Portfolio Risk Control: We Are All Blind Before We See

By Ferris Eanfar, Managing Partner, Vision Bancorp

It’s All About Risk Control. Portfolio Risk Control

How do you “control risk”? Unfortunately, most asset and money managers don’t fully understand how to effectively control risk in their client portfolios. They may say they “manage risk” or “measure risk” or “analyze risk” and they may use impressive technical jargon, but the majority of financial advisors, money managers, traders and portfolio managers don’t understand how to quantify and control risk in real-time. If you can’t actually control risk in real-time, then all the typical risk management jargon and back-testing analysis is a waste of time and resources. Vision Bancorp’s team has a long history of revolutionizing financial service industries; so we know something about controlling financial risks by building market-leading financial services technologies that solve real-world challenges. In this article we will explore how investors and their portfolio managers can quantify, measure, monitor, manage, and control risk in real-time.

What is Risk?

This should be a very simple question with a very simple answer, but most people make it much more complicated than it needs to be. In the context of investment portfolio management, “risk” is simply the possibility of losing money. (Note: Losing purchasing power is implicitly included in the phrase “losing money”.) This reality can be easily observed by recalling the natural questions that people instinctively ask when they are considering a financial investment of any kind. For example: “What’s the risk of a bad investment?” The answer is “losing money.” Or “What’s the risk of inflation?” Losing money. “What’s the risk of a collapse in the stock market?” Losing money. “What’s the risk of interest rates rising/falling?” Losing money. “What’s the risk of getting bad investment advice?” Losing money. In all conceivable investment scenarios, the risk is always pure and simple: Losing money.

How do You Avoid Losing Money?

This is the real question, which requires a bit more time and attention to the details. To avoid losing money you need to follow a straight-forward process:

  1. Identify Risk. Market risk, liquidity risk, price risk, inflation risk, systemic risk, political risk, interest rate risk, underlying company performance risk, model risk, credit risk, environmental risk, counterparty risk, margin call risk. . . . Risk Managers around the world can easily identify many risks. How many of these risks can influence the performance of your portfolio? All of them. How many of these risks can you really control? None of them. What! . . . If we can’t control any of those risks, how exactly does a Risk Controlled Asset Management System work? Simple, there’s only one risk you need to effectively identify and control: Money Manager Risk.

  2. Measure Risk. You have your money manager in your cross-hairs, now it’s time to perform some mathematical analyses on your money manager’s historical performance data using algorithms and formulas that would probably give Stephen Hawking a mental challenge. (I said the process was “straight-forward”, not easy.)

  3. Monitor Risk. After every trade made within your trading account(s), compare the ongoing outputs from the previous step to relevant benchmarks over a defined period of time to detect deviations from your money manager’s expected and/or desired performance.

  4. Risk BudgetCreate Risk Budget. Define a “Risk Budget” as a percentage of the cash value of your portfolio, which defines exactly how much of your portfolio you are willing to lose to achieve a given rate of return. This is the opposite of how most money managers and investors think. So pay close attention to the following question because this principle is the deceptively simple and profoundly important core of the entire Portfolio Risk Control and Risk Optimization Process: What rate of return are you willing to accept per unit of drawdown risk? In this context, “unit of drawdown risk” would be any currency unit, e.g., Dollar, Euro, Renminbi, Yen, Rupee, etc., used to measure the maximum peak-to-trough decline in an asset’s value within some defined period of time during a money manager’s historical performance.

  5. Allocate Risk. Based on the analytical steps above, and with a clear understanding of your Risk Budget, allocate a portion (or all) of your portfolio to the money manager(s) whose maximum drawdown has never exceeded your Risk Budget. This process can be as simple as finding a money manager who has never had a drawdown of more than 10% during the previous 10 years; or as complicated as engineering an entire blended, risk-weighted, multi-asset-class portfolio with hundreds of money managers, strategies, fund-of-funds and corresponding aggregated individual Risk Budgets. Although allocating risk and corresponding funds across a large multi-manager portfolio can get complicated, the Risk Budget dramatically simplifies the process for portfolios of any size. However, the real magic comes next.

  6. Control Risk. Armed with your Risk Budget, your automated analytical systems humming, your performance reporting tools aimed menacingly at your money manager, and decades of financial trench warfare experience to guide you, you’re now able to hold your money managers strictly accountable to your individual Risk Budget. Actually, in my firm’s case the whole process is easy because it’s fully automated using our real-time Omni-Sector Countertrend Algorithmic Risk-Controlled Asset Management System (Yes, the technical name is ridiculously long so we simply call it “OSCAR"™.) to automatically detect in real-time whenever any money manager connected to OSCAR™ reaches a client’s Risk Budget.

  7. Automate Risk Control. Using an automated Risk Risk Management Performance ChartControl Asset Management System, as soon as the client’s Risk Budget is reached, an alert should be sent to the client and to the Relationship Manager in the firm who’s responsible for the client, and then the money manager is instantly blocked from trading anymore of the client’s funds. At that moment, the client can select another money manager with a Risk Budget that’s more appealing or the client can liquidate the portfolio, withdraw the funds and spend some time on the sidelines until the client finds another money manager with a more compelling Risk Budget. In a well-managed firm, the entire risk control process can occur within minutes, including protecting the client’s portfolio from poor performance, re-allocating the funds to a better performing money manager, and even re-balancing the entire portfolio to exploit new opportunities in any exchange-traded market.

