Welcome to Finance and Fury

Today – Want to start looking at what would likely survive another financial correction or worse, collapse

Been thinking a lot recently about the structure of the modern economy – This episode is probably more like a FF ep, but this topic will have a massive impact on each of our lives at some point – where to have your money in preparation for the next crash

  • Heavy topic – so a few things need to be explained before diving into what to look for in what will occur in the next collapse.
  • If you listen regularly, you might have noticed a lot of topics have revolved around monetary policy lately – rate cuts, effects, etc. – Been looking for an answer to what the best investment would be in the event of a financial collapse
  • As the current financial system of uncollateralised debt will be the cause
  1. This doesn’t mean that the Next Financial collapse is imminent and that you should rush and sell everything – but it is important to still pay attention to certain signals –
    • Are people buying more or less luxury items, are they going on more or fewer holidays, what products are being marketed, how much are companies reinvesting profits, or paying it out as a dividend, and how much people are saving?
    • These paint a thematic trend of the ‘mood’ of the economy – the economy collapsing is a financial collapse
    • An economy can exist without money – i.e. barter – but two issues in modern economy without money
      1. Limited in wealth – people don’t have much in the way of physical goods – chickens, sheep, etc
      2. Very ineffective – imagine your own life – income from job in the form of food, you pay rent in tvs, which you get from trading away cookies you make
    • The economy is a number of things, all bundled into one concept though – The invention of currency did revolutionise though – But at the core, the economy is between two players
      1. You have consumers – which are a major driver of growth – Demand
        • Nobody to sell to – no companies
        • If people can’t afford what you sell – no companies
  • If people don’t want what you have – no companies
  • You have producers – Those that provide the supply
    1. Nobody to buy from – you starve or have a low quality of life

The cycle of the economy 

  1. There is a flow between consumers and producers – exchange of money for good or service
    • All agree that the more that is being exchanged and if the growth of how much is being produced, consumed is going up, the economy would also grow
    • Most people think of companies are producers – but they are also consumers
    • Consumers can also be producers – I consume, but also produce at the company end – I am a bad consumer personally, but the company makes up a massive difference, and flow on effects of what people you receive an income from the company go on to consume.
  2. In the extreme example – this would be a ‘free market’ – system in which the prices for goods and services are determined by the open market and by consumers
    • Producers are free to make what they want, sell at what they want and at the quality that they want – but what they want is what the consumer wants – the customer is always right – remember – company goes out of business if you have nobody buying your goods because someone else does it better.
    • Individuals would be free to then dictate to the producers what they want with their wallet.
  3. Currency/money and the modern financial system allowed the economy to boom – connected billions of suppliers/consumers
  4. What gets in the way? Laws, taxes and regulations –to protect us, or provide growth in the government (expand capacity or revenues)
  5. I used to think that if we got rid of taxes, regulations, etc, we would have a free market
    • Forgot the fact that the very cost of money is controlled (interest rates) – along with the supply of money
    • At the higher level – this probably has more impact on the economy running inefficiently – a massive build-up of debt of nations and slowing growth
  6. There is no true free market – That was a quick overview of the nature of an economy and concept of the free market –
    • Why is it important to know this?
  7. Looking at How to prepare crash revolves around looking at the interaction between these elements
    • Goes beyond just human behaviours now with Government and regulators – as the outcome is based around what is allowed and what can be done –
  8. There is no way to be able to exactly call when where how on a crash – almost like predicting the weather – condition changes
    • Start – most crashes are behaviour triggered, but system created
      1. Allows people to do what the system allows
  • So behaviours create it in the system of the economy
  1. A much better idea about what would happen after based around looking at the system – Government – what can they do?
  1. Crashes of the past – panic selling – Most of crashes is behaviours – Governments step in to try to stop panics – showing action –
    • Why govs banned short selling in GFC – otherwise it becomes a race to the bottom
    • Also why the ‘bailouts’ occurred – action by gov to stop panic of banks/insurers going out of business
    • The Gov has to show action – otherwise people may panic more making it worse –
    • While action in the short term can reduce the panic – can lead to a massive problem down the road
  2. The actions the Government can take have to be legal though – laws/regulations tells us exactly how governments will act – just have to pay attention – so what can Governments do now that they couldn’t pre-2005?
  3. What if it blocked us from selling shares, or withdrawing money? Or take our deposits, or bank notes to bail out the economy?
    • Take the cash out of your bank and freeze you selling any investments? Along with telling investment manager, stock exchanges, super funds to not trade a thing?
    • It sounds like an impossibility, right? But sadly, Govs of the world think it can remove individual behaviours through similar policies
      1. Nothing really new after all – just a massive increase in scope that they are slowly working towards
    • Where to invest if the Gov can freeze bank accounts, convert or write off money invested/deposited with them?


