Welcome to this week’s edition of Cape May Wealth Weekly. If you’re new here, subscribe to ensure you receive my next piece in your inbox. If you want to read more of my posts, check out my archive. The first version of this article was published in February 2025.

Financial news outlets have no lack of doomsayers. Whether it’s Reddit’s r/superstonk, where investors still talk about an (alleged) market manipulation in Gamestop, slightly more professional but unquestionably biased news sources such as ZeroHedge, or actual hedge fund managers such as Michael Burry (who, to quote someone on Twitter, “successfully predicted 14 of the last 2 crashes”, and finally threw the towel on his fund this year) - someone always expects an imminent market crash. For a long time, I paid little attention to those crash prophets. As my co-founder Markus likes to say, there’s always a reason not to invest - it’s exactly those looming yet undefined risks that justify long-term equity returns. 

But admittedly, my view on such things has changed a bit over the last 12-18 months. And for the first time, I’ve started to pay more attention to adverse (geo)political scenarios. There’s my home country of Germany, which is facing the most challenging economical environment in my lifetime - such as a structurally challenged automotive industry, paired with an unfavorable demographic pyramid. Further to the east, there’s the ongoing war in Ukraine, and the overall unclear ‘threat’ of Russia to Europe. And lastly, the political events in the US, and whether decisions made by the current government might have lasting (negative) effects on how investors perceive the USD and its debt as a safe investment.

And it doesn’t just worry me, but many of the affluent investors that we work with. All of them want to see Germany, and Europe, succeed. They’d happily pay their taxes if they felt like they got the commensurate ‘return’. But given slow digitalization, demographic challenges, and a bleak industrial outlook, they wonder whether their home country, where they made their money, is also the place where they should keep their hard-earned money. Or if they should look elsewhere.

So let’s talk about this (alleged) decline of the West - of Europe, and the US. So what scenarios of decline should we consider? And how might affluent investors protect themselves against them?

Before we can think about what measures might be relevant, we need to discuss what we think this decline of the West could look like. In our view, there are three scenarios to realistically consider: An economic stagnation, an economic collapse, and some sort of political shift.

The economic stagnation is something that I would compare to what we have seen in Japan’s lost decades. After the collapse of the Japanese asset bubble in the 1990s, Japan grew significantly more slowly than the rest of the developed world, even seeing a period of deflation. Despite substantial measures by the Bank of Japan, Japan has so far been unable to return to growth in the conventional sense - going so far as losing its status as third-largest economy to (ironically) Germany amid the significant decline in the value of the yen.

Economic collapse would be a more drastic outcome, and could look like what Argentina has been facing in recent years. Amid challenges such as significant government spending and a struggling economy, Argentina has seen its currency collapse and even defaulted on its government debt multiple times. As a result, assets denominated in Argentine pesos have seen a massive decline in value. There has been some successful measures by President Milei, but they haven’t gone as smoothly as promised - requiring, at one point, a $40BN lifeline by the US government.

Lastly, political shift. A recent scenario that comes to mind is what happened in Russia since their attack on Ukraine, with the nation and its citizens being cut off from the Western financial system.  In this category, one could also categorize the fears of some of our clients about a wealth tax, or even confiscations of funds and assets (Enteignungen) in case of the success of a left-wing electoral victory. (For more thoughts on this topic, check out last year’s article Return of the Wealth Tax.)

So which scenario do we find likely?

If Germany doesn’t find a way to revitalize economic growth, a Japan-like scenario of economic stagnation seems increasingly likely to me. We are already struggling with substantial spend on pensions, and this spend will likely only go up. Given our strong Mittelstand, our economic base will not crumble away from one day to the other - but with no new sources of growth, and a seriously challenged automotive industry, we might find ourselves in a slow but steady decline. Over the (admittedly very) long term, this might turn into an Argentina-like economic collapse.

Political upheaval, on the other hand, seems less likely to me, even in the (currently) unlikely event of an extremely left-wing government coming to power. For that, the German legal system just seems too unwieldy and powerless, especially against much-better qualified private law firms (see CumEx). What seems more likely is continued action against illegal tax evasion, or some sort of wealth tax, as outlined above.

