How to Defend Your Wealth from Political, Terrorist and Empire Risk

Talking Points:  Terrorism and empire risk may well be the leading threats to your portfolio wealth held in America today.  If there is a future terrorist attack against Wall Street and the financial infrastructure, how can you protect your wealth and liquidity from destroyed or closed markets and the financial consequences of such an attack? 

 

In today's world new considerations must be taken to properly defend your wealth. Listed below are new concerns and protection methods you should be aware of:

With the U.S. color coded terrorist alert system bouncing back and forth between orange and red during the two years since the 9/11 attacks no one can deny that this is a serious situation. The solution to these concerns is actually quite simple. For investors in American mutual funds, variable annuities or a managed portfolio, make sure the financial institution, manager or fund is outside of U.S. stocks or bonds and has a base of operations and custodian outside the New York City area. For example, many U.S. mutual and variable annuity funds, as well as insurance companies, are located in Boston which is a far less likely target.

The problem with even those American funds invested internationally or globally outside our markets is although the underlying foreign markets would not be targeted and their market closure would be brief if it happens at all, every U.S. domiciled investment product would be likely be closed and illiquid for the duration of the New York Stock Exchange closure. The ultimate solution is to have part of your portfolio invested in first-rate offshore money centers and outside of U.S. investments in order to maintain your liquidity.

The best way to determine what strategies are necessary to protect our wealth from another terrorist attack on Wall Street is to walk through a scenario of this likely future event.  Be sure to read the case study, Nightmare on Wall Street, at the end of this chapter. The Case Study URL is http://web.archive.org/web/20040416215637/http://www.swissgnomes.com/book/casestudy/cs-9.htm

Ø Protection Through Investment Diversification in Jurisdictions With Minimal Terrorist Risk – One should determine the level of terrorist risk and potential threat to financial markets, records and  institutions by monitoring the political situation and the foreign policy of the nation or jurisdiction.  I prefer jurisdictions which have a long, stable political and regulatory environment of hundreds of years with little or no military or foreign policy involvement in the Middle East. Due to the increasing threat of militant Islamic terrorist groups I consider New York City, Washington, and London as the three most likely targets of a future major terrorist attack. If terrorists have access to a weapon of mass destruction and can transport it to a single target,  New York City would be the probably target of opportunity.

Ø Protection from Market Closure and Illiquidity – The NASDAQ and New York Stock Exchange were closed for over a week following the 9/11 attack on Wall Street and the World Trade Center. Imagine the length of time for closure and the illiquidity problems if a weapon of mass destruction attack were targeted at Wall Street. This action could effectively freeze and lock up foreign and American investments in U.S. mutual funds and variable annuity portfolios, in addition to the U.S. equity markets, for months with the potential of making the 1929 stock market crash a minor footnote in history compared to the trillions of market losses and illiquidity. For this terrorist risk concern, I recommend limited investments in either American mutual funds, variable annuity products or the U.S. stock and bond markets because of the vulnerability of our financial infrastructure and markets. 

Ø Financial Institutions, Trustees and Financial Providers Should Be Located Outside of Potential Terrorist Targets – This means no partner, financial firm or custodian involved with your wealth preservation strategy should be headquartered or have its only records facility in  New York City, London, or Washington D.C.

Ø Records Protection Utilizing Safe Facilities -  All  records, both computer and hard copy, should be maintained in at least dual locations in separate jurisdictions with minimal terrorist risk in order to protect records from theft, political confiscation, war, terrorist attack, national emergency or natural disaster.

Ø Protection From Currency and Exchange Controls – Currency and exchange controls are always implemented suddenly and during a financial, banking or political crisis without any prior notice. Investors who wisely have diversified a portion of their wealth and investment portfolio outside their home country before these controls are implemented remain safe from the effects of such a government action.

Ø Protection From a False Crisis or Regulatory Confiscation For Political Purposes – When confiscation targets are politically motivated, except in the recent case with the Russian oil company oligarch, they are usually religious, ethnic or national in scope.  In my opinion, few Moslem nations or wealthy individuals should keep more than a minimal amount of funds in U.S. markets unless the ownership is protected through trusts and multiple corporate structures. The risk of a politically motivated investment freeze or confiscation reaction to another terrorist attack on America just outweighs the potential investment profits and benefits. After all, the emergency executive orders to accomplish this were implemented immediately following 9/11 and all that is necessary is another major attack.  We know this, Washington knows this and more importantly, the Islamic terrorists know this.

