Pascal’s Wager

January 22, 2009 by  


By Bob Wood, MMNS

Students of philosophy will remember the French philosopher Blaise Pascal and his famous solution for reasoning out how to live one’s life in the absence of tangible proof of God’s existence. Pascal theorized that it made perfect sense to live life as though God’s existence was a proven fact. If one lived as though God were real and according to His principles only to find out He did not exist, nothing was lost. But if one lived believing that God did not exist and proved wrong, he could pay a heavy price.

Pascal believed he had nothing to lose and everything to gain by assuming that God’s existence was a fact. That was the safe way to go, which certainly makes sense to most people.

How his philosophy relates to investing should be quickly apparent. In no way can we know exactly what the future holds for the markets and world economies. The numerous sets of varying annual predictions coming from Wall Street promoters clearly attest to that fact, as proven again in 2008.

We can not know for sure if the markets will run higher or sink to new depths in the coming year. In the absence of any certainty, my contention is that preserving our assets during a secular bear market is the safer way to go.

If the markets continue to head lower, as I believe they will, I will still have my capital and live to fight another day. Investing defensively will limit my losses until a better investing environment comes along. Should the markets race unexpectedly higher, I will still live to fight another day, simply choosing a better opportunity to take risks.

This week’s column covers a topic I have been reading more and more about each week, namely protecting oneself with supplies of ‘’gold, guns and groceries.’’ I find that advice of this type is being heeded by some of the richer, better informed investors.

Recently, Merrill Lynch analysts reported the growing popularity of gold bullion, with sales rising 121% in the third quarter of 2008. Buying small amounts of gold bullion in coin or bar form now requires paying very big premiums over the spot price, showing quite strong demand. Many buyers, including me, are looking for protection against the rapidly falling real value of the dollar, and one look at this country’s enormous budget deficits projected for coming years could be rationale enough.

But not just the U.S. is seeing skyrocketing gold bullion sales. In Australia, the Perth Mint reports working overtime, trying to keep pace with demand for bullion. Reportedly, Russian investors are waiting in line to buy gold in response to the falling value of the ruble.

Thinking in the style of Pascal, gold buyers figure if they are wrong about the falling value of their home currencies, they will be left holding a tangible asset that, for centuries, has held its value in terms of purchasing power. Gold is readily sold for cash anywhere in the world and carries little downside risk as a metal with indestructible quality.

That example covers holding gold, but what the other two tangible items cited above, guns and groceries? These aspects owe much to how bearish economic analysts see the U.S. economy teetering on the brink of an all-out depression. Market watchers like Peter Schiff, Marc Faber, John Williams and Jim Willie have been warning for months about a coming depression. So why should we listen to what they are saying?

We should be aware simply because these are some of the same people who warned us about the real estate bust, the recession and mounting debt problems — when most market promoters were basking in the glow of the “Goldilocks” economy. While these bearish seers warned of the coming “worst case scenario,” they, particularly Schiff, were laughed out of every room where they made these predictions.

Look again at how real estate problems are still mounting, with record foreclosures announced every month. Check the workplace where U.S. workers lost about 2.5 million jobs last year. For those losing good paying jobs in finance, manufacturing or retail trade, where will they find a new job with these entire industries contracting?

With the bailing out of the corrupt and incompetent on Wall Street, almost nothing in the way of government aid has made its way to those victimized by the housing debacle. Add to this our concerns about being without work and income, and you can see where dissatisfaction and anger could grow in coming months.
We’ve seen reports of widespread demonstrations in China in response to its closing thousands of manufacturing plants and terminating hundreds of thousands of jobs. This is not an exclusive event for that country. Rising discontent is already evident in our country.

Add to that example, how, in our weakened financial condition, outside threats take on more weight and cause additional concern. For example, let’s look to another seer with a solid track record for predicting the future. Gerald Celente of The Trends Research Institute, who authored Trends 2000 — a widely appreciated book about future trends, recently issued an alert. He cites the current conflict in Palestine as a potential source of trouble for the U.S., since it is viewed as an enabler of the Israeli incursion. With Israeli strikes now likened to war crimes by the United Nations’ mission there, Celente sees the potential for negative blowback on America’s support of Israel.

This may not be a radical view, when we recall the Arab Oil Embargo of 1973, which responded to a very similar situation of Israeli aggression against its neighbors and was supported by America. Celente uses these words to end his alert:

“Stay abreast of ongoing Middle East developments.  Assess them by weighing the facts and gleaning the truth lurking behind the propaganda smokescreen. Should an oil embargo ensue, product scarcities will cause frenzy buying of food and fuel. Gold prices will spike, the dollar will crash and global panic will most likely break out.’’

Of course, not just another energy embargo could threaten our food supplies. Remember a few months ago when oil was selling at almost $150/barrel, which surprised most of us? Diesel fuel was so expensive that truckers began protesting, and some went out of business. Delivering food to our grocery stores became a concern.

Like Pascal, we can’t know with certainty what will emerge as truth in future economic or geopolitical events. But we can choose to play safe. If we load up on food and gold but the worst-case scenario never materializes, we will still have use for the food and a store of wealth in our gold bullion.

If rich investors prove right in stockpiling food, gold and guns for protection in a crumbling civil environment, they may have little need to be among those lining up outside the nearest grocery store and facing the prospect — along with hundreds of others in very foul moods — that rationing of short supplies is the only option. In a disruptive economic environment, such as one with prospects of possible depression resulting from rising unemployment, mounting foreclosures and growing discontent, a worst-case scenario must be considered.

Consider the most basic reason for owning insurance on your car, home or life: “just in case.” We’re dealing with the concept of magnitude vs. probability. There may be a very small chance that your home will burn down, but, if it does, you could be devastated financially. If you die unexpectedly, your family could meet with severe financial hardship, even though the chances of your dying might be statistically small.

Even though the worst case scenario, a full-fledged depression, might have a small chance of happening, wouldn’t it be comforting to know that you’re prepared, just in case the people who have been right all along about our economy are right on this prediction, too?

Have a great week.
Bob

Bob Wood ChFC, CLU Yusuf Kadiwala. Registered Investment Advisors, KMA, Inc., invest@muslimobserver.com.

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