As the US markets closed for trade last Friday, it became apparent that First Republic Bank [NYSE:FRK] was as good as dead. A potential seizure by the Federal Deposit Insurance Corporation (FDIC) is likely to go ahead coupled with an asset sale to other major banks.
Only two months ago its market value exceeded US$40 billion. It closed last Friday at less than US$1 billion. This type of value destruction rivals what the cryptocurrency markets saw last year after several high-profile tokens collapsed.
I regard these banks with greater disdain than I do cryptocurrencies. My reasoning is that they’ve existed for longer. Those running these organisations should know better. Their failure came despite being beneficiaries of a low interest rate environment that brought them more business by way of the volume of lending they enjoyed.
Reaping the whirlwind of the era of
reckless easy money stupidity
While many investors are nodding in agreement with government bureaucrats and financial pundits, who say everything’s fine and they should remain invested in the market, I have a feeling there are some rough patches ahead. The market has rallied a bit over the past few months as investors suspect the US Federal Reserve and other central banks will start to ease their monetary policy and cut interest rates.
What if they don’t? After all, we found out last Thursday that Fed Chair Jerome Powell had signalled, in a prank phone call where he thought he was addressing Ukrainian President Volodymyr Zelenskyy earlier this year, that they were struggling to contain inflation. Other members of this institution are also coming out admitting that the collapse of Silicon Valley Bank and Signature Bank was due to the failures in their regulatory supervision.
I’m not surprised if their strategy to compensate for their failures is to flog the economy harder. After all, it was easy money that led us into this mess in the first place.
If low interest rates caused this problem, perhaps raising interest rates now will solve it. Never mind if it’s a case of ‘too little, too late’. They didn’t see inflation and underestimated the severity of it as recently as the end of 2021.
Just like the housing bubble in 2007, right before the whole thing went KABOOM!
But don’t simply blame easy money. The culprit is blind stupidity from those at the top.
What ‘cashing out of the system’ really means
It’s a well-known piece of wisdom that no one rings the bell at the top. And everyone heads for the door in a panic.
However, many people miss something that’s really important and it’s about how to find actual cover or refuge during such times.
Many believe that ‘cash is king’ when bubbles burst.
I have a different view of this. I believe that assets will actually rise in price in the next crash because it’s the fiat currency that’ll crumble.
I want to clarify something, though.
I foresee an initial retreat in asset prices when the crisis hits because that’s a natural reaction from investors scrambling for safety.
However, I’ve reasoned that fiat currency is inherently worthless. Its value comes from the collective agreement that the issuer of the currency will honour its liability, and historically that’s from governments levying taxes on the people to pay for the loan they’ve made from central banks.
What if the system is exposed as being hopelessly corrupt and incompetent?
And this ain’t a conspiracy theory either. They’ve admitted to yet another blunder in this banking crisis to show their incompetence. Then there’s the Epstein factor that is gnawing at JP Morgan and Deutsche Bank.
In this case, it’s important to have some of your wealth outside this game.
How do you do that?
You need to have physical ownership of it, where daily price gyrations won’t affect you.
Real estate that you’ve paid off fully comes to mind. You own the title deed. But a property under mortgage doesn’t count because the bank that lends to you holds that deed.
But how many people can easily get hold of a property that they paid off in full? It’s out of reach for many.
In this case, look for something more affordable instead.
This is where physical bullion in the form of gold coins and bars could come in handy. They come in denominations that are small enough for you to buy and store, without costing you an arm and a leg. A one-ounce gold coin costs around AU$3,000 right now, while a 100-gram bar would set you back around AU$10,000 and is only the size of a gym pass.
Owning gold coins and bars won’t turn you into a multimillionaire overnight. Truth be told, rich and successful people have been storing some of their wealth in gold for generations, passing it on to their children and descendants to create generational wealth.
Look, I’m not saying you need to take all your wealth out of the system before the crash hits.
It’s good to have a foot in both camps to give you the security to sleep soundly at night and the chance to seize on opportunities that a crisis can offer you.
Those who are unprepared will get caught up in the panic once things start turning south again.
Make yourself an exception to this.
Plan ahead, then sleep soundly while others are feeling anxious.
If you want to find out more about how to get your hands on physical gold, check out this free report.
Editor, Fat Tail Commodities