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Investing for Deflation Part 2: More Reader Questions

/ Deflation Jul 29, 2010 - 11:04 AM GMT

By: JD_Rosendahl

Best Financial Markets Analysis ArticleAs many of my readers know, I’ve been running a deflationary investment model for my parents since 2003.  Please see:  How I Saved My Parents a Small Fortune!  And the Advice I've Been Giving Them!

And in that strategy we have a definitive goal of moving money outside of the financial system.  A few weeks ago I wrote:  Investing for Deflation: Reader Asks the Question of the Decade.  That blog generated a lot of very good questions for deflation investing better answered in a follow up blog.  Here they are with my answers:

Hi J.D.
Thank you for publishing your investment thoughts and strategies.  I live in Australia.  I have already purchased a significant quantity of gold and silver coin. My problem is the relative strength of $A and cost of gold in $A.
My question is do you see your strategy working the same all around the world or should it vary from country to country?

This is an interesting question.  I’m not a currency expert nor do I really follow them and in part it depends on your cost basis.  However:

My parents and I discuss a concept I call relative performance.  In a deflationary cycle I doubt I can bullet proof every red cent.  In one form or another, the market, the government, or ill-liquidity of some form, will cause some kind of loss.  However, if I protect their wealth and only sustain minor losses compared to the situation where most people lose the majority of their wealth, have we not gotten richer than everyone else?  The answer is yes. 

Relative out performance is our bottom line strategy.  If I can make money off the market melt down that’s coming, well great.  But relative out performance and retaining the majority of our wealth is the focal point.

In that context, I don’t think it really matters what any local currency does.  One needs to bullet proof their net worth, and having some metals is a key part of that diversity of assets and having some form of cash equivalents.
From Deb

What I would like to know is how your model has considered something like this massive expansion of the monetary system? 

If history is any guide the government will probably continue to print and issue more money.  It has been their only tool for the most part and they fail to recognize nothing works forever.  Nor, do they really care about the long term ramification.  It’s a self serving trading now for later policy for political motivations. Unfortunately, the greater public doesn’t see the crisis it has and will generate.

For us, it really doesn’t impact our deflation strategy for the very same reason as the prior question.  Again, we are structured for relative out performance.

Hi Rosey,
Could you try to explain a little more how you are removing things from the financial system?  You say you vault your metals "off-site."  Do you mean "off shore?"  Do you mean actually in a private vault, or in an off-shore bank, etc? What are some practical options for removing investments from the financial systems?

Thanks.  Always enjoy your common sense approach to investing/trading.


We have been averaging money out of the financial system for the past 4-5 years.  We have been doing it slowly in small amounts over time.  We dollar cost averaged into precious metals in 2003-04 and held that in a safety deposit box.  Cash in a safety deposit box.  We currently own a house free and clear.  We own tax receipts. And we are looking to move sizable money in the next couple months into short term treasuries at Treasury Direct.  All of those represent money outside of bank and brokerage accounts and money outside of insurance companies.  We are about 50% outside the financial system and look to push that to 70-80 percent if possible. 

We hold nothing off-shore, but I’m not adverse to that.  I just haven’t had the time to research something that makes me totally comfortable. 

Hi J.D.
Thanks for your thoughts on the market and investing at Safe Haven and your Rosey's Outlook. I have also followed a similar path of shifting resources to cash or short term instruments.  I also agree that precious metals should be allocated in one's portfolio in the current train wreck environment. 
I have a question on the storage of MM's.  No, not the candy M&M', but the "Mattress Money" to which you aptly referred.  What recommendations do you have for storage of cash and metals if it is not in the two of the three FIRE (finance, insurance and real estate) dogs? 
Besides everyone wearing sandwich boards, what elements do you believe will signal the eventual shift to an inflationary phase and the ending of deflationary conditions?  

I love the term Mattress Money.  My grandfather grew up in the great depression, and when he passed away in 1998, we found cash in socks, coffee cans, dresser draws, etc.  It was literally like an Easter egg hunt.  This is where I got the idea of moving money into the category of Mattress Money, only before not after deflation.  So, where to keep your mattress money?  You don’t have a lot of choices:  Safety Deposit Box, T-bills at Treasury Direct as a portion, Buried somewhere safe on your property, or in a safe on-off site.  For now the safety deposit box is the easiest.  We are actively looking at Treasury Direct to move money in the next couple months.  Cash or cash equivalents are king, so it’s cash, gold and silver, and T-bills.

Inflation:  I'm assuming we are talking about a period of higher interest rates and not the flooding of new currency into the system.  The trigger I think that is a clear signal we are about to embark a high interest rate environment is the breaking down of the US Treasury Long Bond market.  I'm looking at the break below of the bottom channel line as a signal it's coming

From a friend, S.G.