But your time reading this article wouldn’t be well spent by outlining any personal projections here. Instead, let’s focus on the more important question: Thinking about you can protect your wealth.

Perhaps If I am worried that Germany is approaching its decline and fall, I should simply leave Germany - no longer finding myself exposed to high taxes, demographic challenges, and the theoretical threat of confiscations.

Be warned - completely leaving a country is much harder to do than many YouTube videos and whitepapers make it seem. Individuals are subject to so-called exit taxes (Wegzugsbesteuerung), which see the departed jurisdiction levy taxes on all unrealized gains. They also come with tough requirements, i.e. no longer having a permanent residency in the departed country. So while they are creative structuring methods to reduce or avoid said exit tax, only few of the individuals that ask Tamara and I about departing Germany actually do it.

So perhaps it’s more straightforward to stay in Germany, but keep your money elsewhere? Once again, trusting those YouTube videos, we might be inclined to set up a foundation in Liechtenstein or a holding company in the UAE. Yet once again, things are more challenging than those videos suggest: In this day and age, most Western nations have protected themselves from the most blatant forms of cross-jurisdictional tax optimization. At least from the taxation angle, such structures are not easy to maintain - one affluent client we work with already decided to move his holding company out of the UAE. Be aware: If not done properly, you might not only pay the same taxes as before, but might even face criminal charges for tax evasion.

So what actually makes sense for your average, concerned investor? We would recommend considering how you can diversify your custody and jurisdictional exposure. That could indeed mean having your holding company in a jurisdiction the respective investor considers more stable, while perhaps operating it as if it was a German company (i.e. without any major tax optimization). In a more simple manner, it could also be choosing banking relationships in and outside your home country, i.e. neighboring countries such as Luxembourg or Switzerland.

So you’ve optimized your jurisdictional setup, and diversified where your assets are custodied. But what assets should you actually invest in to be decline-protected?

Last year, a client sent us a video of an investor who drew parallels of the West’s current situation with the fall and decline of the Roman Empire. According to the investor interviewed, Rome declined because their currency was subject to currency debasement (i.e. lowering the intrinsic value of their coins by moving from gold to silver to even less valuable metals), and that we in the West, driven also by substantial money printing, were subject to the same issue without knowing it. In other words: Slow but steady (hyper)inflation.

That argument we could understand (although we didn’t necessarily agree with in full). But what we certainly didn’t agree with were the suggested hedges: Crypto (as a non-regulated, scarce commodity) and technology stocks (due to their ability to scale at essentially no cost).

Starting with the latter, technology stocks. Here, we’d politely disagree: While their ability to scale at little to no cost is indeed a major advantage, it also comes with the challenge of much more rapid disruption (AI certainly top of mind here, as we saw last week) and a lack of physical, inflation-proof assets. Moving on to crypto: Some digital assets, most notably Bitcoin, are indeed scarce (given its limited number), and many digital assets are indeed not centrally controlled. However, crypto clearly also has disadvantages, such as a lack of physical value, its traceability, and at least some dependence on regulatory recognition. (The 6-month chart in most major crypto currencies certainly doesn’t help the case as stable, value-maintaining asset either.)

So with tech stocks and crypto as imperfect means of protection - what other assets come to mind? We’d generally look for assets that see direct or indirect positive benefit from inflation: In terms of direct benefit, there are inflation-indexed instruments such as inflation-linked bonds or infrastructure investments that have inflation adjustments built into their long-term revenue streams. We also think that hard assets are beneficial, i.e. those that can not be immediately replaced and/or have a stable replacement value even in hyperinflation, such as real estate or commodities (including Gold, which will get a well-deserved own article in the near future).

But of course, no single asset is a perfect solution. Real estate might be an inflation hedge, but still loses its value if they are based in a declining region or country. Gold has historically retained its value over the long term, but can be as volatile as small-cap stocks over the short- to medium-term.

Hence, we’d recommend the same as for jurisdictional matters: Diversify across many such inflation-protected asset classes. Perhaps even by adding a bit of crypto.

