Lee is a hedge fund manager who has chosen Monaco as a second location for his fund, Trafalgar. He has come to IUM to make a presentation on the topic of protecting wealth in an era of sovereign debt. These are some of the highlights of what was a very interesting presentation.

Lee:

“In late 2007, everyone at some point had asked themselves, “Is my bank safe?”

Let’s talk about money and what it means. Originally when someone wanted something from someone, they would need to barter, trade goods for goods. Then people thought about a central unit of exchange which could make things simpler. Money would become a bill of exchange. One unit of money represented a certain amount of goods you could get with it. To get the bill of exchange, you would have to provide an asset to someone else, and then you could get something in return.

The founding fathers of America, who were very smart people, figured that gold would work well as a method of exchange, because it couldn’t simply be printed. Gold kept people honest. If you had earned enough of it then you could buy what you wanted, and if you didn’t have enough, then you simply could not.

In 1971, Nixon, who was fighting a terrible war in Vietnam, decided to come off the gold standard. He basically said that he would pay everyone in paper dollars, and if they didn’t like it, too bad. Suddenly he could print as many dollars as he wanted to pay for the things the U.S. needed. This was alright to start with, as long as eventually the implied debt was paid back and things returned to normal.

The problem is that politicians have their own personal needs in mind. To get elected, and get reelected, they often have to promise things that they can’t deliver. To deliver on their promises, they simply kept extending the debt limits of the U.S. government, and kept printing money. This is pandering to short term wants. In the long term though, everyone suffers.

Some people say money is good because you get interest on it. But the interest does not reflect a growth in assets. If there are 100 trillion dollars but only 60 trillion in asset, then you only get 60 cents on your dollar.

At the same time, many Central Banks are acting on their own currencies to weaken them for import and export reasons. No one can take on the central banks. If they want to weaken their currency they can just print more money. What’s stopping them?

The first question you have to ask yourself before investing is what currency you’re doing it in. If you pick the wrong currency, it’s like fighting a headwind, whereas having the right pick can act as a tailwind.

We had the gold standard because no one can cheat. It’s like a lock on your house. It forces people to behave. It slows growth. I don’t think it’s optimal because it does slow growth, but we have had a hard time staying at optimum levels of debt. Once we figured out that we could just pay for things later, we took it too far. The gold standard acts as a protection.

50 years ago people thought of things in terms of gold. Now we measure everything in simple paper. Pensions were originally thought of when people died around the age of 57. They didn’t expect that people would end up living a lot longer. By the time the effects are felt, those politicians will not be in office anymore. Unfortunately, often when politicians focus on the long term, they don’t get reelected.

The U.S. government for example has a huge debt to its own people. The current promised social security debt with what it has promised to its people totals $106.8 trillion. The U.S. government cannot pay that unless it prints more money. By 2030, Social security payments for that year will represent 50 percent of the tax intake.

One of the main advices I can give is to hedge your currency risks. If you’re invested in U.S. treasury bills and the dollar drops 50%, then you’ve lost half your wealth. 99 percent of the population, that doesn’t specialize in currency trading, needs to diversify their currencies. Currencies are an IOU which could easily change in value.”

Lee was then asked about his opinion on whether someone should have gold in their portfolio. His response:

“The thing about gold is that it is accepted in every central bank in the world. If the dollar crashes and you land in Panama or Cuba, you can use gold to buy food and feed yourself. I would advise that everyone has some gold in their portfolio.”