Patrick Watson of Mauldin Economics takes a look at what the unlikely scenario of a break-up of the USA could mean from an investment perspective

Patrick Watson of Mauldin Economics takes a look at what the unlikely scenario of a break-up of the USA could mean from an investment perspective

By Patrick Watson*

Some things are so horrible, you don’t want to think about them.

Institutional risk managers think about “tail risks” - scenarios with very low probability. But should they happen, the consequences would be so devastating that you must plan for them.

Often this involves questioning your assumptions. What if things you believe will always be true, suddenly aren’t?

In the mid-1980s, people in the Soviet Union thought their government was, if not ideal, at least secure. Ten years later, it was gone. Former Soviet republics like Ukraine became independent countries. Everything changed.

Could something like that happen to the United States?

Historically, political regimes tend not to last more than a few centuries. The US probably won’t be an exception, though we also have our strengths, so we’ll probably last a few more decades, give or take.It’s not a crazy thought. We’re politically polarized and maybe, as a population, the angriest we’ve ever been.

However, that’s only a guess. The odds that it’s wrong may be low, but they’re certainly above zero.

So just as engineers plan for once-in-a-thousand-years storms when they design bridges, investors should think about remote scenarios.

The thought exercise might reveal some design flaws.


Photo: Wikimedia Commons

Missing property rights

A few weeks ago, John Mauldin and I were on one of our frequent phone calls, discussing ideas for his annual forecast letter. We were despairing a bit over the political situation.

As you know if you read both of us, John and I disagree on some big issues. But we both love our country, and we’ve been friends long enough to respect each other’s opinions. We can talk civilly, which is often hard these days.

Anyway, part of that conversation appeared in John’s Year of Living Dangerously letter. Here it is.

I keep trying to imagine what/who might reunite Americans, and drawing blanks. As Lefsetz says, we don’t have the kind of issues that would do it. Nor do we have any elder statesmen or nationally unifying figures whom everyone respects, much less agrees with. This will make our various problems worse.

In short, I see dangerous times coming. I’d like to be wrong about this, but I don’t think I am. I think 2019 will be a Year of Living Dangerously, followed by the 2020s as a Decade of Living Dangerously. Then we’ll have a Great Reset and enter a new and better world. But we have to get there first.

I agree with this. We’re in dangerous times, and while it’s still highly unlikely, we can’t rule out a scenario in which the US breaks up into smaller sovereign countries, as happened with the Soviet Union, Yugoslavia, and elsewhere. It could happen violently, too.

I’ve tried to imagine, from a practical perspective, what that would mean for investors. The short answer is, “Nothing good.”

Investors succeed by either drawing income from some kind of asset they own, or by purchasing an asset and then selling it at a higher price.

The asset can be anything: buildings, raw land, stocks, loans, gold, or other commodities. But you need to own it or at least control it.

Ownership rights mean little without a government to protect them and courts to settle disputes. The US presently has both. What if it suddenly doesn’t?


Photo: Wikimedia Commons

Whose assets?

Let’s imagine what this might look like.

Suppose, 10 or 20 years from now, regional divisions cause the US to break up into several pieces, each with its own government. (Protecting your wealth might be the least of your worries in that event, but let’s assume it happens peacefully.)

Further suppose you own shares of stock in a large company that does business in all those new countries.

You might have problems.

First, do you really own those shares anymore? Says who?

Second, even if you still own the shares, will the company still own the assets that give those shares their value?

Again, we don’t know. But when this sort of thing has happened in other places, those in power often seized foreign-owned assets. And if you’re in, say, Texas, then California might consider you a foreigner. Or vice versa.

Furthermore, you could find yourself disfavored even in your own home. We see the maps dividing the US into “red” and “blue” states, but they’re misleading. Even the reddest states have substantial blue populations, and even the bluest states have substantial red populations.

In the kind of bitter atmosphere that would make the US fall apart, it’s easy to imagine majority groups punishing those they perceive as “the other side.” Taking your property is one way to do it.


Photo: Wikimedia Commons

Local assets

Again, I’m not predicting any of this will happen. I doubt it will. But with non-zero risk and consequences so terrible, maybe it makes sense to hedge against the possibility.

How would you do that?

Well, one way is to hold hard assets like gold, stored in places where a new and unfriendly government couldn’t reach them. But that has other risks and is probably not appropriate for your whole portfolio.

Another way is to own local assets tied to wherever you live. That could be real estate, small businesses, loans to local borrowers, or other things. The point is to remove, as much as possible, the exposure to governments that might stop defending your property rights.

A local farm or ranch, for instance, should be able to keep operating even in these worst-case scenarios. People will always need to eat.If you have cash to invest, maybe do some local “angel investing” in addition to buying stocks. Find entrepreneurs in your area who need capital and offer to help them.