What do the laws say is up for grabs in the next crash?

Brings us to what are called Bail in laws – looking at these shows what to avoid investing in going forward

  1. Story to tell here – Cyprus, USA, Brisbane 2014, EU and AUS/NZ today – as bail in laws have been a decade in the making –
  2. There are one of the 3 alternative actions which can be taken in respect of a distressed bank
    • Bankruptcy and liquidation of the bank, Bail-out, Bail-in
    • Let a company fail, or find capital to provide liquidity (i.e. cash to pay off their debt obligations – debt>value)
  3. Why are bail in/outs needed? Economy is reliant on companies to run – producers – Letting them go bankrupt can be bad for the economy (which we are a part off)
    • But sometimes one company gets so big that if one goes, they all go – house of cards – the concept of ‘too big to fail’
    • We saw bail outs in 2008 – large banks and insurance companies given funds as part of a securities purchase program of MBS or other debt instruments/derivatives – i.e. Given face value on an asset that’s prices are cents on the dollar
      1. Injected $700 billion into some of the biggest financial institutions in the country
      2. Bank of America Corp. Citigroup, AIG
    • But the government doesn’t have its own money, so it must use taxpayer funds in such cases
      1. But that is limited to access based around the ire of the population

Enter Bail in (like a bailout)

Still provides relief to a financial institution on the brink of failure through a resolution scheme used in distressed situations – list of what to do

  1. A bail-in is the opposite of a bailout – funds don’t come from external parties (i.e. governments using taxpayers’ money)
    • With a bank bail-in – money of unsecured creditors (depositors and bondholders, hybrid securities, etc.) is used to restructure a banks capital to remain solvent – i.e. use certain liabilities on their book and convert them into worthless assets, essentially turning what was a debt into nothing – restructure the books
    • Imagine that someone loaned you money to start a business – but the business is now bankrupt, so you tell your friend that you will give them some shares in your business to repay the loan
  2. Bail-in and a bailout are both designed to prevent the complete collapse of a failing bank. The difference lies primarily in who bears the financial burden of rescuing the bank.
    • Bailouts help to keep creditors from losses while bail-ins mandate creditors take losses


Bail-ins are becoming popular

Bail-in schemes are being more broadly considered across the globe as a first phase resolution to help mitigate the number of taxpayers’ funds used in supporting distressed entities – Timeline – going back