A Journey of a Thousand Trades Starts with Effective Risk Controls.

In the mid-1800s the travel time required to ride a horse over the treacherous Oregon Trail across the United States was six months. Today the same distance only takes six hours by airplane. When it comes to portfolio risk management, most money managers are still wandering aimlessly on the Oregon Trail, exposed to myriad risks that threaten their livelihoods every day. The money managers who know how to measure and control portfolio risk in real-time have an unfair advantage because they can manage much larger portfolios and efficiently serve many more clients, which means they can earn more and/or work less and enjoy more time with their families at home.

The portfolio risk control process is not complicated to understand conceptually, but no matter what anybody tells you, if they don’t have a system that automatically enforces a Risk Budget against the money manager’s real-time performance, they are not controlling portfolio risk. If this approach to portfolio management seems complicated to implement, you’re right, but only if you’re wandering down the old Oregon Trail of portfolio management.

Managing a Portfolio Without a Risk Budget is the New Definition of Insanity.

Einstein said, “The definition of insanity is doing the same thing over and over and expecting different results.” By that definition, there are many insane portfolio managers repeatedly exposing their clients to the same risks year after year and expecting different results. This helps to explain why so many money managers are struggling to generate alpha for their clients despite the persistent buoyancy of the equities market. It’s not that some money managers don’t occasionally have good years, it’s that they rarely have consistent performance over any significant period of time because they get sloppy, fall prey to style drift and other gotchas that erode their performance. This is why managing a portfolio without a Risk Budget is like driving a car down the freeway without a break pedal. Sooner or later you and your clients will crash.

Looking Back to See the Future of Portfolio Management.

My firm’s asset management team built our real-time risk control system because it felt like we were on the Oregon Trail as all the usual money management risks were flying at us at the speed of a 21st Century globally connected world. After we fully automated the processes for our internal asset management needs, we realized that a fully automated risk-controlled and risk-optimized portfolio management system would inevitably change the way all portfolio managers run money. Revolutions don’t happen overnight so don’t expect your financial advisors to understand how to use and enforce a Risk Budget in real-time on their own, but ask yourself this simple question: “If ‘risk’ simply means ‘the possibility of losing money’, and if I don’t want to lose money, then why would I allow my portfolio to be managed without a real-time Risk Control System automatically enforcing a Risk Budget?”

We Are All Blind Before We See.

See the light of automated Risk Control.Those who embrace the light of truth usually see the path to prosperity much faster than those who dwell in the dim rituals of the past. It may not be today or tomorrow or next week, but at some point in your future, your portfolio will inevitably get bombed by something that some trader or money manager will vigorously describe as a Black Swan. At that moment, you will hear the echo of these words in your head. You will begin to yearn for a futuristic world where portfolio risks are tamed, money managers are held accountable for their performance, volatility is less fearsome and returns are more consistent, the banking system is less vulnerable to cowboy traders, and the global community of investors and their portfolio managers can breathe a collective sigh of relief knowing their assets are being managed responsibly and consistently. Indeed, the future of real-time risked-controlled portfolio management looks bright . . . .

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About the Author:
Mr. Eanfar is a Managing Partner at Vision Bancorp, which specializes in commodities-backed asset management, commodities trading. His professional experience spans diverse environments including technical development, media, finance, military and government affairs. Mr. Eanfar can be contacted at the website: https://visionbancorp.com.

Finding Certainty in a World of Economic Instability

By Ferris Eanfar, Managing Partner, Vision Bancorp

Description: /images/articles/chaos.jpgFrom London to Athens, Dublin and Madrid, the Euro Zone has been rocked by riots and political turmoil because global banks and Western politicians have driven their economies into the ground. Although the situation in The Middle East is even more tragic, most Americans have believed their lives are relatively unaffected by the suffering in distant places with names like Cairo, Tripoli, Damascus, and Tehran.

However, regardless of the reasons, the Euro Zone is different from the perspective of global investors. Riots and burning cars in global banking centers like London and Dublin strike fear into financial markets because it reinforces an underlying suspicion that something in these Western societies is fundamentally broken. This suspicion is metastasizing into a conscious collective fear that is sending shock waves throughout the global economy and cracking the very foundations of Western Civilization.

In Periods of Crisis, Normalcy Bias is Your Worst Enemy.

Normalcy bias may be the most lethal killer during any crisis because it causes people to blindly assume that things will get better without any substantive evidence to support their assumption. This causes people to waste precious time at precisely the time when immediate and decisive action is needed to survive. Normalcy bias results in unnecessary deaths and financial losses during natural and man-made disasters because it leads to a lack of preparation to deal with the violently shifting conditions that occur during a disaster, which leads to inadequate shelter, supplies, evacuation and contingency plans.

/images/articles/normalcy-bias-lemmings.jpgNormalcy bias causes people to severely underestimate the impact of a crisis. They blindly assume crisis conditions will improve despite being exposed to well-substantiated reasons to believe that inaction will lead to severe damage. This creates cognitive dissonance in their minds, which can only be eliminated in two ways: a) Become a victim of normalcy bias and ignore the warnings and evacuation recommendations or b) overcome the normalcy bias and escape the danger.

