Mandibles, both the US (1933) and the UK (1966) have previously deemed it necessary to restrict the private ownership of gold.
Property
Freehold property ownership proved a better investment for the Mandibles. Whilst in the short term they were thrown out of their house by gun-wielding squatters (who were later thrown out by even scarier gun-wielding squatters), once some sort of normality was restored a few years later, property ownership was reinstated.
Communist revolutions tend to be less kind to property rights, but if you can avoid those then it seems there’s a fair-to-middling chance you’ll get to keep your house by the end of any upheaval.
Although you may need to budget for a new kitchen and carpets by that point.
Guns
Guns often seem to play a key role in apocalyptic tales of human endurance, but starting gun fights is not a good survival strategy.
As we saw with the squatters, there’s always someone else with a bigger gun. It might be best to stay out of the arms race altogether.
Skills
Much more useful is to acquire some practical skills. If you can grow food, fix the roof, or dig a cess pit, you will find yourself in demand.
Developing a new skill is the greatest investment of all. It cannot be confiscated and will pay you dividends for ever. But you need to pick the right subject.
One of the older Mandibles was an economist back when the economy was still functioning. While his offspring fought for their collective survival, he dedicated himself to writing a thesis on why he was right about everything all along, despite not foreseeing the economic collapse.
Spoiler: he did not survive until the end of the book.
(Some less generous readers may think that economists aren’t of much use even when the economy is functioning.)
Survival
Some of the Mandibles did survive to see some sort of order restored. Key to this was joining a small community on a ranch owned by their uncle. Which was handy.
Survival is hard on your own. You need friends with complementary skills to make a go of it.
One of the Mandibles even managed to hang on to some gold throughout the whole ordeal. That helped them get back onto their feet.
Plan A
So there you have it. Own a property, bury some gold in your garden, practice your poker face, get some friends, and go to carpentry evening classes.
Survival guaranteed!
But what if the next real disaster doesn’t look like this? Will any of the above help you when it comes to the crunch?
Or maybe there won’t be a disaster, but you end up eating cat food [5] because most of your portfolio is buried under the Hollyhock.
Plan B
I do not have gold buried in the garden (although of course I would say the same if I did). And I’m told my face always betrays exactly what I’m thinking – which can sometimes be embarrassing but more to the point means I would not fare well under interrogation.
I do own a property, and I maintain good relations with my daughter and her partner who live in a rural area and grow some of their own food. But my motivation for this was not related to surviving economic meltdown.
Whilst a cautious approach to investing – founded on diversification and a hefty cash buffer – will hopefully enable me to ride out the ups and downs of the market rollercoaster, I have no contingency plans for anything worse.
While the sun is shining, I will enjoy my good fortune in life and maybe go out for a walk [6]. I’ll worry about the gun-toting squatters when they turn up at the door. If I’m lucky they never will.
Fingers crossed.
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