I greatly enjoy reading your posts at Safe Haven.  A recent post, “Investing for Deflation”, mentioned “Mattress Money”, money vaulted off site.  How does one find a non-bank safety deposit box?
Any suggestions you might offer would be greatly appreciated.
You state “We have and are continually moving money outside of the financial system”.  “Outside the financial system” are the key words. 
I do not like bank safety deposit boxes because at present if the owner should die, the tax man must be present at the opening.  Any official seeing a hundred thousand dollars in a lock box is going to initiate a full investigation.  Also according to Bob Prechter, many banks are going to fail in the coming years.  If that is correct, one can only imagine the huddles trying to get to your lock box; one will be lucky to get inside the bank.  The safe storage of greenbacks is a huge problem.  Having greenbacks will most likely be one of the very best investments in the coming deflationary phase.  I expect the purchasing power of ‘held’ greenbacks to increase by a factor of “five”.
Since I believe you read Bob Prechter’s work, you and I are on the same page.  The safe off-site storage of greenbacks is very important to me. 
Thanks again,

Yes, I have read Prechter’s work.  I agree with his premise that the end of the major cycle and deflation is upon us.  I view the deflationary period coming as a cycle:  Mustard Seeds For Deflation, The Deflationary Cycle Full Monty: Part 2

Storing cash in the safety deposit box:  It’s a safe place for now. Instead of moving big sums of money triggering notification to the government, we have been using smaller amounts and building it over time.  I agree that it will need to be moved prior to the expected banking crises, which is not now but coming.  I don’t mind using a safety deposit box for now.  This may sound a little weird, but I’m using the stock market as a guide or trigger when to move.  Something like the stock market breaking below the 2009 lows.  That is a serious confirmation of deflation.  So, when we move out one of the stressful decisions is where too?  The obvious choice is home in a fire proof safe.  I doubt we’ll keep it all in one place, and we might use my home with a safe too.  The only other choice I can think of is burying it on your property.  Depending on your property, I'm not adverse to that.

Also, we have everything titled in a family trust and LLCs.  If one person should pass away there are others in control of accounts and deposit boxes.  There will be no tax man present.  If you do not have one, I highly recommend a trust for many reasons.  Please see a trust attorney.

I believe you live in the SF Bay area, as I also do to.  I am considering vaulting my gold and cash at Los Altos Vault and Safe.  Do you use them, and if so, are you happy with them?  If not, whom do you use? I want to get my assets out of the banking system.

Yes, I live in the Bay Area, but my Parents are in the Midwest.  No, we use a safety deposit box for now.  Just like above, we will need to move it at some point.  I prefer to keep it in my control entirely.  At the end of deflation the world is going to be so weird with Social Unrest, I won't trust anyone but mom and dad, so I don't want our wealth in someone else's hands.

I really enjoyed getting those questions and they are worthy of a serious conversation of investing for deflation.  I’ve tried mostly to give real answers within what we are doing.  It’s not the only choices in this world, but it's live money management being used as part of our deflationary investment model started back in 2003.

I have a couple of final thoughts not mentioned in my first blog.  If there is one asset I wished we owned:  It’s a small farm or ranch of 100-500 acres.  We had the chance to keep one several years ago from an inheritance but chose to sell it.

Why a small farm?  A 100-500 acre farm in a remote part of the United States that has private wells for water, the ability to raise some live stock and chickens, and grow crops or have a garden.  It  may seem totally ridiculous.  However, when the deflationary cycle comes and social unrest is the new bubble, food and water channels may be disrupted.  And a farm in the middle of nowhere will remove you from the big city Social Unrest, which will be crazy.

Lastly, this is going to sound ridiculously stupid, but something I’ve been telling my parents for the past five years is at some point we want to have a stash of $1 and $5 dollar bills and a lot of coin (quarters).  I laugh every time I think or write this one.  But essentially, if you have stored wealth and you're rolling around this world in deflation with your $20 and $100 bills, and driving a new BMW, and sporting new clothes, you will be one big target in “Social Unrest.”  You want to look dirt poor and blend into the world.  Old clothes and nickel and dimes look as poor as you can get.  I’m still laughing...................but count on it.

Hope all is well.

By J.D. Rosendahl

J.D. Rosendahl was a former stock broker/investment consultant (currently not licensed) before becoming a Commercial Banker for the past 14 years. He manages his family's wealth, helping them avoid the high tech bubble and the real estate bubble melt downs and preserving wealth.

© 2010 Copyright J.D. Rosendahl - All Rights Reserved
Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

© 2005-2019 - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Anne Glassman
12 Aug 10, 08:16
stashing quarters

JD - I too stash quarters, along with singles and fives. Just trying to think ahead is all.

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