 

 

Europe’s Fires Will Spread to the U.S.

/images/articles/recession-global-financial-crisis.jpgThe Euro Zone is deteriorating rapidly and there is no rational reason to believe that conditions will improve any time in the foreseeable future. The World Bank, IMF and ECB will not be able to magically solve the structural economic challenges that are causing the problems in the Euro Zone. Even relatively strong countries like Germany are being pulled down into the flames and will not escape unscathed due to the interconnected economies within the European Union. Europe is burning, but it is a relatively small smoldering ember compared to the raging economic and political infernos that are very likely to start sparking up all over the United States later this year.

When contrasted with Europe, in the United States there appears to be relatively less frustration with deteriorating economic conditions, but that is probably only because the welfare checks have generally continued to flow to over 45 million Americans, keeping the most severely impacted people relatively docile. However, as welfare benefits expire, unemployment continues to rise, and persistent budget deficits force American politicians to cut welfare spending for all but the most needy individuals, we will see a dramatic increase in the number of riots and violence in the U.S.

Comparing the Great Depression with Economic Conditions Today

When you walk down most streets in America today it may not seem like a Great Depression is upon us, but there is no escaping the reality that the fundamental social and economic conditions throughout the world today actually have more catalyzing force to trigger a global economic crash than the conditions that triggered the Great Depression that began in 1929. Major market collapses are rarely perceived as obvious trends when we are living through them. Not until years after the event when historians impassively summarize the speed and magnitude of a crash are we able to clearly see the trends. This is because historians are compelled to conceptually compress all the discrete events that comprise the “crashing process” into a singular “crash” so that the events and accompanying lessons can be more easily understood by our posterity.

Most Americans and Europeans are currently living the story of the frog in the frying pan: When the water is gradually heated to the boiling point very few frogs perceive the heat; so they do not try to escape the frying pan until it is too late. Historian John Brooks captures this psychological process in his description of the Great Depression years in 1929-1933:

“[The Great Depression] came with a kind of surrealistic slowness . . . so gradually that, on the one hand, it was possible to live through a good part of it without realizing that it was happening, and, on the other hand, it was possible to believe one had experienced and survived it when in fact it had no more than just begun.”

The following table compares the economic conditions in the U.S. and most other countries around the world today with the conditions at the beginning of the Great Depression:

Adverse Economic Conditions

Today

Great Depression

The banking system collapsing.

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Tidal wave of foreclosures sweeping the country.

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Tumbling housing prices.

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Bear market ravaging Wall Street stocks.

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High unemployment (over 20%; “official” rate is bogus).

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Overall deflationary asset spiral (CPI inflationary).

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Interest rates recklessly low.

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Consumer confidence abysmally low.

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Debt-to-GDP ratio greater than 100%.

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Huge trade deficits.

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Huge foreign reserves deficits (-$3.8 trillion w/ China/Japan).

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Rapidly decreasing manufacturing capacity.

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The economic conditions that led to the global economic collapse in the late 1920s were bad, but there is no question that the fundamental economic conditions today are significantly worse.

The following chart illustrates the debt problem in the U.S. by providing some historical context and by identifying the sources of debt that are crushing the U.S. economy. Any one of the sources of debt depicted in the chart, which are even higher in 2011, would be enough to drag down the productivity and economic prosperity of a nation. However, when combined, these massive amounts of debt represent an insurmountable national crisis that is virtually guaranteed to end in economic collapse, devastating wars, widespread riots, and a prolonged economic depression that is likely to last at least a decade.

multi-source-debt-chart.jpg

The following chart simplifies the data in the previous chart to help illustrate the magnitude of the debt problem in the U.S. today. The debt problems are even worse in the Euro Zone nations and elsewhere where riots have already begun to erupt frequently.

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Sources: U.S. Treasury, Census Bureau, Bureau of Labor Statistics
The following chart illustrates how the Nixon Administration’s decision to abandon the gold standard in 1971 has culminated in economic disaster.

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U.S. Treasury Bonds are NOT a Safe Haven

/uncle-same-life-support.jpgInvesting in U.S. Treasuries is not a safe strategy at all. Bill Gross of PIMCO, the world’s largest mutual fund, has already dumped all his U.S. Treasuries, and he said, “I cannot conceive of lending money to the U.S. government for 30 years” because of the growing debt burden and unprecedented spending by the U.S. government. Warren Buffet and many other prominent investors are jumping out of the Treasuries game as well.

Anybody who thinks U.S. Treasuries are still a safe haven is suffering from a severe case of normalcy bias. The cumulative debt burden illustrated above has resulted in U.S. federal government debt exceeding 100% of U.S. GDP, total U.S. debt (government, consumer, and corporate) exceeding 300% of GDP, and various other problems. Even if we ignore all the political factors that significantly diminish investor confidence in the U.S. Government’s ability to manage its finances responsibly, which the ratings agencies include in their analysis, the U.S. debt burden alone will force all the ratings agencies to downgrade U.S. Treasuries. Truly independent ratings agencies like Weiss Ratings have already announced multi-notch downgrades of U.S. Treasuries and have accused Moody’s, S&P and Fitch of negligently under-stating the risks associated to investing in U.S. Treasuries.

