How to protect assets from international disruption

Investing / Others
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Without going into politics, and I say that with all seriousness, things do not look good. Things did escalate, and I don’t know when or if it is going to stop. This uncertainty, of which one can not say how low or high it exactly is, is called Knightian.

Especially the expropriation risk can not be priced fairly. That follows from asymmetric risk. If you are going to be expropriated tomorrow, but someone else will not, the price should be between your zero and whatever that someone can gain from it. But it can not be both at the same time. Where it ends up has to do with the marginal investor, and that is influenced by which of both groups is dominant in capital. There might be more precise theoretical calculations, which I don’t have.

If you knew the exact likeliness of those events, you could just calculate diversification gain against loss. If diversification benefit of an asset can not beat expected loss, you reduce its allocation. Diversification benefit per Unit rises as it approaches 0. But it can also reach 0. That is option 1.

But if that likeliness is a very imprecise range, that is a more difficult decision. Your decision can be wrong before you even get results. Which is different from a good decision with bad results.

But you have actions with a better profile without changing your actual allocation:

  • Matching jurisdictions: E.g. hold VTI (US: stocks, wrapper, provider) in a US broker. Hold CEU2 (Europan: stocks, wrapper, provider) in a European broker. Same for Japan, etc.
  • Derivatives: Instead of stocks hold DITM long call Options. They limit the risk but give nearly full (upside) exposure. Your asymmetric risk might not be dominant. Your counterparty could be an unaffected local providing arbitrage. E.g. buy SPX options (US: underlying, clearing).
  • DRS (Direct Registration System): Registers shares in your name. Only the company and clearinghouse jurisdiction should matter anymore. Not available for all assets.
  • Jurisdiction tilt: Shift custody of some 3rd party assets to less hostile and less involved jurisdictions. Good candidates at the moment would be India, potentially New Zealand, Uruguay. Likely holds even if you need to flee (I hope not).

Additionally, the following assets can be taken over the border:

  • Assets already there (see above and also consider bank accounts)
  • Your human capital
  • Cryptos (blue chips like BTC, ETH)
  • Classic physical valuables (gold, jewelry, cash).

Holding some of those at a low percentage of your total value (include your human capital) won’t impact your return, but can be insurance.

If you think this is alarmist, I’m a very rational person. People have died in gas chambers in denial before. Ah, and if you can do some more than save your assets, please do, but this is not the forum to discuss that.

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Selling before the bubble bursts?
2

Great lead sentence, Sir, but isn’t this question all – as in almost exclusively – about politics and the judgement we pass on the current developments?

Wouldn’t this be a question better suited for a prepper forum? People who (seem to) worry about their own survival and preserving (some of) their assets? Not mocking you.

I like some of the more detailed questions you ask, but overall, you’re – despite denying it – asking the question of the political possibitilies realizing that you’re fearing or theorizing about. No?

I remain an optimist for what it’s worth.

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No, whilst our portfolios are very much affected by politics (about which I have a very clear opinion), the content of this post aims at what to do with your portfolio, if you hold it possible that there could be problems. Especially if you fundamentally don’t know how likely it is, but at the same time could be elevated enough.

It shows that you don’t have to choose optimistic or pessimistic. You can optimize even under Knightian uncertainty. The cost of the first alternative is nearly free and can probably beat even very low probabilities. To not do so, you will have to be very sure that nothing will happen.

My assessment of probabilities has risen, but this is off-topic, and I do not ask about a discussion whether it is true or not. Such things can be discussed in private messages.

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4

I’m afraid Goofy is too dumb for this topic.

It seems intellectually interesting on a theoretical level – Asymmetry! Uncertaintly! Diversification! Assessment of Probabilities! – but it becomes increasingly poltical on a practical level the more concrete it gets (“Jurisdictions”, “India, New Zealand, India, Crypto, gold, jewelry, this and that”).

Y’all have fun discussing this, and good luck!, but I’ll stay away from this for now.

Enjoy!

5

I think your instinct is right, keep everything in the same bucket to reduce ‘attack surface’ of each element.

But in practice it is very difficult as there are so many intermediaries you don’t even know about.

You buy a security. It might be on one exchange, your broker might be in another jursidiction, you try to bring them all in the same jurisdiction.

Maybe sometimes this doesn’t work, for one reason or another. And then you have all these intermediaries in between which do settlement. Then there are the banks for all the intermediary parties.

As someone who got burned by buying Russian stocks which were actually depository receipts listed on the UK stock exchange and I tried to trace-back and un-pick this and had the worst combination of intermediaries. There were multiple sets of sanctions under different authorities.

I spoke with those who had simpler arrangements with only US sanctions and they managed to convert their units into native Russian stocks, but the UK had actually more stringent sanctions which blocked this.

6

Without going at the broker level, for someone who would want to derisk it also makes sense to avoid foreign intermediary at the fund level.

For instance US stocks in EU-domiciled ETFs and non-US stock in US ETFs would have higher chances of collateral damage in case of sanction from either side for a swiss investor.

(It also simplifies withholding taxes)

A Swiss ETF might also avoid that issue.

But that might have a complexity (and fee cost), so up to each individual investor to judge the odds.

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7

Long answer short, IMHO, there is no absolute protection if sh!t hits the fan. E.g. even ownership of gold was illegal during difficult times in the US.