I realize this isn’t pleasant to think about. The safety briefing on your airliner isn’t fun either. It might seem unnecessary since almost every flight arrives safely.

But if yours doesn’t, you may be glad you noted the nearest exit.


*Patrick Watson is senior economic analyst at Mauldin Economics. This article is from a regular Mauldin Economics series called Connecting the DotsIt first appeared here and is used by interest.co.nz with permission.

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22 Comments

Maybe a fun mental exercise but that's all.

Yes, cant see this happening in my lifetime. Anarchy would have to exist before this happens. USA has strong Army airforce etc.

Try reading the Limits to Growth, 30-year update.

Not in your lifetime?

The thing is a decade overhung already

The PRC will disintegrate before the USA. Mark my words.

Wouldn't put money on it. The American Civil War was actually about state versus federal authority, and the states did not like being dictated to by the Federal Government. (Those who think it was about slavery need to take another look). Trump, and others like him is very likely to be able to create the type of division that would lead to this kind of break up. Indeed he was probably the catalyst for Maudlin et all to consider this risk.

The American Civil War

Was much less recent than the Chinese one - which established a system on the mainland that can only be altered by violent revolution. Dictatorships are not stable and ultimately don't last that long.

Nazi Germany: 1933-1945
Fascist Spain: 1947 to 1975
USSR: 1917-1991
Communist China: 1949-???

Accepted , but how firm or tenuos is the grip that Xi and the CCP have on its population? China's population today is much like Russia's. While highly patriotic, they are also several generations into autocratic rule, and thus the collective memory and cultural identity orientates to that type of rule. Many fear the chaos that they percieve to come from too much freedom and debate. We can see that argument here in NZ when there is talk about lowering the threshold to get into Government. Thus from a political and Governmental perspective, compared to the US china currently is more stable than the US.

Maybe it is a long shot, really long shot, but that sort of thinking as in retrenching to local would certainly help speed up it's coming.

We could even term it 'The Long Emergency'....

What a nonsense article. Next we'll see a piece on how aliens landing in Texas might impact the economy.

Given how divided the US is, politically and economically, it's far from nonsense. There's a secession movement in California (https://www.cnbc.com/2018/04/24/calexit-plan-to-divorce-california-from-us-is-getting-a-second-chance.html.) As the author says it's something unlikely to happen soon but foolish to dismiss it outright.

By 2045, the share of white population in the US is projected to be less than 50%.

Interesting time and something will happen.

Frankly I can't wait till there has been so much intermarriage that we can no longer be identified as separate races (won't be in my lifetime, but eventaully it will happen). Bring on a world of coffee coloured people without the racism. Get rid of that and religion and we'll be on our way to a much better place.

it is called 世界大同 (the world will become largely the same), predicted in one of the chapters in 推背图(https://en.wikipedia.org/wiki/Tui_bei_tu)

If you think an admixture of all the worlds races would come out "coffee coloured" you drastically over estimate the amount of light skinned people on earth.

... or you drink your coffee very dark.

People will find a way to segregate, it’ll be Pecan vs Cinnamon. People will walk around holding up Dulux colour charts in disgust.

The key aspect keeping the USA buoyant is the absolute advancement in technology, which supports her military superiority, financial dominance (USD the petrol dollar), diplomatic unilateralism, and global culture influence.

HOWEVER, what would happen if the USA's absolute advancement in technology started to wane, and even surpassed by someone?

Ask yourself this question and start to think of any possible domino effects.

HOWEVER, what would happen if the USA's absolute advancement in technology started to wane, and even surpassed by someone?

Pax Americana will not last forever of course. But in 2019 there are no candidates to surpass the US. The USA is so far ahead of the competition that it routinely sails unescorted destroyers in the waters claimed by it's closest geopolitical rival - with zero consequence. Keep in mind that this is less than 100km from the so called rivals costs and a whopping 8000 kilometres from the closest US state.

This is a clear and undeniable demonstration of the insurmountable gap between the US and Second Place.

The trouble the US facing is NOT invaded by someone but being left out of the global system that weigh towards Eurasia day by day.

The Pacific and Atlantic oceans are great barriers for the US. Well, of course, in both ways -- stop enemy while also stop trade.

Sounds like a lot of fear above, Not only is this likely, but it is likely there is no successor Empire. Not enough left for a boot-up.

The USA started out in its entirety - was birthed - from a Civil War, and it will finish in a Civil War.
From the swamp back to the swamp.
And if the Democrats get back in, they will have members opposed to the West.

Given how the trumpeter is dividing the USA with his total ignorance of world affairs, fear mongering and hate rhetoric on so many levels, and that roughly 45% or so of the population agrees with his drivel, then stay tuned for one of the most hate filled and polarizing elections to ever be held in the US. It does not help that no one has yet come forward for the Dems that show any promise...…..