The inevitable ratings downgrades on U.S. Treasuries will continue to occur, which will mandate increased interest rates for the U.S. Government thus making it much more expensive for the U.S. Government to fund its endless budget deficits. This will inevitably push the national debt to nearly $20 trillion by 2015. In fact, this is probably an optimistic figure because it does not take into account the inevitable rating downgrades and corresponding financial burden from interest rate hikes, nor the inevitable increases in consumer household debt and corporate debt between now and 2015.

“Inevitable” is the operative word here to emphasize that no amount of wishful thinking or “but, what if . . .“ theories will reduce the inevitability of these risks to global investors. The risk of direct default and/or indirect default (through inflating away the debt) by the U.S. Government is inevitable, which means that U.S. Treasuries will perform terribly over the next 10 to 30 years. The recent investor flight into Treasuries is merely a knee-jerk response based on the market’s collective normalcy bias, i.e., millions of people still insist on assuming the full faith and credit of the U.S. Government will protect their investment, but there is absolutely no rational reason to believe that U.S. Treasuries will keep pace with inflation, which will inevitably result in real investor losses caused by the ongoing economic crisis now and into the foreseeable future.

Economic growth in the U.S. and most Western nations will be flat or negative during the next decade as both private and public credit freezes. Even if Western nations suddenly adopted a savings mentality like there was up until the 1980s, it would take at least a decade to save enough money to start lending in volumes that would significantly increase economy-wide productivity. It is not enough for a handful of large companies to squeeze a few more percentage points of profitability from automation, workforce reductions and other efficiency gains and call that “economic growth”, which is what self-interested politicians and bullish pundits have been trying to do since the 2008 spasm of this ongoing global economic crisis.

The United States Has Lost Control of Its Destiny

The following chart illustrates the declining value of the U.S. Dollar since 1973. When the USD declines in value, two major consequences occur: 1) all your existing cash and non-cash assets become worth much less (asset deflation) and 2) everything you buy and consume on a regular basis becomes much more expensive (CPI inflation) because the U.S. is completely dependent upon foreign countries to produce everything you see in your homes and supermarkets. Literally everything in mainstream America today is dependent upon the manufacturing and petroleum production capabilities of other countries that do not have America’s best interests at heart.

currency-index.png

The following chart illustrates two critical dynamics that have forced the U.S. to relinquish substantial control of its economy: The U.S. trade deficit and the corresponding sell-off of U.S. assets to foreign investors. This correlation between the trade deficit and foreign-owned U.S. corporations, real estate, and other assets is an inevitable consequence of running long-term trade deficits. The reason these consequences are inevitable is because nations holding USD-denominated foreign reserves can only use those reserves in two ways: 1) Buy U.S. Treasuries (finance our debt) and 2) buy U.S. companies, real estate, and other assets.


Sources: U.S. Census; U.S. Treasury
The massive sell-off of U.S. assets over the past 30 years to foreign investors, amounting to over $20 trillion (only U.S. securities depicted in the chart above), has forced U.S. policy makers to lose their ability to effectively act in the U.S.’ own self-interest, which has resulted in the U.S. effectively losing its sovereignty. This is one of several reasons why U.S. politicians have been impotent to avert the economic crisis that is threating the U.S. economy today despite the fact that hundreds of economists and business leaders have publicly predicted everything that is happening today. Given the conflicting interests imposed upon American policy makers from domestic and foreign special interest groups, there is no rational reason to expect these trends to change in time to avert an economic collapse. In fact, this trend will certainly accelerate.

During an Economic Crisis Commodities are Precious

/images/articles/commodities1.jpgThe only reason anybody would continue to keep their cash and cash equivalent assets tied to the sinking U.S. Dollar is if they are (1) ignorant, (2) in denial, or (3) brain-dead. Normalcy bias is one of the most powerful delusions, which often keeps people tied to the U.S. Dollar until it is too late and their portfolio is totally worthless. Do not allow normalcy bias or the falling U.S. Dollar consume your wealth and destroy your ability to afford the quality of life you desire.

At my firm we tell clients to immediately convert their funds into Swiss Francs to protect their principle and then invest the funds in an investment vehicle that is primarily focused on gold. The gold investment vehicle does not necessarily need to be 100% backed by stored physical gold as long as:

  1. The asset manager’s overall strategy does not depend on the rise and fall of the stock market, which is sometimes called a “non-correlated” or “negative beta” fund.
  2. The asset manager has access to deeply discounted commodities pricing.
  3. The asset manager’s strategy is exclusively focused on buying and selling gold and other strategic commodities that will provide an effective hedge against the falling U.S. Dollar, inflation, and realistic potential to capture some profit from the buying and selling of the actual physical commodities.

Your Hedging Strategy is Paramount

/images/articles/profit_from_returns.jpgIn today’s unpredictable economic environment and into the foreseeable future, if you can consistently protect your principle from the falling U.S. Dollar and inflation and capture a few percentage points of profit you are doing very well. However, for a gold and commodities-based strategy to work, the asset manager must have direct access to the physical product and must have a strong and proven hedging strategy that can generate returns regardless of which direction the market moves; otherwise the unpredictable fluctuations in the spot price of gold and other commodities will create too much acquisition risk and your portfolio could still be crippled by negative returns.

