by Jeff Thomas, Gold Seek:
The pending Brexit has, not surprisingly, caused a shakeup in the investment world, particularly in the UK. Of particular note is that, recently, asset management firms in Britain began refusing their clients the right to cash out of their mutual funds. Of the £35 billion invested in such funds, just under £20 billion has been affected.
For those readers who live in the UK, or are invested in UK mutual funds, this is reason to tremble at the knees.
So, why have these investors been refused the right to exit the funds? Well, it’s pretty simple. The trouble is that quite a few of them made the request at about the same time.
Of course the management firms don’t keep enough money on hand to pay them all off, so, rather than spend all their money paying off as many clients as possible, then going out of business due to a lack of liquidity, they simply announce a freeze on redemptions.
Those who are outraged may read the fine print of their contracts and find that the fund managers have every right to halt redemptions, should “extraordinary circumstances” occur. Who defines “extraordinary circumstances?” The fund managers.
Across the pond in the US, investors are reassured by the existence of the Securities and Exchange Commission, which has the power to refuse this power to investment firms…or not, should they feel that a possible run on redemptions might be destructive to the economy.
Countries differ as to the level of freedom they will allow mutual fund and hedge fund management firms to have on their own, but all of them are likely to err on the side of the protection of the firms rather than the rights of the investor, as the firms will undoubtedly make a good case that a run on funds is unhealthy to the economy.
The Brexit news has created a downward spike in investor confidence in the UK – one that it will recover from, but, nevertheless, one that has caused investors to have their investment locked up. They can’t get out, no matter how badly they may need the money for other purposes. This fact bears pondering.
Presently, the UK, EU, US, et al, have created a level of debt that exceeds anything the world has ever seen. Historically, extreme debt always ends in an economic collapse. The odiferous effluvium hasn’t yet hit the fan, but we’re not far off from that eventuality. Therefore, wherever you live and invest, a spike such as the one presently occurring in the UK could result in you being refused redemption. Should there then be a concurrent drop in the market that serves to gut the fund’s investments, you can expect to sit by and watch as the fund heads south, but be unable to exit the fund.
As stated above, excessive debt results in an economic collapse, which results in a market crash. It’s a time-tested scenario and the last really big one began in 1929, but the present level of debt is far higher than in 1929, so we can anticipate a far bigger crash this time around.
But the wise investor will, of course diversify, assuring him that, if one investment fails, another will save him. Let’s look at some of the most prominent ones and consider how they might fare, at a time when the economy is teetering in the edge.
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