According to the website Wikipedia, systemic refers to something that is spread throughout, system-wide, affecting a group or system such as a body, economy, market or society as a whole.

2013-03-31  Market ReturnsSince the financial crisis began in 2008, many politicians, technocrats, media commentators and the like have denied that there are systemic problems in the global economy. I have a very different view and believe that there are many powerful systemic problems within the global economy. As this report is being prepared, the one systemic problem staring the global economy in the face is the dysfunction in Europe which is now focused on Cyprus. Cyprus is just a recent example of an ongoing systemic banking, debt, and currency crisis all rolled up together.

If we look around the western world, we are seeing unprecedented systemic issues such as:

  • Dangerous sovereign debt levels
  • Competitive currency devaluations
  • Aging populations
  • Sticky unemployment
  • Bank insolvencies
  • Prolonged zero interest rates

To think that all of these issues are not intertwined is not only foolish, but dangerously shortsighted. To be sure, these systemic problems, as well as the band-aids being administered to address the systemic problems, will have powerful, negative repercussions.

Systemic collapses

Fear not, we are not calling for the water and electricity to be shut off. Nor are we foretelling of paying for goods with gold bars. Systemic collapses have happened in the lifetime of anyone reading this update. If you know your history, you may recall that on 5/1/1933 President Roosevelt issued Executive Order 6102 confiscating American Citizen gold. Some may also recall 8/15/1971 when President Nixon closed the gold window, thereby officially ending the Bretton Woods agreement. Both of these are results of systemic financial collapses in the US alone. We can also look around the world and see that financial collapses have happened in recent years in South East Asia, Russia and Argentina.


History shows that leading up to and during systemic collapses, we see sovereign defaults, devaluations of currencies, capital controls, and bank holidays. Anything sounding familiar here? A systemic collapse of the global financial system was underway in 2007-2008 but was checked with the myriad of bailouts, interest rate manipulation, and money printing. The collapse is still unfolding as we watch the struggles in Europe and the ongoing western world’s response of currency devaluations, soaring debts, bank failures and so on. Right now, everything is fine here in the US. But, when a systemic crisis arrives, it is usually without a warning, announced over a weekend, followed by drastic measures, and someone ends up losing some of their wealth. Check the western nations of Greece and Cyprus.

Investing versus Insuring

In many of our writings over the last year we have made references to insurance, risk, risk management and the like. We believe investing and insuring are like the yin and yang in Chinese Philosophy. The yin and yang is used to describe how seemingly opposite or contrary forces are interconnected and interdependent yet give rise to one another. Consider that investing is about positioning your wealth to profit from outcomes one expects. Conversely, insuring is about incurring a relatively small cost to protect against outcomes that one does not expect but may prove catastrophic.

What do you see?

In the past we have shown a graphic that depicts what an investor’s goals should reasonably resemble based on the stage of a market rise. The graph shows that in the early stages of a market rise performance should be sought over prudence, but as the rise matures the two (performance and prudence) should become equally weighted. Finally, in the late stages of a market rise, one should look to prudence over performance to preserve some of the past gains.

Not only are we in the late stages of a rally but, it is a rally that has been fueled not by productivity but money printing, lending to great systemic risks. I’ll now discuss how we are addressing not only market risk, but systemic risk in our clients’ portfolios.

People do not insure risks they do not see. -Anonymous

Market Approach

If you watch TV, you are likely to have seen an Allstate, State Farm, Progressive, GEICO or Farmers insurance commercials. In most cases, they are advertising for auto or homeowner’s insurance. When was the last time you saw a commercial for investment portfolio insurance? That is correct; you have not and never will. Let’s shift gears and review what your largest assets are in no particular order:

  • Your health which is your earning power (insured by health insurance)
  • Your home (insured by homeowner’s insurance)
  • Your car (insured by car insurance)
  • Your investment portfolio (no coverage available)

As discussed above, insurance involves a “relatively” small cost to insure against catastrophic loss. The question now becomes, “Is it possible to find alternative ways to insure your investment portfolio?” This first assumes you see the risks to your investment wealth. So, let’s assume you see the risks to your investment wealth via the systemic risks outlined above.


Most clients are tolerant of the gyrations of the market within a 10% swing. We have all been conditioned that the market moves up and down but the trend over time is up; so, just hold on. As we have pointed out, the problem with continuing to think like this is that the tools which have boosted the market in the past are used up (interest rates are already at zero globally, and money is already being printed en masse). As we sit at all-time highs in stocks in the US, with a dire global economic and fiscal back drop, the question becomes what would a systemic event look like? Easy. You are seeing it now (real-time) in Cyprus with bank holidays, capital controls and near panic. Sure the lights are still on, the water still runs, and the electricity is on, but access to wealth is restricted and being seized.

Seeing risk

Again, we are not saying this will happen in the US tomorrow or at any point but, based on the trajectory of political, economic, and central bank decisions, we are headed for serious problems. Systemic crises unfold quickly and leave little time for adjustment, and are followed by restrictive environments. It is our concern that if we were to experience a significant downdraft in the stock markets (more likely caused by an unforeseen systemic event) it could be a very long time before the market returns as compared to the last two times (2000 & 2008) when markets have bounced back. Again, policy response and bailouts likely will not be forth coming in the future. More realistically, it would likely be the end of the latest great experiment of printing money. In the course of history, no society has ever printed their way to prosperity.

The longer the current political and economic maneuvers go on, the closer the global economy gets to a systemic crisis that will require a reset of the global financial system. The reset will likely be painful for a time, but will usher in the investment opportunities of a lifetime. There are number of folks who made fortunes during and after the depression. Folks like Joe Kennedy, Charlie Merrill, and Sir John Templeton had a few things in common in building their wealth – they saw the risks in stocks in the late 1920‘s, shifted to conservative stances, and maintained their wealth to buy at lower prices.


Right now the market trend is still up but long in the tooth. Accordingly, we are taking on less risk in client portfolios. We have positioned clients with a level of insurance in portfolios with a mixture of either, lower equity exposure, increased conservative investments, and precious metals exposure. In addition, we have very particular exit points set for equity investments should the market turn south. But, the one thing to keep in mind is that quick moving risks will offer little time to move to investments you wished you would have moved to previously. Said otherwise, you cannot buy insurance when you need it most.

The cost of insuring an investment portfolio from catastrophic loss is giving up some of the upside in markets. Keep in mind that the greatest amount of upside is lost near market tops where the risks are too great for the relatively small rewards. We remain cautious on the markets as we look to protect our clients’ investments and purchasing power for the longer-term.

Do you have an investment strategy that seeks to protect your portfolio against volatile economic conditions?  Call me to schedule a free review of your current investment portfolio – 913.402.6099.

John P. Chladek, MBA, CFP® is the President of Chladek Wealth Management, LLC, a fee-only financial planning and investment management firm specializing in helping families and couples who are not yet retired realize their financial goals.  For more information, visit