The world is a board game and we as normal citizens are not making the rules. As we have stated before, we cannot advise on or manage money based on the expectation that a calamitous event will occur. The most we can do as advisors, is to take the current situation and the most likely unfolding of potential unknown scenarios into account when structuring your financial roadmap. Charlie Munger, vice-chairman of Berkshire Hathaway and one of the wisest investors of the last century, passed away on Tuesday, November 28, at the age of 99. He often said that it is futile to make any investing decision based on forecasts of future results. That is an admission of ignorance, an understanding that the future is so unpredictable that it’s not worth even trying to predict it.
Being ignorant about the potential of our current financial system crumbling like a house of cards, prevents us from living in fear and squandering this one beautiful life we have. These potential threats to our immensely complex, man-made financial systems, can take the form of either natural disasters; or wrong or criminal decisions by the people who make the rules for this board game we live in (our governments); or a combination of the two, as we got a taste of with Covid in 2020.
If you are interested in the potential dystopian future that can result from an implosion of our financial systems, feel free to read books like Currency Wars by James Rickards; Endgame by John Mauldin and The Mandibles by Lionel Shriver. The main potential triggers for such an implosion will be too much debt and people losing trust in a major currency like the US$. As recently as 2008, we saw what too much debt can do to the world economies, when the global financial crisis rocked our world. Simplistically, what happened was that everything was going so well that people borrowed huge amounts of money from their banks to build houses. The banks created financial instruments called mortgage-backed securities and sold them to investors as a low-risk investment. When people couldn’t repay their mortgages and so many houses came on the market that valuations dropped, the proverbial bubble burst, and the world went into recession. Our whole financial system has little collateral backing it up. It is based on sentiment and promises.
The same happens to major companies every now and then. Just look at the disaster at Aspen and Tongaat when their debt became unbearable. Even on a micro scale you will see many households going under due to excessive borrowing. Another risk to our current investment stability is the strength of the US$. Because the US$ is the currency in which the majority of world trade is conducted, any instability or excessive weakening of the dollar can lead to spectacular fireworks. The USA’s debt is higher than its income and although it has always been high, the current level of 123% debt to GDP, is the highest it has been in a long time – and they continue to increase it. So if the US$ should weaken significantly in case, for example, BRICS succeeds in creating a new reserve currency and selling their US$ holdings in favour of the new currency, all the investments we have in US$ will collapse and our little dystopian story will come to fruition.
So at the end of the day we cannot invest based on what-if scenarios. Should we do so, we would have only a box of gold on an off-the-grid, self-sufficient smallholding somewhere in the bush, because anything else could in theory be wiped out overnight. The good news is that financial disasters are not that uncommon and we even have names for them, namely depressions and recessions. What we have learned from them is that the best way to avoid a complete permanent loss of capital when they happen, is to be well-diversified and to never allow yourself to be stretched too thin when it comes to your debt to income ratio.