Ø Protections From Foreign Policy and Empire Risk - The very nature of all empires is to advance, occupy land, people and resources until imperial overreach is attained. When this happens, then the sometimes slow, long decline or quick retreat begins. From Greece and Rome, the British Empire, the Ottoman Empire, France under Napoleon, Germany under Hitler, the Japanese Imperial Empire during World War II, to the Soviet Empire. The decline and fall is always the same.  Standards of living suffer, the economy and prosperity is reduced to pay for the financial and military costs of each empire, the currency weakens and the world position of the great power is reduced. Terrorism, increased taxes and controls, a weakening currency and perpetual war are the evidences of a declining empire. This long term risk can best be reduced by making the investor and portfolio independent of the survival and further advancement of the empire.

Ø Multi-Jurisdictional Protection  – As stated earlier, empire risk may well become the greatest risk to your wealth over the next decade. For this reason, I suggest you consider an offshore strategy in a safe jurisdiction. Thus the ongoing economic costs, limitations on civil liberties and financial freedom or terrorist attacks do not threaten either the liquidity of your investments, the management, or the organization and day-to-day affairs of the strategy. A properly structured strategy should be immune to the problems of empire, local politics or confiscation so prevalent in many nations today as well as in all empires of the past.

The negative political effects of advancing or retreating world empires, are usually concentrated in the foreign territory in question or in the home nation of the empire. Since we are primarily discussing the Washington Empire just be aware of the political risks to your wealth when too much is domiciled in the U.S.  These risks can take the form of excise and other temporary tax measures, prohibitions on currency and travel restrictions, or the movement of assets either into or out of the country. History shows that when world events turn against an empire it is best to already have a substantial base of protected wealth, property and even your family, if possible, outside your home country.  The collapse of empires if not a pretty picture even if they are going from tyranny to freedom and no war is involved.

Ø Currency Risk Protection - First a brief history of other world currencies verses the dollar in recent years. From the 1980’s up through 1995, we saw strong hard currency values verses a weakening U.S. dollar. After bottoming in the fall of 1995 until late 2002 (except for a brief period in 1998 during the Asian financial crisis) investors would have benefited from dollar denominated investments. This was a time of a strong American dollar combined with a U.S. stock market mania of unparalleled proportions not seen since the roaring twenties. While I believe the dollar is now in a long-term down trend, it is prudent for most high income investors to always diversify outside their home or national currencies in order to avoid their home currency risk. For example, Europeans should diversify a percentage of their portfolio outside the Euro, the Swiss out of the Swiss franc and Japanese investors outside the Yen. Most investors are generally over weighted in investments, equities, real estate and cash in their home currencies.

Ø Avoid Most U.S. Securities - If you are an American investors there will, of course, be times when you may want to invest in specific U.S. stocks or sectors.  This is prudent as long as you have sufficient assets outside the dollar and U.S. markets.

 Ø All Asset Protection Partners Should Be Regulated and Domiciled in Top-Tier Jurisdictions – Obviously the actions of a few large nations and their intrusive regulators have clouded the real benefits of quality “client first” protection in an honest and secure regulatory environment. Stringent regulations and oversight is a positive benefit when not coupled with the loss of confidentiality and privacy for honest clients as is the case in the U.S. today.

The following case study, Nightmare on Wall Street, highlights the worst case scenario of a terrorist attack against Wall Street. The possible terrorist risk to the growing American empire and our political reaction to such an attack could be the greatest threat to wealth in the 21st century.  Each of the protection methods discussed above will help you establish additional layers of protection against this future risk.


 Case Study: Nightmare on Wall Street

First read the following news report: Report From Haaretz Israel News: Al-Qaida Has Obtained Tactical Nuclear Explosives The URL is http://web.archive.org/web/20040417073209/http://www.haaretz.com/hasen/spages/392006.html

New York Gets Battle Plan On Terror - Report From The International Herald Tribune
http://www.iht.com/articles/129725.html

Here is a short story describing a possible dirty bomb attack on Wall Street and how such an event might impact the U.S. economy and financial markets.  Let us hope this third Islamic terrorist attack on Wall Street will never happen, but remember 9/11 was the second terrorist attack against the World Trade Center Towers. Could both incidents have been an attempt to topple the World Trade Centers twin towers into the NYSE building?   As an investment professional and a close follower of the news and current events, I would not recommend that you bet your entire investment portfolio that this nightmare on Wall Street never happens!

To set the stage we have three different types of investors in this scenario:

First, there is Paul, a dentist in St. Paul, Minnesota.  Paul has his entire qualified retirement plan managed by a major investment firm in New York City.

