The Fallacy of The Diversified Portfolio

Given the current state of affairs in the investment markets – particularly that fundamentals have long ceased mattering and tweets move the markets instead – I think a frank discussion is called for.

It’s an article of faith amongst financial planners that one must diversify his or her portfolio; that their investments must be spread across several economic sectors: transportations, utilities, growth stocks, emerging markets, and so on. And, of course, there’s a certain reasonableness to it: Those market segments go up and down at differing times (or at least used to), and no one knows enough to pick precise winners and losers. And so, spreading the money out means that you’re less likely to be wiped out by a surprise move.

The problem is that this type of diversification, while fine so far as it goes, misses the proverbial elephant in the room. And that elephant is capable of rendering diversification moot… as in blowing through it like tissue paper.

And so I think this is important to point out. A lot of decent people are relying upon “diversification” to protect their retirement money. And maybe it will. Or, maybe it won’t.

The Core Issues

The deep problem is that people don’t question diversification because “everyone does it,” and “authority says so.” Those are just about the most dangerous phrases known to the human race. The emotional hook is that you’re insulated from blame by staying with the crowd. If you do something different, on the other hand, any error you make can be exploited against you forever. Needless to say, none of this makes for particularly good choices.

But, let’s get right to the point.

Diversified assets – the aforementioned asset classes – are not really diversified. Yes, you may own so much utility stock, so much in foreign bonds and so on, but all those assets are held in a single pot, controlled by others.

That is, 100% of the assets of the typical retiree are held on Wall Street. And they’re all in government registered accounts. Unless you specifically choose to jump through inconvenient hoops, you don’t precisely own the shares of stock you paid for; your broker owns them for you. That’s a complicated generalization, of course (these things are always complicated), but it’s also generally true.

So, your portfolio is diversified so fas as it goes, but it all sits in a single pot, controlled by the lords of Wall Street and their partners at government agencies.

The typical response to this is, “So what? They’ll never take our money!”

The purpose of that statement, however, is to drive away an unpleasant concept. Or, perhaps, to appeal to the gods. Of course governments seize assets, they do it all the time.

FDR seized nearly all the gold in America. He had to wait until everyone was really scared, of course, but he stole the gold, “compensated” its owners at a terrible exchange rate (which he raised once the payments were made), and did it all with impunity.

The bosses of Cyprus shut down all the banks in their country and seized a good portion of the money in all the country’s bank accounts, the government of Ireland swiped €6.5 billion from their National Pensions Reserve Fund, the French parliament took €36 billion from a reserve pension fund, Hungary took $13.5 billion from retirement accounts, Poland took one-third of future contributions to individual retirement accounts.

The IMF has produced papers proudly suggesting “financial repression” to fix economic problems. And back in August 2010, the US Departments of Labor and the Treasury held joint hearings, deciding how best they could take control of all assets in IRAs and 401(k) accounts.

So, yes, they can, and they do, and they keep blueprints for doing so in the future. That means that diversification is valid only until the next time the pot-holders to dig their hands into your assets. 

What Is To Be Done?

Understand, please, I don’t have any perfect solution to sell you. What I’d like is for people to understand that diversification, applied to the usual portfolio, can and will be rendered void when the lords of finance decide it should be. And at that time there will be very little you can do about it.

Those of you who are concerned about such thing can figure out what is best for you. And note, it will always be less convenient than walking the prescribed path. The smooth, easy and wide path is nearly always one that was built for your fleecing.

We all know the alternatives: Bitcoin, cash, gold, real property, investments in local businesses, and so on. These are alternative market segments, and using them creates an actual diversified portfolio.

So, do what you think is best, but be clear on the fact that all your “diversified” investments are held in the same pot, and that pot is under someone else’s control. When things get serious, the people who control that pot will use it as they see fit, not as you see fit.

Maybe that won’t happen for another decade or two. Maybe it will happen next year. Seeing the future is difficult. But seeing the fact that all your money rests in someone else’s hands isn’t too hard.


If you want a deeper understanding of these issues, see:

          FMP issue #7

          Parallel Society #4

          The Breaking Dawn

This Is – by Far – the Biggest Threat to Your Investments


Have you ever noticed that nearly all the world’s surplus rests on Wall Street… or maybe in the City of London? I think this is something we should pay attention to.

So, let’s face it directly for a moment: All the big investment markets are owned and controlled by the Western aristocracy: by politicians, high officials, mega-corps and deep-state operators. These people are fully in control of the markets; they can close them anytime they like.

And in fact stock and bond markets are closed, and fairly often. NASDAQ has closed repetitively for technical reasons, all the New York markets closed for Hurricane Sandy, and nearly every market was closed after 9/11. The markets reopened each time of course, but only because it was in the best interest of the aristocracy. They didn’t have to reopen them. These people were – and are – in control.