  1. USA – The financial crisis of 2008 ushered in the term “too big to fail,”
    • Good phrasing for regulators and politicians – gives a rationale for rescuing some of the country’s largest financial institutions with taxpayer-funded bailouts
    • Public wasn’t happy – Occupy wallstreet – Congress passed the Dodd-Frank Wall Street Reform and Consumer Act of January 2010
      1. Eliminated the option of bank bailouts but opened the door for bank bail-ins
      2. Modelled after a cross-border framework and requirements set forth in Basel III International Reforms 2 for the banking system of the European Union
    • Creates statutory bail-ins – Fed, the FDIC and SEC (alphabet soups) authority over companies in receivership
    • But expanded the net of what companies fall under this legislation – now they can control non-banking institutions
      1. Systemically important bank (SIB) – is a bank whose failure might trigger a financial crisis, or
      2. Systemically important financial institution (SIFI) – insurance company, or other financial institution
        • Insurances – Allianz, AIG, AXA, MetLife (few)
      3. Cyprus 2013 – uninsured depositors (defined in the EU as people with deposits larger than 100,000 euros) in the Bank of Cyprus lost a substantial portion of their deposits
        • Depositors received bank stock – but the value of the shares was at a fraction of the cashes
      4. Brisbane 2014 – Financial Stability Board (2009) and the International Organization of Securities Commissions
        • Mandate from the G20 and the Financial Stability board and the implementation of bail in regulations
      5. EU – In 2018 – incorporating bail-ins into its resolution framework
        • The banking systems in EU distressed – low or negative interest rates, more bank bail-ins are a strong possibility.
      6. Today – Deposit Bail-In -overt example now in New Zealand under the Open Banking Resolution
      7. Australia – passed a mini version of this at start of 2018 – Financial Sector Legislation Amendment (Crisis Resolution Powers and Other Measures) Act 2018
        • Treasury and politicians say there is no intent to bail-in deposits to rescue a failing bank
        • Can’t comment on their intent – but had a fun weekend diving into this legislation – true that doesn’t say they can
          1. But doesn’t say they can’t either –in conjunction with other legislation though – Banks T&C – not impossible
          2. Actually – relatively easy – banks just need to reclassify deposits, can do without your consent
        • What is definitely in there at this stage? – certain instruments and unsecured debts (deposits are this to a bank) to convert into shares – cover this and more in another ep
          1. Cover Types of assets to watch out for further – at some point in time – economy will take another tumble – who knows what bit of white noise will eventually trigger it
        • But what types to avoid investing in is a start to protect your financial security – Run through this in another ep

Thanks for listening! Sorry it was a heavy topic – thought I would share it though as there hasn’t been much discussion on this topic – why? Cover this in this Friday’s episode – and the investments next week.


If you want to get in contact you can do so here

How to negate Central Banks negative effects in your own life

Welcome to Finance and Fury. There will be two parts to this episode. Firstly, do we even need Central banks and what is an alternative, then secondly, as they are probably not going anywhere anytime soon, how to negate their negative effects on your own life. If you...

Is the bank ‘crisis’ over?

Welcome to Finance and Fury. In last weeks episode, I stated that I was going to cover the collapse of SVB, but by now this is old news and there have been further developments – so we will still give a quick recap on SVB but the main focus will be on further...

Never let a good crisis go to waste – The new evolutionary phase of the economic system.

Welcome to Finance and Fury – Last year through September, October and November – was running through the future of the economy – was looking at this through a few episodes – interesting to see a lot of what was discussed playing out now In those episodes – went...

How to invest to achieve your goals?

Welcome to Finance and Fury   Today – Talk about goals based investment – setting up buckets of investment allocations to meet needs Approaches to portfolio construction three common approaches in building the framework of a client’s investment solution:...

When bond yields start to rise, what happens to the price of gold and shares?

Welcome to Finance and Fury. In the last episode I went through the bond market and how inflation expectations being on the rise are having their effects, yield curves starting to steepen. So what will happen to other asset classes? In this episode we will look at...

Say What Wednesdays: Adani Coal Mine; we dig deeper and look more closely at the pros and cons

Say What Wednesday Adani Coal Mine; we dig deeper and look more closely at the pros and cons Welcome to Say What Wednesday. Today's question is from our listener, Sam. "Hi Louis, love the podcast! I’m wondering if you could do an episode on Adani. I’ve seen lots of...

Furious Fridays: The price of free is freedom – Taking a look at Lenin’s reign of terror

Furious Fridays The price of free is freedom: Taking a look at Lenin's reign of terror Today we’re going to run through the very first implementation of Communism on a mass scale. Our last few Furious Friday episodes are a lead up to this. If you didn’t catch those...

Are the risks from investments in structured products worth their potential returns?

Welcome to Finance and Fury, the Say What Wednesday edition. This week the question comes from Mina. “I would love to get your view on Structured products like the ones being offered by sequoia. Is the risk worth the return?” Great question – thanks Mina - this...

Private equity investments

Welcome to Finance and Fury. Looking at alternative to listed shares, with private equity. Globally, private equity has for many years been a niche area of the investment universe, dominated by institutional investors and very wealthy individuals. However, trends in...

What is considered poor in Australia and how to become truly rich?

Welcome to Finance and Fury. I recently was reading an ABC article about the latest earnings reports from the Australian Bureau of Statistics (ABS) – revealing the average income in Australia – now this average is probably a little higher than what most people would...

Pin It on Pinterest

Share This