Creating a Natural Hedge

NaturalHedge

QUESTION: Sir,

like many others I was fleeced with the gold as money story and took my losses and moved on, particularly as I ingrained the principles of investing and practise the discipline of day trading – that of obeying the buy/sell signals and not falling in love with the trade. As a resident of Switzerland I can see reason in monitoring and if a signal is generated (particularly in EUR/USD), buying US dollar denominated securities and perhaps finally a bit of gold and silver again, should currency flows shift and the SNB and the Franc be punished by the market for pegging itself to the Euro.

As a working fella with a mortgage in the local real estate market – purchased by fortune in 2002 before massive currency inflows inflated prices by some 50% – the one variable I cannot see or calculate is how far the Swiss real estate market could plummet should those capital flows shift out of country and continent. I have not used the price gains on paper as an ATM to finance personal spending as has been much the case in the US and to a lesser extent my country of origin Australia. The interest only mortgage has been a boon (and perhaps a

trap) in allowing us to live well in what is an expensive country and I now go through our own household version of austerity so as to be able to pay down some of the mortgage in order to improve that buffer of safety if housing prices should slump.

But this is our home and not a trading instrument that I wish to offload at a potential market top, so I need to have some understanding of the potential downside that could be inflicted. Do you have historical data that could help me better understand this phenomena and the cycle of price and time?

Sincerely and with much appreciation for your efforts.

LR

ANSWER: You have some time before real estate cracks in Switzerland. The new construction especially in office space there is indicative of the classic boom bubble. When real estate crashed after 1987, in Canada there were actually demolishing some building to reduce taxes.

I will doing a detailed piece of creating a NATURAL HEDGE for the trading seminar. Creating a Natural Hedge is what I was doing for many of the people who were taking over companies in the 1980s. Effectively, I would input a portfolio of assets (companies and real estate) based in each currency of location. Next, I would take this portfolio and run it through the model. Some portions will rise and others fall. I would then restructure companies based upon the model selling off assets in one country and buying others in another. The object was to create a natural hedge constructed from immovable assets and any residual would then be actually hedged in the market. In this manner, I could hedge a trillion dollars without having to try to enter the markets that could not handle the size.

The only real risk to remaining in Switzerland beyond the currency would be limited to geopolitical. The danger is Europe and its committing economic suicide by destroying its economy with high taxes, expanding government, which historically invites the predator. Europe is imploding with its own Marxist stupidity. Once Brussels was created, that becomes an entity of self-interest that will NEVER consider anything it does as the problem. The culprit will always be someone else. With Russia back in the Empire Building Model to regain its pride. Russia is still old world and believes territory equal might rather than an efficient economy. Japan is tiny from a territorial perspective yet to rose to the second largest economy before it blew itself apart.

Europe is rapidly disarming itself thanks to socialistic economics. Europe has to learn that an inefficient government does not work and that is what really broke the bank of Communism. This creates the geopolitical risk that cannot be ignored and historically reveals the pattern of how EVERY empire falls, and nothing, including the USA, will prove to the exception historically.

The best thing will be to create a Natural Hedge as much as possible. The people who were so gun-ho on gold and how it was money are now at it with Bitcoin. They have applied the same stories of hating the dollar and preach Bitcoin will have ATMs everywhere and displace the dollar becoming the new world currency. This is just the same gibberish. Just look at the tax-straddles of the 1970s where people discovered buying next year’s contract of gold and shorting the nearby this year allowed them to tax losses now and move profits forward. The IRS cam out with mark-to-market, fined the brokerage house for selling those deals, and then hit the people with interest and penalties retroactively. I knew people who lost everything at the end of the day back then.

NOTHING will be allowed to displace any government when it comes to taxes. They will always give people as much rope as they want to hang themselves. If they did it before, they will do it again. What we do has to be straight up – no schemes. There is no tax-free escape hatch these days.

This is what I did and ended up getting blamed for creating the takeover boom. I simply used currency and showed clients how to buy companies using a currency that depreciated. In this manner, I was able to convert debt into a performing asset.  They could figure out where the profits were coming from. Sometimes we made more money on the currency than the asset.

It still works with the model.