Also keep in mind that your returns will not suffer significantly when the price of gold occasionally falls as long as the firm can acquire gold substantially below the London Bullion Market spot price. This will enable the firm to make profits regardless of the price of gold as long as the fund manager adopts a strict “First-In-First-Out” inventory management policy to ensure optimal timing of the transactions and maximum profitability for their investors.

Advantages of Investing in Gold

To illustrate the advantages of investing in a properly structured gold investment fund, below is the same table of current adverse economic conditions presented previously. However, this time each adverse condition is accompanied by a brief explanation of how investing in a gold fund helps your portfolio perform well even in the worst economic conditions.

Gold’s Wealth Protection Advantages During Adverse Economic Conditions

Investing in Gold
Helps Because . . .

The banking system collapsing.

Your funds are invested in gold which has perennial value dating back to thousands of years. FDIC is worthless during a depression.

Tidal wave of foreclosures sweeping the country.

Parking your funds in gold until you are ready to purchase real estate ensures optimal returns across your portfolio.

Tumbling housing prices.

Gold will appreciate significantly relative to deflating housing prices. So if you are only purchasing real estate as an investment, gold would be a much better investment.

Bear market ravaging Wall Street stocks.

Gold prices generally move inversely to stocks, which means your gold will appreciate while the stock market declines.

High unemployment (over 20%; “official” rate is bogus).

Your retirement funds are safe in gold. So if you are unemployed or retired your wealth will still remain stable.

Overall deflationary asset spiral (CPI inflationary).

While other asset classes deflate, gold retains its purchasing power (real value). Gold is also a natural hedge against CPI inflation.

Interest rates recklessly low.

Prolonged low interest rates cause widespread inflation. Gold wealth naturally rises to offset the impact of inflation.

Consumer confidence abysmally low.

As consumer confidence wanes, economy-wide conditions deteriorate, which causes gold to appreciate.

Debt-to-GDP ratio greater than 100%.

More quantitative easing and loose monetary policy will be employed to resolve debt problems, but these will create widespread inflation. Gold is a natural hedge against inflation.

Huge trade deficits.

Persistent trade deficits depress the value of the USD, which causes inflation as imports become relatively more expensive. Gold is a natural hedge against inflation.

Huge foreign reserves deficits (-$3.8 trillion w/ China/Japan).

Substantial foreign ownership/control over U.S. industries creates significant economic unpredictability across all asset classes. Gold retains its relative value regardless of the impact that foreign entities have across the global economy.

Rapidly decreasing manufacturing capacity.

GDP, national security, and available jobs all decrease when manufacturing declines, which creates significant economic volatility and weakness. Gold retains its value and is a natural hedge against economic volatility.

 

/images/articles/economic__collapse-1.jpgConclusion: Creating Financial Certainty by Snatching Profits from the Jaws of Inflation & Deflation

Many people are confused about whether the U.S. is facing an inflationary or deflationary environment. The answer is “yes” to both. The Consumer Price Index (CPI) has and will continue to rise faster than in previous years because of inflationary pressure caused by the Fed’s aggressive quantitative easing and a declining USD relative to other global currencies. This will cause prices of imported and domestic consumable goods to rise significantly as foreign nations seek to offset the weakening USD.

However, virtually every hard asset you own except for precious metals is going to continue to suffer constant downward deflationary pressure for the foreseeable future. This virtually guarantees that all asset preservation strategies will be worthless because virtually all markets are going to fall, which means that all passive portfolio diversification strategies will fail to preserve your wealth.

Western nations will continue to see violent and sporadic bear market rallies and the people afflicted with normalcy bias will jump into them believing they have reached the end of the recession. They will be wrong and they will lose money. The only strategy that is guaranteed to work in this environment is active participation in the physical commodities markets where buying as low as possible and selling as high as possible can be repeated over and over again, regardless of what price the commodities may be trading at during any given period.

Active participation in the commodities markets means directly buying the physical commodities (or futures contracts) from suppliers and selling them directly to buyers, not purchasing securities that merely represent fractional ownership of a company that produces commodities. In an economic crisis environment, consistent profits can only come from the actual sale of commodities, not from the sporadic or non-existent appreciation of securities. Additionally, futures trading on the automated exchanges does not offer consistent price arbitraging opportunities due to the inherent price discovery efficiency of high frequency algorithmic trading systems. As a result, the only guaranteed strategy to make significant and consistent money in even the worst economic environments is to have unique access to deeply discounted physical commodities and sell them at substantial premiums directly to buyers.

Unfortunately, very few people have direct access to commodities suppliers for any valuable commodities, which means most people will not be able to profitably participate in the commodities markets. That means the only truly safe asset preservation strategy available to most people is to invest in a hedge fund that actively buys and sells commodities. However, hedge funds are typically very exclusive investment vehicles reserved only for select accredited investors; so most people will not have access to this form of investing. But for those who qualify, it can transform a nightmarish economic collapse into a very satisfying investing experience, yielding stable and positive returns.

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About the Author:
Mr. Eanfar is a Managing Partner at Vision Bancorp, which specializes in commodities-backed asset management, commodities trading. His professional experience spans diverse environments including technical development, media, finance, military and government affairs. Mr. Eanfar can be contacted at the website: https://visionbancorp.com.