Second, is John, an entrepreneur in New Jersey.  His business is located about thirty miles west of Manhattan.  John has half of his investment in U.S. global mutual funds and a U.S. variable annuity.  The rest of John's investments are in a global portfolio managed by a private bank in Geneva, Switzerland.

Third, is a wealthy, pro-western Saudi businessman.  His investment portfolio is managed by a large international bank headquartered in Charlotte, North Carolina.

The event:

An Islamic terrorist group managed to obtain enough radioactive materials and conventional explosives to construct a dirty bomb.  The explosives were strategically positioned in vacant warehouses in New Jersey just north of the Newark Airport and the detonation was timed to take place during a winter day when the winds were blowing east south east which would carry the radiation across the Hudson River area of New Jersey, on across lower Manhattan Island, and then on to Long Island.

Another advantage of this particular wind direction was that the Wall Street emergency back up facilities, back office operations and data storage centers were located  in eastern New Jersey and western Long Island.  Terrorist cells, as well as, all the American people had been told of these emergency locations and back up facilities following the 9/11 attack three years earlier in an attempt to ease investor concern and stop a possible market panic during the market closure. Of course, it didn’t take a rocket scientist to figure out that the hundreds of thousands of Wall Street workers would need the back up emergency facilities within easy commuting distance of Manhattan to make the system work.

While the physical damage to the Newark warehouse district was quite extensive the number of lives lost there was minimal. The problem began with the radiation, debris and dust cloud which swept across a narrow but widening area beginning on the Hudson River, taking in the southern part of Manhattan including Wall Street and covering much of western Long Island.

The resulting rioting and panic as the radiation cloud moved over Manhattan killed over 100,000 people as millions of residents and commuters tried to flee but this was just the beginning of the problem.  Next came the radiation sickness and poisoning which began after the panic had subsided. Of course the markets were immediately closed and the U.S. army cordoned off the entire area as millions of sick refugees were slowly decontaminated and allowed through the lines to be transported to emergency medical treatment facilities all across the United States. The tragedy and Wall Street holocaust, as it became known, resulted in the largest number of Jewish deaths since the Nazi holocaust - something also factored into the terrorists plans.

The terrorists hated America, Israel and Saudi Arabia with almost equal intensity. Another part of their plan had been for selected supporters in Saudi Arabia within the banking and financial industry to spend hundreds of millions of dollars buying put options on the U.S. stock market in the days leading up to the attack. Their plan wasn’t just to destroy the U.S. financial markets, but to also take down Saudi Arabia in the process. Even though they knew the tremendous profits from these market puts would be disallowed, their actions within the Saudi financial establishment had a more important goal. Making these investments also served to implicate the Saudi financial establishment and government which, when discovered, brought the full wrath of U.S. public opinion and the government down on Saudi Arabia. Every dollar of Saudi funds by individuals, banks, financial managers and even the government invested in the U.S. markets were frozen and seized.  

Immediately following the attack all existing Presidential Emergency Orders were activated and all banks and investment markets were shut down. The press was forbidden to publicize or even discuss the amount of contamination to Wall Street and, more importantly, to the back up emergency centers. All they could say was the investment markets are sound and closed on a temporary basis until we can get the employees back into New York City.  The media downplayed the damage to the facilities and all evidence of the rioting and massive panic which caused most of the initial causalities.  All freedom of speech, civil liberties, the Bill of Rights, Habeas corpus, and constitutional protections were suspended for the duration of the emergency.

The problem the media didn’t tell investors was that the contamination of the area meant it had to be quarantined for a minimum of six months before clean up crews could make it safe for the financial service employees who survived to return to work.

While the human toll from the terrorist attack was incalculable due to the delayed effects of the radiation poisoning, the financial toll was not. The American dollar lost 70% of its value during the six-month period compared to the Euro, the Yen and the Swiss Franc.  There was a brief one week solidarity closure of all world markets but eventually one at a time they started trading again. The U.S. markets remained closed as the 'temporary' one week delay stretched to 3 weeks, then 2 months, then finally 6 months.

The foreign market panic finally subsided as investors outside the U.S. and American investors with funds outside the closed American markets picked up investments at very low prices.  It became apparent that America’s misfortune would throw all cash and liquidity starved U.S. companies and citizens into a depression far worse than the Great Depression of the 1930’s.  Although the banks opened back up after a month, there were severe limits on the amount of funds which could be withdrawn from checking or savings accounts. No U.S. stocks or bonds could be traded, as was the case for mutual funds, investment management accounts and variable annuity portfolios.