That aside, but that’s the very political part of the topic, things might look better than ever. How was the past better? War in Yugoslavia, 1 hr flight from here, Cuban crisis, Red Army Faction RAF left terrorism killing business people in Germany, nuclear meltdown in Japan, Chernobyl, genocides in multiple countries, 9/11, and endless list… I get it, current events always feel worse and the mind tricks you into forgetting the negative experiences of the past. That’s my bottom line after endless conversations with my late grand mother. Imagine that, she felt the 2010s very more unsteady and scary than the 2nd World War she was born into, poorest of the poor, lost her father, was best in school but couldn’t afford getting more education… and still she thought the 2010s were scarier.

So, for me, in comparison, current events seem very manageable.

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8

I’ve considered for the first time to put some significant funds into buying Puts. Thusfar I have mainly sold calls/puts.

9

Hm, but puts won’t survive sanctions. Neither will the capital in the corresponding stocks.

Only the capital that you didn’t invest, because you bought calls will. And even then, intrinsic and extrinsic value of the call option will also disappear.

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They might, they also might not. Only if you are certain that asymmetric risk is nearly non existent, should you not hedge your bets for nearly free.

I don’t know how one can come to the rational conclusion that higher risk is an impossibility at this point. The tendency to deny what should not be fighting the tendency to fear things that are not there, cloud our judgement under sparse and noisy information. But it can, of course, be that others have superior information.

I reiterate: Saying that the risk could realistically be elevated is not the same as saying it is elevated. It is saying: I don’t have enough information to know. I can’t assign a number. If I still act (or stay inactive) based on my random number I will likely be wrong

But there are actions that work regardless of what is true.

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11

Hi, long time lurker here.

Here’s an idea: you’re both right, and the disagreement is mostly about what to do with that.

You genuinely cannot assign a probability to “will the US sanction European investors holding VT next year.”

But here’s the thing about Knightian uncertainty: it’s not a bug in equity markets, it’s the feature. If you could perfectly calculate the probability of expropriation, sanctions, and geopolitical tail risks, so could everyone else, and the price would adjust until the expected return was the risk-free rate. The reason stocks pay more than bonds over time is precisely because you can’t know. The equity risk premium is compensation for the feeling you have right now—that vague dread that something bad might happen but you can’t quite model it. If it were modelable, it would already be in the price, and you wouldn’t get paid for bearing it.

Which doesn’t mean the hedging strategies are wrong. Matching jurisdictions, DRS, some portable assets—these are reasonable if the cost is low. “Nearly free insurance” is good if it’s actually nearly free. Though I’d note that DITM call options aren’t free, and the bid-ask spread on “flee the country” liquidity can be substantial.

The deeper question is: what’s the base rate for “regime expropriates foreign investors in developed markets”? It has happened. But the last 15 years have also been a parade of things that felt like the end of capitalism. In 2009 everyone was waiting for the second dip. Then Greece was going to blow up Europe. Then Brexit was going to blow up Europe differently. Then Trump I. Then the trade war. Then the yield curve inverted, which historically means recession, except when it doesn’t. Then a global pandemic shut down the economy, which you’d think would be bad for stocks. Then Evergrande. Then inflation. Now Trump II, tariffs again and whatever we’re calling the current situation.

There’s always a reason the market is about to crash. What rotates is the specific reason. The vibe of imminent doom is the constant; the justification is the variable.

And yes, if you keep predicting catastrophe, you will eventually be right. But this cuts both ways. If you had invested at the literal worst possible moment, right before 2008, you would have watched half your money evaporate immediately. Very unpleasant. But if you just kept it there, today you’d be very well off. The market does go down sometimes, often for reasons that seem very compelling at the time. It also goes up. Historically, it has gone up more.

So: hedge if the hedge is cheap. But “I can’t assign a number to the risk” is not itself an argument for action or inaction. It’s the permanent condition of investing. That’s why there’s a return.

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12

I want to stress, that we are not dealing with a market up and down phenomena here. This is also not about this time is different.

What makes those measures sensible in the first place is the possibility of elevated asymmetric risk.

Lumping those two things together is a mistake (as in portfolio return).

13

Well if Greenland is attacked, then Europeans will disinvest from US . Now we don’t know if EU will also do something (unlikely because they are totally dependent and don’t have consolidated power like one man show in US) but sentiment wise, it would be weird for Europeans to keep buying US bonds and stocks when US is attacking one of the European territories

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who, how and why? there isn’t an obvious logical consequence from the trigger to your proposed action.

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If not due to political pressure / decisions to dump US assets, then pension funds with ESG restrictions may be forced to do so anyway, and I suspect a lot of retail investors will vote with their feet and wallets just like they did by cutting back travel to the US.

I know a lot of people (not just Canadians) who have made the conscious choice already to reduce spend on US products/services.

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Well no dumping of shares so far after tariff episodes and abduction of Venezuela’s President. Will Greenland be the last straw? It isn’t obviously so.

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China (17 year low), India, Brazil… have all been reducing US treasury holdings.

I feel more comfortable with less US exposure.

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I mean if Greenland is attacked, it would and should definitely cause outrage amongst general population. That’s when I think European investors would sell US assets

At least this is what I think a normal reaction against a country who is attacking your friend would be.

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OK, but other investors selling assets shouldn’t bother me. On the contrary, irrational selling and depressing of prices would be a buying opportunity.

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Really?

Imagine -: US invades Greenland and Europeans start dumping US stocks , this would be a buying opportunity? maybe it’s a buying opportunity, but I wouldn’t label it rational. It’s like me trying to buy Russian stocks when they invaded Ukraine