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“London-style riots a scary possibility in U.S.” CBS News. Retrieved 8/20/2011.

“Supplemental Nutrition Assistance Program”. U.S. Department of Agriculture. Retrieved 8/21/2011.

“’Safe haven’ Treasuries now a perilous bet as top fund managers bail”. Investment News. Retrieved 8/15/2011.

“Flawed Credit Ratings Reap Profits as Regulators Fail Investors”. Bloomberg. Retrieved 4/29/2009.

“Why are your ratings so different than other rating agencies?”. Weiss Ratings. Retrieved 8/19/2011.

“U.S debt to rise to $19.6 trillion by 2015”. Reuters. Retrieved 8/20/2011.

“Quarterly Update: Foreign Ownership of U.S. Assets”. Council on Foreign Relations. Retrieved 8/15/2011.

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“FDIC Projects Losses Of $50 Billion On Failed Banks – Insurance Fund To Remain Underfunded For Decades”. ProblemBankList.com. Retrieved 8/21/2011.

You Are Your Country’s DNA

By Ferris Eanfar, Managing Partner, Vision Bancorp

National DNAMany people no longer believe wealth is created from hard work, discipline and patience. In fact, these concepts are so repulsive to some people these days that I had to consider whether to even include them in the first paragraph of this article. That brief, seemingly benign but profound moment of hesitation reminded me of a fundamental principle that can be observed from studying the rise and fall of civilizations: Whenever large segments of a society start vomiting, complaining, cursing or convulsing at the mere sight of the words "work," "discipline," and "patience," you know that society is speeding blindly toward global irrelevance and self-destruction.

Many people have come to believe that the American Dream is just that, a "dream." As a result, they often either give up and live their lives in quiet desperation working in jobs they can barely tolerate or they feel entitled to instant financial success through various get-rich-quick schemes. Experienced television producers and marketing executives have seized upon the concept of the American Dream because they know that virtually all people would love to strike it rich. They make it seem like winning millions of dollars is easy. Lotteries are advertised to make us think we all have a realistic chance at winning the big payoff. But after observing many successful entrepreneurs over the years, I know the reality in all these cases is that the "American Dream" is not only unattainable through those schemes, their advertised version of the American Dream isn’t even true to the core spirit of the American Dream.

The American Dream is about more than an instant payday; it’s about the journey. As cliché as that may seem, it’s absolutely true. How many times did you cheat on a test when you were in school, only to feel like the "payday" (your good grade) was undeserved? Did that feeling allow you to truly enjoy the benefit of a good grade? Probably not if you’re honest with yourself. Now apply that logic to your life today. Sure, it would be nice to win any lottery, but all lotteries are dependent upon luck and luck is not something you can depend on, which means it’s no substitute for hard work, discipline and patience.

Additionally, there is something instinctively gratifying about making money by helping other people. This is one of the core principles of our corporate culture. I always tell people, don’t focus on the money; focus on improving the quality of people’s lives and the money will come. If you can find a way to help people, financial independence will find you.

Ultimately, every person wants to achieve the goal of financial independence, but how we make our money is at least as important as how much money we make. And the collective decisions that we each make are what defines the spirit and the success or failure of a nation. That means that you are your country’s DNA because a nation cannot survive unless its individuals have the tools, conditions and personal values to thrive.

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About the Author:
Mr. Eanfar is a Managing Partner at Vision Bancorp, which specializes in commodities-backed asset management and commodities trading. His professional experience spans diverse environments including technical development, media, finance, military and government affairs. Mr. Eanfar can be contacted at the website: https://visionbancorp.com.

Are You a Victim of Immaculate Discernment?

By Ferris Eanfar, Managing Partner, Vision Bancorp

Making DecisionsCertain religious people believe in a concept called “Immaculate Conception.” This phrase is used as a reference to the Virgin Mary giving birth to Jesus Christ without requiring any form of sexual intercourse. Your religious beliefs are your own business, but the concept of the Immaculate Conception is a useful analogy to describe another phenomenon that exists in our society regarding the process of developing discernment in the human mind.

It seems that some people believe in the spontaneous birth of discernment, which I call “Immaculate Discernment.” These people think that discernment is something that you’re either born with or not—no exposure to reliable information required. Unfortunately, when enough people believe in Immaculate Discernment it can have devastating affects to individuals, communities and nations.

You can often recognize when people believe in Immaculate Discernment whenever they say something like, "Of course, everybody knows about political and special interest propaganda. I’m not stupid, I can separate fact from fiction and I don’t need to spend time studying the issues." To that, I respectfully say this: If any person reading this believes that it’s possible to discern between fact and fiction without being armed with reliable information, especially when being bombarded by the types of sophisticated and well-funded political tactics used in modern political campaigns, they are grossly underestimating the importance of reliable information and critical thinking skills.

What is "Objective Information"?

