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Charlie Atwill
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I manage a Registered Investment Advisory firm (AFCG, LLC) that follows an Austrian School economic and investment approach. We base our portfolio models and financial planning on a macro-based, top-down understanding of Austrian Business Cycle Theory, monetary policy, and a desire for "real"... More
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  • Bedrock 0 comments
    Oct 21, 2011 12:48 PM | about stocks: CEF, PHYS, PSLV, SDRL, SCPZF


    Seeking Real Value in a Transitory World
    Charles B. Atwill, CFP®
     In a world where an earthquake can move the entire island of Honshu (Japan’s main island) by an estimated 2.4 meters (almost eight feet), the term “bedrock” as a standard of permanence and immovability might ring hollow. The earthquake and tsunami that ravaged coastal Japan in March – quite literally – broke the geological moorings that tethered a country to the planet on which it resides. While the separation of landmass from planet was relatively brief, the destruction of large swathes of the coastline defies words. Tectonic forces like the ones involved in the Fukushima earthquake can shake the very notion that anything of this world is, indeed, permanent.

    As financial markets convulsed through much of the last two months, it was easy to question where exactly one could find safety amid the chaos. Few asset classes – outside of the US dollar and Treasury bonds – afforded much protection from the volatility. However, times like these can inspire one to think about what is valuable in an absolute sense, and what might be cast asunder in the violent forces of a financial tsunami. 

    In a “margin call” event such as the one we experienced last quarter, cash is king. During these events, big market participants (e.g., “hedge funds”), trading with massive amounts of leverage (i.e., “borrowed money”), may be forced to raise cash
    . When a hedge fund borrows money to invest, it is required to maintain a minimum amount of collateral to satisfy the lenders. If this requirement is not met at some point, a margin call ensues. At that point, the hedge fund must sell anything it can – at any price – to raise cash to meet the margin requirements. The result: many good, valuable assets are sold off indiscriminately and prices on them fall until buyers return. When this happens, the market price of an asset disconnects from its intrinsic value.

    Paradoxically, while cash (paper money) is the “safe haven” position
    sine pari during a rout, it is simultaneously dangerous to hold as a long-term position because of the ease with which it is being devalued by governments. Before modern central banking and the advent of multi-trillion dollar deficits, the effects of price inflation were, generally speaking, negligible. With central banks printing electronic money by the trillions and back-stopping entire sectors of the economy (not to mention entire countries at this point) paper currencies have lost much of their appeal as “safe havens” to store purchasing power over time. Once considered bedrock, cash is now more akin to quicksand, slowly devouring the holder until all purchasing power has been consumed.

    AFCG’s foundational investment classes continue to be precious metals, natural resources, and income-producing securities issued by financially strong entities. We are under no illusion that our investments are immune from shorter term periods of sharp volatility. Instead, we look to our investments as the bedrock of portfolios required to withstand the punishing circumstances of the global debt crisis, as well as the arduous test of time.
    The debt crisis has increased near-term volatility in the financial markets while making the case for owning assets of real value (gold/silver, food, energy, etc.) even stronger.
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