Diversifying Portfolio Cash – Part 1

My initial thought is that cash should broadly reflect the same geographic distribution in the portfolio as the “normalized” investments one would try to achieve over time in a balanced portfolio. If, for whatever reason, one can’t seem to find good investment opportunities at a particular point; then defaulting to cash that is dollar-denominated is, in practice, making a speculative bet — on the particular currency that your cash is denominated in. Cash itself becomes not a source of funds for other speculations/investment — but an actual investment itself.

Given that that is the reality of a portfolio that can’t legally be denominated in any currency I choose, and that I live in a country where the central bank has openly declared war on savers and is stealing those savings for the benefit of crony insiders, I’m going to have to use currency ETF’s to achieve the purchasing-power stability that I expect the cash (and to a degree fixed-income) part of my portfolio to have. The side benefit of this is that once opportunities do arise to deploy cash into more volatile investments, I will be able to analyze these investments not just in dollar-denominated terms (eg the price of an ADR on an exchange) — but in terms of whichever currency ETF I choose to fund that investment. More on that thought later. For now – diversifying cash

North America — My personal target for this geography is roughly 35-40% of my portfolio. Slightly larger than the regions share of the world economy but this is home and these markets are what I understand best and that have the most influence on me. Don’t need to worry about US dollar here – but do need C$ (FXC) exposure here. The only fixed income exposure I expect here is corporate bonds. Treasuries are toilet water and will remain so for the rest of my life.

Europe — Personal target for this geography is 20% of my portfolio. Smaller than regions share of economy but this ain’t a region with a bright future. It’s old, stagnant, in debt, and it’s best days are gone. Still, there are enough opportunities and liquid markets here. Zero interest in any sovereign bonds here for the rest of my life. Three currency ETF’s – FXB (pound), FXE (euro), and FXF (swissie) can provide the source of funds. The pound and euro have been highly correlated with each other for the last couple of years — and the swissie anti-correlated. Going forward, all three in combo can serve as stable cash and/or source of funds.

Asia — Personal target for this geography is 25-30% of my portfolio. The most diversified region with bright long-term prospects and more than enough opportunities. I doubt I will need much cash exposure here — but the FXA (A$) and FXY (yen) provide non-correlated currency exposure when I find myself with excess cash.

Emerging markets — Personal target for this geography is 15% of my portfolio. Some of these markets aren’t really “emerging” but they do all tend to have higher perceived/actual risk (political, capital, commodity, institutional). Nevertheless, this is probably the region with the brightest long-term prospects — and a dearth of opportunities. There are no currencies here that are stable enough to be considered cash. But this is the one region where locally-denominated bonds may themselves be investable via closed-end funds. So need to do research on them.

Gold — No target. Gold is really the anti-currency currency and the anti-everything TEOTWAWKI hedge. The core gold holding — in physical coin/bullion/jewelry form, in one’s possession, debt-free and unleveraged — is not “cash” in today’s world. It is insurance – and is not sold unless/until the TEOTWAWKI comes. Unless/until one owns that form of insurance – in whatever amount one deems appropriate to NEVER sell until/unless EOTWAWKI – there is little point holding “cash” in “gold”. Once that insurance is owned — AND the cash part of one’s portfolio is bigger than you would like it to be — THEN a certain portion of that cash exposure might be allocated to a “currency price of gold” form of “cash” — GLD or CEF or something. That will ostensibly serve to hedge cash/currency against widespread competitive currency devaluation (which will happen just before the bottom of a deflation cycle). Whether that strategy will actually work is questionable — since it is pretty obvious that central banks and fiscal authorities will do everything — and I mean everything – tax, confiscate, regulate, declare you a terrorist and shoot you – before they allow gold to undermine their currency monopoly. They have all done it before and they will all do it again when they view it as “necessary”. Otherwise, gold is a speculation — not cash. Like it or not, government-issued fiat cash/currency is “the world as we know it” (TWAWKI). If that ends, then that is “the end of the world as we know it” (TEOTWAWKI) — and only the physical insurance form of physical gold in your personal possession – and not in your portfolio – will carry over to the new world.

Now — on to the specific currency ETF’s

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