Virtually everybody thinks they know what “objective information” is, but their actions, their votes during political elections, their stock/forex trading behavior, and their decisions in their daily lives often suggest otherwise. It’s likely that 99 out of 100 people would say they know exactly what “objective information” is because we all want to believe that we are intelligent enough to see the world accurately, but when you ask them where they get their information, those same people will invariably point to various news sources, books, magazines, politicians, celebrity commentary, website blogs, talk radio hosts, and even fictional movies and television programs. This may come as a surprise to many people, but none of those sources of information provide truly “objective information.” Each type of information source noted above is filtered through somebody else’s biases and prejudices before you receive it, which means they are not purely objective sources of information.

How can we make decisions without truly objective information?

Although there’s no such thing as truly objective information, that doesn’t mean you can’t use "reliable information" to make effective decisions in life and in business. Reliable information requires that you develop critical thinking skills so that the decisions you make are based on a more systematic process that will enable you to avoid being manipulated by the media, politicians, corporations and others who do not have your best interests in mind. To that end, here are some of the most powerful critical thinking tools that you can immediately start using in your daily life:

1. Question Everything. You should question everything you see, hear and read, regardless of the source. This process of questioning things is the foundation of all critical thinking. This doesn’t mean being obnoxious and asking irrational questions without any purpose; it means thinking about the issue and asking thoughtful questions that naturally come to mind. If no questions come to mind, you’re probably not evaluating the information effectively and you should make a stronger effort to think about the issue some more until you come up with some relevant questions.

2. Falsify Everything. Try to “falsify” what you read/view/hear, especially if some important aspect of your life depends on you making a good decision. To falsify information is the opposite of trying to verify information. Verification is useful too, but the problem with the verification process is that it implicitly causes you to only look for evidence to support the issue, which makes you vulnerable to the “You’ll always find what you’re looking for” phenomenon. In contrast, consciously trying to falsify something forces your mind to look at what everybody else is usually ignoring, which enables you to very quickly see the truth in situations when a counter-productive “mob mentality” might be dominating a particular issue.

In practice, falsifying something simply means that you ask yourself this simple question: “Are there any situations where this information does not apply?” This is one of the most powerful forms of critical thinking because it forces your mind to look for exceptions to the “rules” that the media, radio hosts, bloggers, corporations, politicians, etc. are feeding you. If you can think of a lot of situations where the information does not apply, then it’s very likely that the information they’re feeding you is very biased and intended to manipulate you. In this case, it’s your responsibility to continue studying the issue until you can find alternative information that has more universal applicability in your life.

3. Follow the Money. We’ve all heard this, but many people still do not use this powerful critical thinking tool in their daily lives. Anytime you hear somebody talking about an issue that affects a large number of people (usually politics and corporate commercials), it’s imperative to ask yourself: “Which people are most likely going to make a lot of money if this legislation is passed?” Or “Which parts of society or special interest groups will receive the most money or benefits if this president is elected?” Or “Will a merger between these two companies benefit consumers or will it eventually lead to less competition and higher prices?” In many cases, this “Follow the Money” critical thinking tool alone will help you avoid being manipulated so you can make better decisions in your business and in your life.

4. Focus on Quality of Life. Whenever you are exposed to new information from people that are doing something on your behalf (politicians, companies, unions, non-profit organizations, etc.), ask yourself: “Will this improve the quality of my life? If so, how exactly will it improve the quality of my life?” And don’t rely only upon the answers from the politicians, corporate officials, union bosses, etc. that are creating the rules because they obviously have a vested interest in giving you the answers you want to hear. Instead, ask other people in your community. Get as many opinions as possible from the most diverse set of people possible. And if you use the critical thinking tools described above while you’re talking to people, soon you will see whether the propositions that are supposed to be “good for you” are truly going to improve the quality of your life or not.

5. Seek Out Dissenting Opinions. This is the hardest technique for people to perform, but it’s one of the most important. Most genocidal tragedies are the result of politicians and military dictators who would not tolerate dissenting opinions, and as a result, many millions of people have been murdered. History is filled with human atrocities caused by people who did not appreciate or tolerate diverse opinions.

Although most people do not face the threat of genocide in their daily lives, seeking diverse opinions is extremely important because it shields us from insular thinking, prejudice, and racial discrimination. These are all hallmarks of ignorance and ignorance is arguably your worst enemy in every situation. Seeking out diverse opinions also strengthens your critical thinking skills and improves your ability to defend your own values and adjust your opinions when your assumptions and beliefs are based on inaccurate information. You will always make yourself stronger—never weaker—by surrounding yourself with people who have diverse opinions. And people will respect your inner strength and character when they see that you can explore many different ideas, even if you don’t agree with them.

There are many other critical thinking tools that you can use to find reliable information, but if you only integrated the five techniques above into your life, in most cases you will be able to avoid being manipulated by the media, politicians, corporations, and anybody else who does not have your best interests at heart.

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About the Author:
Mr. Eanfar is a Managing Partner at Vision Bancorp, which specializes in commodities-backed asset management, commodities trading. His professional experience spans diverse environments including technical development, media, finance, military and government affairs. Mr. Eanfar can be contacted at the website: https://visionbancorp.com.