This being the case, I’d like to familiarize you with two words that you have rarely heard but which are likely to be heard far and wide some day: Systemic Risk. Wikipedia defines systemic risk as “the risk of collapse of an entire financial system or entire market, as opposed to risk associated with any one individual entity, group or component of a system….”

My point is this: Your most serious risk is not from the failure of a single stock or even a group of stocks, but a closure of the market itself.

“They’d Never Do That!”

Of course they would… and of course they have.

Don’t we remember what they did to Cyprus, just a few years ago? Haven’t we seen their current campaign to ban cash? Didn’t we see them save the institutions they owned in 2008, selling average folks down the river? And there’s more, including the US Treasury holding meetings on taking control of IRAs and 401(k)s and the IFM discussing “financial repression.”

The truth is that the Western aristocracy does what’s best for the Western aristocracy. If that means keeping the status quo going, that’s what they’ll do. If it means turning the status quo off, they’ll do that. Shutting it down would be a big and risky step for them of course, but if they face a near-certain loss of control otherwise, you can bet that they’ll do just that.

“Oh TINA, Thou Art a Heartless Bitch”

With due credit to William Shakespeare, TINA – There Is No Alternative – may end up being the most heartless wealth-destroyer in history. Why? Because of everything noted above and because of this:

Anyone who has examined the current situation knows that the markets should have tanked years ago and have been held up with massive currency injections from the central banks. They know that the system would crumble if any serious portion of that was pulled out or even if interest rates reverted to the mean.

And yet, people stay right where they are, smack in the middle of the risk zone. And why? Because there is no alternative. Where else can they put a million dollars or a few million euros? How many of us even have savings accounts anymore? With interest rates hovering around zero, they make no sense.

There are options of course, but they all involve extra work. Dump your money into the stock and bond markets, and you can move it from place to place with the click of a mouse; you can get instant charts and graphs; and of course you get crisp, clean accountings of everything. All is clear, all is simplified, all is easy.

And so, 99% of the world’s surplus has fallen into fully undiversified investments: Regardless of ‘market sectors,’ they all stay in the same big pot, controlled by an aristocracy that nearly all of us either distrust or despise.

This, at least in my view, is not a good plan.

But… TINA!

Yes, there are alternatives, but they involve work. Moreover, they also involve us taking responsibility for our failures. And let’s be honest about that too: Having investments ‘in the market’ means that you can blame any number of things for your losses, rather than taking blame yourself.

One option is to invest on Main Street… in a local business. Truthfully, that kind of investing can be far more personally rewarding, but it certainly isn’t sanitized and sanctified by authority like Wall Street is. If you invest in a dry cleaner that fails, your authority-minded ‘friends’ might ridicule you; if your Apple stock crashes, it’s merely “bad luck.”

But while investing on Main Street isn’t point-and-click easy, it’s far more diversified. And it gives you some personal control over your investments. If, for example, the dry cleaner or the grocer you funded is having problems, you can get involved, rather than watching helplessly from the sidelines.


So, we face choices. My point is that closing your eyes to your greatest risk – merely because it has an “Approved by Authority” banner draped across it – is a foolish thing to do.

* * * * *

If you’ve enjoyed Free-Man’s Perspective or A Lodging of Wayfaring Men, you’re going to love Paul Rosenberg’s new novel, The Breaking Dawn.

It begins with an attack that crashes the investment markets, brings down economic systems, and divides the world. One part is dominated by mass surveillance and massive data systems: clean cities and empty minds… where everything is assured and everything is ordered. The other part is abandoned, without services, with limited communications, and shoved 50 years behind the times… but where human minds are left to find their own bearings.

You may never look at life the same way again.

Get it now at Amazon ($18.95) or on Kindle: ($5.99)


* * * * *

Paul Rosenberg

Who Will Be the Last to Crash?

lasttocrashThis is the question that astute investors are forced to ask themselves these days. No reasonable person believes that a system of ever-expanding debt can resolve painlessly. It simply cannot happen… not, at least, until 2+2 stops equaling four.

But the international money system, while deeply interconnected, can implode in sections. In fact, it’s highly unlikely that it will crash as a single unit.

So, if you have significant moneys to invest, you end up coming back to our question: Who will be the last to crash? Once you decide that, you can concentrate your assets in that place, hoping to come through the crash with at least most of your value intact.

Let’s look at several aspects of this:

#1: Background statistics:

  • World debt is upwards of $200 trillion, and growing steadily. World GDP is $70-some trillion, only about a third of the debt. This debt will not be paid back. Massive amounts of debt will have to be written off in losses.

