The Warmest Spots in a Financial Winter
In yesterday’s Money Morning, I wrote to you about how Australia has been on a downward rate run for the last 30 years.
The standard variable home loan interest rate has never been lower than it is today. And we’ve gone through the records, back to 1959.
Money is cheap, the cheapest it’s ever been. That’s good for the consumer. You’d think.
The reality is, rates can be too low. Money can be too cheap. And sometimes, if it’s completely free, then you might want to, ‘run for the hills!’
When money is cheap, organisations like banks have reducing margins, reducing profits. Sometimes losses and sometimes, with conditions spiralling out of control, they will fail.
Now, it’s been a while since we’ve seen a big bank fail. But what a lot of people forget is that banks fail all the time. It’s just they’re not typically the ones that create systemic risk to the financial system.
That’s what regulators like APRA are there for. They’re to stop systemic risk to the financial system. And they do it via monitoring and control of banks.
Other regulators around the world do similar things for their domestic banks. And then when things get bad regulators, governments, authorities step in to keep things afloat during bad times.
This is a survival of the fittest in capital markets
Now let me ask you this…if Google suddenly ended up in a position where they were about to fail, do you think anyone would step up to prop them up? Don’t you think that Google, surely would be, too big to fail?
Of course not. No one would do jack squat. The government definitely wouldn’t be there with a bailout package. Yet Google is arguably equally as important to social function as a bank is.
Perhaps that’s a debate for another day. The point is capital markets determine (usually) what does and doesn’t survive in public markets.
Except for banks. When it comes to people’s money, then the stakes are a little higher.
But banks should be allowed to fail. If they stuff up, if they operate poorly, if they’re simply no good, they should be allowed to fail.
This is a survival of the fittest in capital markets. And long term it creates a more robust, healthier system. What creates cancers on the system is crumby, poorly run, bumbling banks to continue on their merry way repeating the same mistakes of the past.
And sadly, that’s very much what’s happening.
Now, this isn’t necessarily an issue for Aussie banks. They’re well capitalised, they’re pretty robust and they’d be able to withstand another ‘GFC-like’ event.
But the same can’t be said for foreign banks. Banks in the US, banks in Asia, banks in Europe are ticking along okay now, but many would crumble into ashes should real hard times fall again.
And it seems like hard times might be on the way. Will this spark a spiral of pain and suffering around the global financial system? Well, yes it might do exactly that.
Will it hit Australia? Yes, while we might be in a good position, you can’t escape real global trouble. Particularly if a global recession hits.
Well, if a global recession is coming and it’s all pain and devastation, what can you do about it?
What you can do in a global recession
Do you own a cat? Maybe not, maybe you do. I do. And in the winter the cat goes from place to place in the house looking for a warm spot. My cat doesn’t just pack up and leave, it stays around on an eternal search for that perfect spot until summer rolls around again.
Sometimes it will be underneath the radiators (and sometimes on top of them) and sometimes it will be someone’s lap.
In the cold, the cat is on an endless search for a warm spot to snuggle into and stay all day long.
Money is like a cat in winter. When financial winter hits money doesn’t just pack up and leave never to be seen again. It just hunts around for a warm spot.
Now, as you’re well aware, there aren’t as many warm spots in winter as there are in summer. But there’s always a warm spot somewhere.
And that’s the kind of mentality you need to take in a financial winter. Smart money is just on an eternal search for that perfect warm spot until summer comes back.
The really smart money gets to the warm spot just before winter hits. That way when the masses start trying to find those spots the smart money is already snuggled in, sitting pretty.
You see, in a really bad winter, there isn’t enough warm spots for everyone. Some people get left out in the cold and have to suffer all winter long.
That’s why it’s key to get your warm spot before everyone else.
Today’s warm spots
When it comes to these warm spots there’s not many of them. But there are some. And in a really bad financial winter two in particular stand out like a sore thumb.
The first, traditionalists will be quick to jump on. And that’s precious metals. In particular, gold. Now I won’t disagree that gold is an outstanding hedge against financial crisis. Historically, it’s been that way and there’s a good chance that this zero correlation to wider markets will continue.
So that would be one of the places you’d start to look for your warm spot if things get worse and ultimately disastrous.
However, what gold doesn’t do so well is deliver immense capital appreciation. Sure, it can help stem the bleeding and maybe even deliver some okay returns. But it’s not going to really build huge wealth for you if the winter is long, at least not in my view.
What can do that is bitcoin and cryptocurrency. We’ve really gotten past the point where the idea of bitcoin being a scam is legitimate. Some people in the traditional economics circles still think it’s all nonsense, but they would.
The fact is that bitcoin is here to stay and isn’t going anywhere. Also it’s a magnificent asset to hedge against financial crisis. Heck, the thing is built as an alternative financial system, so of course it’s going to perform when the ‘traditional’ system packs it in.
It’s worth noting that I’d contend not owning bitcoin as a hedge against financial crisis is now an investment mistake. If you want to build a robust portfolio, it’s borderline negligent if you don’t have bitcoin.
Other cryptocurrency, well there’s arguments for those as well, too many things to cover off today. But if you’re looking for the warmest spots in a financial winter. Those are two you should be looking at increasing your exposure to.
Now, as I said, there is a third and it’s one that most people wouldn’t expect.
Next week in Money Morning, I’m going to take a deeper dive into that third warm spot and explain why it’s something that all investors should always have exposure to, in both winter and summer conditions.
Editor, Money Morning
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