So you’ve diversified your portfolio and feel protected in the case of an expected downturn. But what if you want to benefit? Perhaps there is a short- or long-term trade that would allow you to profit in such a scenario, seeing yourself find an opportunity like George Soros’ Sterling Trade?

Let’s begin with the directional, tactical trade. First, you need an idea - a certain factor that you think will be positively or negatively influenced in one of our scenarios of decline. Secondly, you need to be able to actually trade on that scenario (i.e. no super-niche, illiquid instruments). Third and last, you need to be right: Not just in your timing, but also in the direction of your trade - more than once did I correctly forecast an event, but saw the market or instrument actually move in the other direction from how I had expected.

Attempting such a trade is easily done, and if anything, I’d advise investors to give it a try, if only to educate themselves in the wonderful world of financial markets. However, such trades should clearly be placed in the Aspirational Bucket - making up only a small amount of your portfolio that you can lose without endangering your long-term financial goals.

The alternative is so-called systematic hedging. Instead of trying to time an adverse event, you could position yourself to always be protected from that event. But systematic hedges literally come at a cost, as you might be paying for your protection for a long time until the hedged event actually takes place. You might be able to offset (some of) this cost by adjusting your risk budget: Since your downside should be (partially) protected, you might be willing to increase the risk you take, i.e. through leverage and/or a higher equity allocation. However, once again, be mindful that there is always the risk that like with a tactical trade, your strategy might not work out, or not cover every risk event.

But do you actually need such complex strategies in your portfolio?

First, systematic hedging. In most of our client relationships, we find opportunities to de-risk portfolios while maintaining the required target return (see How To Spend It), making many systematic hedges obsolete. (One example of an exception would be a position with a large taxable gain that can’t be sold off, making hedging a more cost-efficient alternative.) Or, if clients want to have additional upside but like the systematic downside protection, we actually try to ‘do the opposite’, taking on derivative upside exposure, for example through call options. (Strategies utilizing such exposure have performed tremendously well last year - if you’re interested in learning more, reach out to us.)

Secondly, tactical trading. While the idea of a billion-dollar trade like George Soros sounds enticing, they rarely work out in reality for non-institutional traders. As mentioned above, even a right idea might not work out as hoped - whether that is a question of direction, timing, or both. In our experience, affluent investors are better served by focusing on long-term opportunities, like starting a new business in a trend-advantaged industry, rather than trying to make a short-term tactical trade in a market full of much better-informed competitors, such as hedge funds or quant trading firms.

This view on tactical trades equally applies to any hedges, or strategies, aimed specifically at the aforementioned ‘Decline’. Remember my initial paragraph: Don’t pay too much attention to crash prophets. While as citizens we should rightfully be worried about how the ‘West’ will deal with the aforementioned challenges, and should urge our representatives to act, we should not forget that most things take a long time to play out - and luckily, more often than not, end up being solved through action, time, or other factors. 

At best, investors lose out more often by being too pessimistic (i.e. being too cautious in their cash quotas or risk levels) rather than losing money to a Black Swan-like event. At worst, by reading too much into the articles of Zero Hedge or other ‘Doomer’ sources, some investors find themselves changed - from optimistic entrepreneurs to fearful individuals, scared of the prospect of losing their money rather than enjoying their life.

So follow our guidelines: Diversify where your bank accounts are based. Diversify your assets. And if you’re bold, maybe even find a manager that can give you some ‘exposure’ to tactical, contrarian ideas. But most importantly, don’t lose your optimism: We Germans love to complain, but often have made it work in the end. Hopefully, this time around, it will be the same.

Concerned about geopolitical risks - and how they might affect your hard-earned wealth? We’d be happy to give you a second opinion on your portfolio’s resilience to geopolitical and jurisdictional risks, helping you find the right balance of protection, stability, and long-term growth.

Cape May Wealth Advisors is a Berlin-based wealth management firm focused on helping affluent entrepreneurs find financial independence. If you are interested in learning more about how we can help you, reach out to us via email, and make sure to subscribe to our newsletter.