  • US debt is north of $18 trillion. (Amazingly, *cough*, it hasn’t changed in months *cough*.) Forward promises are north of $200 trillion, meaning that a child born today is responsible to repay $625,000. And since roughly half the US population pays no income tax… and presuming that this newborn will be a member of the productive half… he or she is born $1.25 million in debt. Such repayments will never happen. Most of those debts will not be repaid.

  • Japan is worse off than the US. The UK is bad. Many EU countries are worse.

These numbers, by the way, are ignoring more than a quadrillion dollars of derivatives and lots of other monkey business. (Rehypothecation, *cough*, *cough*.)

#2: No one wants to rock the boat.

Informed men and women understand that the entire system is unstable. Probably a majority of them are simply hoping that it holds together until they die. A few dream that magical new inventions will kick-start the system into a new orgy of debt, blowing an even larger super-bubble that lasts through their hopefully longer lifetimes.

But informed people also know that the system stands almost wholly upon confidence. If the sheep get scared enough to run away, the whole thing ends… and no one is ready for it to end.

So, heavy investors speak in soothing tones. They don’t want to spook the masses.

#3: We’ve already had warning shots.

Last year, the International Monetary Fund (IMF) published a horrifying paper, called The Fund’s Lending Framework and Sovereign Debt. That paper, in turn, was based upon one from December of 2013, called Financial and Sovereign Debt Crises: Some Lessons Learned and Those Forgotten.

The December 2013 document, right at the start, says that “financial repression” is necessary. Here’s what it says (emphasis mine):

The claim is that advanced countries do not need to resort to the standard toolkit of emerging markets, including debt restructurings and conversions, higher inflation, capital controls and other forms of financial repression… [T]his claim is at odds with the historical track record of most advanced economies, where debt restructuring or conversions, financial repression, and a tolerance for higher inflation, or a combination of these were an integral part of the resolution of significant past debt overhangs.

So, in order to fix debt overhangs – currently at horrifying levels – financial repression is not just an option, but required.

And of course, they’ve already had a trial run, when they stole funds directly from individual bank accounts in Cyprus.

The IMF report goes on to say:

[G]overnments can stuff debt into local pension funds and insurance companies, forcing them through regulation to accept far lower rates of return than they might otherwise demand.

[D]omestic defaults, restructurings, or conversions are particularly difficult to document and can sometimes be disguised as “voluntary.”

We have a pretty good idea of what’s coming down the pike.

But again, Goldman’s Muppets are not to be told about this. And truthfully, most of them don’t want to know.

#4: We have no view of what’s happening in the back rooms.

People make large bets on what Janet Yellen and the Fed will decide next, but when we do that, we overlook something very important:

Yellen is merely an employee of the Federal Reserve, not an owner. And we don’t know who the owners are.

We do know that the Fed is owned by private banks, and that it has a monopoly on the creation of US currency, but we really don’t know who owns the shares. The true owners are almost certainly reflected in the roster of primary dealers, who skim Federal Reserve units as they’re being made, but we don’t know much more than that.


Who are the people that Yellen takes orders from?

What do these people want?

What are their long-term positions?

Who might they protect, aside from themselves?

We don’t have real answers to any of these questions. From our perspective, the guts of the machine are hidden behind a curtain.

#5: The US is playing to win.

One thing we do know is that the US has a strong hand. Within a general deflationary situation, the Fed can print away. And they’re propping up the US markets quite well… for now.

Feeling their power (after all, they can blow up more stuff than anyone else!), the US is throwing their weight around, forcing nearly every bank in the world to play by their rules. (Think FATCA and fining foreign banks.) And for the moment, it is working.

Bullying everyone else over the long term may, however, not be viable. No one – especially people like Putin and the Chinese bosses – likes to be slapped around in public. And they are not powerless.

Conclusion: Most Bets Are on the US

Europe isn’t looking good. Japan isn’t looking good. The UK is holding, but as mentioned above, its numbers are horrible. Switzerland seems to be in-between strategies. China has problems. Russia has problems. The BRICS have never been stable.

That leaves the US. My impression is that most serious investors would rather hold dollars than yen or euros; most big businesses too. Their bets are on that the US will crash last.

So, are the Fed and the US Treasury doing this intentionally? Are they quietly pulling the pins out from under the others, making sure that they’ll be the last currency standing? I have no inside information, but I’d bet on it.

Remember, the gang on the Potomac has most Americans believing that whatever they do overseas is pure and holy. Furthermore, 99% of their serfs will reflexively obey any order they give. So, why shouldn’t they play dirty? They have the best bombs and a somnambulant public.

For now.

Paul Rosenberg