After six months, the U.S. markets opened again on a limited basis for a few hours each day but there was little interest with the Dow trading at around 1,000 and the NASDAQ was down to 120.  The minimal liquidity available in the U.S. and the Presidential Executive Orders allowing only 5% of a bank account, security or portfolio to be liquidated per month turned corporate America into a buying basement opportunity. Foreign investors, and the few Americans with liquidity from investments and accounts outside the closed U.S. markets, purchased U.S. securities at a mere fraction of their values before the attack.

Did the American economy recover?  Yes, but at a high price for investors.  Many of our corporations became foreign owned and controlled when they were picked up at stock prices for pennies on the dollar when the market reopened.  The real estate market crashed like everything else and we went through a period similar to what Russia went through after the fall of the former Soviet Union. Eventually the extreme Presidential Executive Orders were moderated and America slowly returned to normalcy but investor confidence and portfolios were devastated. 

What happened to Paul, John, and the Saudi businessman?

Paul, the dentist in St. Paul, Minnesota, had has entire qualified retirement plan managed by a major investment firm in New York City. It took Paul and his accountant years to prove what was in his retirement plan investments as most of the records were destroyed in the panic and the investment firm employees perished in the disaster. When the market finally reopened and the statements were again available, Paul ended up with about 5 cents on the dollar as many of his equity holdings had declared bankruptcy during the year following the attack.

John, the entrepreneur with half of his investments in global mutual funds and a variable annuity and the rest in a managed global portfolio handled by a private bank in Geneva, Switzerland.  John heard the explosion and saw the cloud heading toward the Hudson River and Manhattan but the wind direction spared his area of the destruction and panic. All of his global mutual funds were headquartered in the Wall Street financial district so they along with his variable annuity were frozen  during the six-month market closure.

However John didn’t know at the time that even though the funds were frozen the underlying foreign securities kept trading and his portfolio actually increased about 30% when the U.S. markets and his U.S. based funds started trading again. The 70% fall in the dollar that continued after the six months period actually helped restart the American economy. This translated into a 100% purchasing power gain in John's foreign funds. Although it took him 20 months to liquidate his U.S. investments at the 5% allowed each month he eventually  sold all at a profit.  The money managed by the private bank in Geneva, of course, continued being managed in non-U.S. investments and he was able to use the proceeds to purchase several quality properties in the distressed U.S. real estate market after the collapse. 

The Saudi businessman with his investments managed by an international bank in Charlotte, North Carolina, was horrified at the attack but he and other Arab investors, regardless of their political persuasion, suffered the greatest financial losses from the terrorist attack. The American government froze most Arab government and individual private investments during the market closure and these assets were temporarily transferred to the American treasury until the real culprits, individuals and nations behind the attack were apprehended and tried.  It has been five years now and the U.S. government has yet to release any of his U.S. investments even though his name has never appeared on a suspect list.  In the end, it really didn’t matter as Saudi Arabia and the other remaining moderate or pro-American nations all overthrew their existing governments and became militant Islamic republics due to the Moslem world’s outrage at the American asset freeze and confiscation.

This is a long case study but important to think about if you share my concerns of a future attack. I do not have inside information or a crystal ball but this is what I think could possible happen if Islamic terrorists are able to build and detonate a dirty bomb or weapon of mass destruction. 

Currently I do not have a single dime invested in the American stock market because I believe the risk of another terrorist attack is too great.  Islamic terrorists have already twice targeted the Wall Street area of New York City.  If in the future they have the capacity to use a WMD every investor in the U.S. markets could be left holding the bag and little else as the American markets could be closed for six months or more depending on the technology damage, death toll in the financial industry and degree of contamination.

Have you considered the likely consequences for another terrorist attack against New York City and Wall Street?  Have you found yourself wondering why media reports constantly warn about the  likelihood of an Islamic terrorist attack on a U.S. target with a weapon of mass destruction or “dirty bomb” but there is NEVER any speculation as to the possible target?  There is a simple reason.  First we have no way to prevent such an attack and, second, the government warning of a threat to the U.S. financial markets would generate a financial and market panic that could equal the effects of the actual terror attack.

Obviously Washington and the financial establishment have decided it is best to treat the terrorist attack risk to Wall Street like every stock market mania and the subsequent market collapse and bear market losses, as something that will never happen but always does. There will be no warning, no suggestion to diversify outside of New York Stock Exchange and NASDAQ securities or out of mutual funds and variable annuity products in these investments.

Will this horrible nightmare take place? I hope not but I urge investors to take this scenario risk into consideration when reviewing how much of their portfolio is invested only in the U.S. dollar and Wall Street investment markets.

 

 

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