Well, what a week it’s been on the financial markets! First Silicon Valley Bank, then Signature Bank and then the contagion spreads to Europe with Credit Suisse the primary victim.
There are two main lessons that I take from the events of the last 7 days.
First, the world’s financial system is far more fragile than most people realise.
Second the technocrats who think they are in control of this system are clueless.
It’s been clear for some time that the likes of Jerome Powell in America and Andrew Bailey in the UK are always a day late and many dollars short. They act like the economy is a well-oiled machine and that they can control the levers to bring inflation neatly back down to their 2% target. This is complete B.S. There are 350 economists employed by the Federal Reserve – how can it be that not one of these geniuses could see inflation coming after the massive currency creation during the pandemic? And how do they respond. First they are in denial , then they say its transitory. Then both Powell and his predecessor Janet Yellen admit how little they understand about inflation. Then they raise interest rates further and faster than at any time in the Feds 110 year history. What could possibly go wrong?
Its not 5 minutes since Powell said he had all the tools he needs to control inflation. Well, last week he created a new tool, the Bank Term Funding Programme – this guarantees the original purchase price of bonds to banks who’ve suffered because the Feds interest rate hikes have caused them to crater in value!. This is a $600 billion facility that they created overnight with seemingly no discussion with their political masters in Congress or the White House. So the Fed will now underwrite the treasuries at the original price the banks paid for them, as opposed to the much lower value they have today value they have today.
I believe there’s also been a $25 billion contribution to this rescue from the Exchange Stabilisation Fund which is America’s currency reserves. These reserves are now depleted to a level comparable with Algeria and Uzbekistan!
To avoid all the flack they received when taxpayers had to bail out the banks in 2008 they are trying to pretend that the average Joe wont be impacted by these plans. Well, who funds the FDIC? The answer is banks and financial institutions. And when they are forced to pay higher FDIC premiums who will they pass the costs on to? Their customers, AKA the average Joe! Its the same with the FSCS in the UK, paid for by regulated entities although it only covers £85,000 rather than $250,000.
Any banking crisis tends to lead to a liquidity crisis, especially shortage of dollars in which 80% of global transactions are settled. So In a bid to keep cash available through the global financial system, six central banks, including the Bank of England, also announced at the weekend that they would boost the flow of dollars to the financial system. This has been done in concert with the Bank of Japan, the Bank of Canada, the European Central Bank, the US Federal Reserve and, in between orchestrating the Credit Suisse sale to UBS, the Swiss National Bank. They are still trying the play down the scale of the crisis, but clearly events like we’ve seen over last weekend are hardly business as usual even for these master manipulators.
What’s also emerged from these events is the scary level of financial illiteracy among most of the population. Most people still don’t realise that when you put your money in the bank its no longer your money, you are now a creditor of the bank. And you are at the whim of politicians and central bankers if the bank gets into trouble. So far this time around they have not used the bail-in legislation that allows banks to turn your deposit into equity. How might that have worked with Credit Suisse investors? They went to bed on Friday thinking the bank was worth over €9 billion and woke up on Monday to find it had been sold to UBS for less than a third of that value with no consultation with shareholders.
People also don’t understand how bonds work. If you buy a long term bond when interest rates are low, its value will plummet when interest rates rise. So if you buy a $100 bond that pays 1% you receive a dollar a year. If the new government bonds pay 5% then what does that make your $1 a year worth? The answer is $20, an 80% fall from the price you paid. It seems that even the so-called professionals don’t understand this because this is what did for Silicon Valley Bank, who are guilty of woefully inadequate risk management. They had big deposits from their tech company clients but also experienced a reduced appetite for loans. So they parked their spare cash in long dated treasuries rather than the safer T-Bills and short term notes. The losses wiped out their equity and nervous depositors started a run on the bank that led the regulators to take it over.
One of the concepts I talk to our members about is Private money, by which I mean money that can’t be inflated away or debased by politicians and central bankers. The two best examples of this are gold and bitcoin. No surprise that demand for gold was up 270% last week and that the prices of both gold and bitcoin spiked. The problem with Bitcoin is that it’s too volatile to be a store of value and too difficult to use as a medium of exchange. Gold has thousands of years of proof of its effectiveness as a store of value but until now it’s not been a practical medium of exchange. I’ve been recommending that our members by gold Britannias as they are one ounce of pure gold that is regarded as legal tender so there’s no CGT if the price of gold goes up as much as I expect it too. But imagine going into your local Starbucks and ordering an Americano. The barista asks for £2.50 and you ask if he has change of £1647? This is where what the guys at Glint have done is so important. I can now use my Glint card and the app will sell £2.50 of gold in my Zurich vault and convert it to sterling on my Mastercard.
Given the pathetic rates of interest paid by banks, the certainty of losing 10-15% of purchasing power each year and the risks of losing deposits in banks, why wouldn’t you put your liquid funds into gold now?’
So what action should you take in response to this mas panic on the global stage? The first is to assess your cash holdings. How much do you have in total and how many banks is it spread across? Remember in the UK you are covered for a total of £85,000 with all the accounts that you hold with a single institution. So if you previously held accounts with HSBC and the UK branch of Silicon Valley Bank, your protection just halved because HSBC now owns SVB UK. Consider moving some of your cash into gold, either through allocated gold or through the purchase of gold coins. If you need instant access to gold, take a look at the Glint card and see if it could work for you.
Next, look at any regulated investments you hold such as pensions and see how much is invested in government bonds or bond funds. It may already be too late to take corrective action but you can at least consider gradually reducing your exposure over a period of time. And third, look at any banking hares that you hold and assess whether they remain a safe investment. They have been paying high dividends and have been among the best performers in the last six months so it may be a hard decision about whether to keep them or leave the sector completely. An important area to look is your pension funds – are you clear about what you are invested in and do you have any control over the asset allocation?
Most important of all, take the events of the past week as a wake up call. You cannot trust the so called experts or assume that they know what they are doing . They are always playing catch up as each new crisis surprises them. Take personal control and become the sovereign steward of your family’s wealth including the proportion of it tied up in the global banking system and in government bonds. Stay informed and try to be one step ahead of events, unlike the idiots running our Central Banks and the political masters they answer to.