COUNTER-PARTY RISK

 

One thing you never hear much about is counter-party risk.  In a society where major Fraud suits are being conducted daily against the largest corporations and the most prominent politicians you'd think counter-party risk would be on the tips of every investing tongue.

But it's not.  Yet.

Every paper and electronic transaction involves counter-party risk.

Yet just turn on the TV or the Internet and you are bombarded with ideas that will supposedly safegaurd your portfolio from risk.  Annuities.  Index-linked annuities.  Crypto.  Diversification.   Hedged portfolios.  Structured products.   AAA bonds. Options.

All of these and everything else besides US Government Treasuries involve massive counterparty risk.  OKay, FDIC protects you up to $250,000.   And Treasuries are safe.  Because the US has a printing press.  But if they have to run those presses overtime to pay off debts the dollars they print to repay your losses are worth less and less.  That is a real risk.

But what about those other safe investments?

Annuities are backed by Insurance companies.  Back in 2008 the world's biggest and safest insurance company AIG was the first to go bust.

Crypto must be traded on exchanges.  Once you use the exchange your are at the mercy of the exchange.  If it just steals your crypto - tough luck.

Every structured product has a counterparty, usually an insurance company.  

Every AAA bond has been rated by a ratings company that can be bought and have made catastrophic ratings errors in the past.

And as for options: 90 percent of them expire worthless - but remember - there are 4 quadrillion dollars worth of derivative contracts floating around the world economy - a fact that Warren Buffet calls the "Rel weapons of mass destruction" and they are all subject to massive counterparty risk.

The world of paper and electronic investments is riddled with counterparty risk.

Any corporation, trading house, platform, bank, insurance company etc can go broke and then the paper/electronic chit you hold is worthless.

How do you mitigate that?

Hard Assets.

Hard Assets exist in your possession in real time in the real world.  It's still there when the electricity goes out.  It's still there when your country's currency crashes.  There is no counterparty.  If you're worried it might burn up if your house burns down, put it in a vault.   When you want to sell it you arrange a deal with a buyer and when you receive your payment - however you want it - you turn over the real asset.  

The only risk is market risk as all assets rise and fall.  BUT

A) there is no Counter-party risk.

B) in an era of unlimited central bank printing of electronic/paper money real things priced in that money tend to rise over time.

So as we go forward and the stories of Counter-party Fraud mount and mount think about the one thing that protects you from a society that has a very blase attitude towards fraud:

HARD ASSETS