The Golden Fall of the U.S. Dollar

By Ferris Eanfar, Managing Partner, Vision Bancorp

Dollar crashing and burning

Would you rather have gold or dollars? People around the world are asking this question more and more as we enter the year 2012. In fact, Donald Trump already accepts gold as a form of payment from tenants in one of his buildings because Trump believes the U.S. Dollar is losing its value and its status as a credible international reserve currency. WikiLeaks leaked a 2009 cable from the U.S. Embassy in Beijing, China, which indicated that the United States and Europe have been suppressing the price of gold for many years to artificially prop up the value of the U.S. Dollar. The launch of the instantly popular Pan Asian Gold Exchange in July 2011 creates strong incentives for global investors to pull their assets out of the West and take their gold and capital to the vast Pan-Asian market. And China’s economic policy statements and insatiable gold-buying appetite in recent years clearly indicate they are working aggressively to release gold markets from the grip of Western control and manipulation. All of these events and many more strongly suggest that demand for gold will continue to rise to significantly higher levels in the months and years to come and the USD will likely collapse within the current decade.

History of Gold as Our Guide

History of Gold as Our GuideWe can analyze many of the current events above and extrapolate what the future will likely hold for the price of gold, but we can also look at gold from a number of technical economic historical perspectives that bring us to the same conclusion. In fact, based on various historical measures, the price of gold relative to other widely used historical benchmarks is substantially under-priced and is primed to rise dramatically in the near future.

M1 Money Supply vs. U.S. Gold Reserves: The U.S. M1 money supply consists of currency and bank deposits. As of 9/29/2011, the U.S. government currently holds approximately 260 million ounces of gold. If the government were to back each dollar in circulation with gold as numerous governments are now considering around the world, the result would be a gold price of $8,102 per ounce (M1 $2.1 trillion / 260 million ounces). This represents potential symptoms of ongoing inflation and corresponding near-future gold price increases.

Comparing Gold Bull Markets: Many gold experts agree that gold is currently in a bull market. However, to put the current bull market into perspective, in the 1970s gold prices rose from $35 to $850 per ounce, which was an increase of approximately 24 times. The low price of the current gold bull market in 2001 was $255.95. It is useful to compare magnitude increases between similar market phenomena to determine the potential phase of development a trend may be in within a given economic cycle. In this case, if we multiply today’s gold price of $1,620 (as of 9/29/2011) by the same factor (24), the current gold price would be $38,880 per ounce. This may seem high, but the inflationary environment of the 1970s triggered a flight to the safety of gold that has a high probability of occurring again.

Global Money Supply vs. Global Gold Reserves: As currency devaluation continues in many of the developed economies due to irresponsible fiscal and monetary policies, global governments may be forced to back their currencies with gold either wholly or fractionally. Assuming governments pay market prices to acquire their gold, and given total reported global M1 money supply of approximately $19.2 trillion, and given total reported gold reserves by all global financial institutions of approximately 930 million ounces, the resultant gold price today would be $20,645 per ounce.

The Dow/Gold Ratio: The Dow Jones Industrial Average converted into ounces of gold is commonly called the “Dow/Gold Ratio”. This ratio was at “1” when gold peaked in 1980, which indicated that the index value of the Dow and the price of an ounce of gold in 1980 were the same price. To bring the Dow/Gold Ratio back into balance today based on the Dow’s current level of 11,153 as of 9/29/2011, the price of gold would need to be $11,153 per ounce. This imbalance between the Dow and the price of gold suggests that the stock market is over-inflated and a significant downward correction is likely in the near future.

U.S. Trade Deficit vs. U.S. Gold Reserves: If the U.S. trade deficit is not reversed, the U.S. will eventually become insolvent because no individual or nation can survive by perpetually spending more than their income. However, if the U.S. trade deficit is reversed, dollars will flow back into the U.S. and contribute to domestic price inflation as the money supply expands. Based on the 2011 cumulative trade deficit of approximately $10 trillion (up from $6 trillion in 2007), and given U.S. gold reserves of approximately 260 million ounces, if the $10 trillion of foreign-held dollars were to be rapidly unloaded into circulation within the United States, the price of gold today could increase to as much as $38,462 per ounce.

U.S. Government Debt vs. U.S. Gold Reserves: According to the Government Accountability Office (GAO), as of June of 2011 the U.S. Government’s balance sheet is overwhelmed with approximately $61.6 trillion in future liabilities for Medicare and social security. If the dollars required to pay for those entitlement programs were soundly backed by gold, and given U.S. gold reserves of approximately 260 million ounces, the price of gold would need to be $236,923 per ounce.


Can We Predict the Day of the USD Collapse and the Price of Gold?

Gold chartNot exactly, but we can predict with a high degree of confidence that gold will rise to well above $2,000 per ounce and the USD will collapse if the economic trends described above continue to spiral out of control. Nobody can precisely predict the future price of any asset, but the objective benchmarks described above compared to their historical levels strongly suggest that the United States and other developed nations have severe structural economic problems that are likely to jeopardize the solvency of these nations and the credibility of their currencies. Under these conditions, I recommend to all my friends and clients that they move at least 20% of their assets into gold and ignore the weekly fluctuations in the price because there is no question that the long-term price of gold can only go up from here.

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About the Author:
Mr. Eanfar is a Managing Partner at Vision Bancorp, which specializes in commodities-backed asset management, commodities trading. His professional experience spans diverse environments including technical development, media, finance, military and government affairs. Mr. Eanfar can be contacted at the website: https://visionbancorp.com.