Sell in May and go away
That’s the mantra of many traders. Nothing happens in the summer months because everyone is in the Hamptons. It’s 5:00 Friday, July 1 and if I needed to reach one of my former bosses right now, my call would likely be returned sometime around Wednesday next week. I know. It happened more than once.
But this summer the roads back to NYC and Greenwich from the Hamptons may be clogged soon.
Signaling a massive capital flight to an asset with universal value, gold has skyrocketed $300 or 30% in the last three months:
Large amounts of capital are moving into the asset that has never gone to zero.
Global banks have plummeted over the last five years. Deutshce Bank lost$7 Trillion in value in the fourth quarter by itself. That’s Trillion – as in One Thousand Billion, times 7!!
Why? Because eight years into this “recovery” the global financial system has ingested $550 Trillion in credit default swaps and other derivatives. Duetsche Bank has ten percent of the total. One institution has 10% of the global total of what Warren Buffett called “financial weapons of mass destruction”. “How is that possible, Joe?” you ask. “I thought it was all about deleveraging after the Great Recession”.
That was what we all read in the financial press. Financial regulators worldwide were forcing systemically important financial companies to rein it in, to decrease risk, to reduce reliance on borrowed funds. It appears that was all window dressing. Even the blog I wrote earlier this week about the eight largest US banks passing the new “stress tests” was evidence of the prevalence of this new story line that on the surface looks great but just below the surface is in reality probably not worth the paper the plans are written on.
To put the risk we are facing in perspective, the Gross World Product was $107.5 trillion in 2014 according to the CIA World Factbook. Based on the $550 trillion figure above, we have hedged every financial transaction in the world more than four times over. I just bought a $3 pack of gum at the Atlanta airport. Global financial traders have already placed bets totaling $12 for and against that transaction. Why? Because financial engineering has taken precedence over actual engineering, actual goods and services.
If you don’t follow Harry Dent at DentResearch.com, you should. Harry has spotted macro trends worldwide for almost 30 years.
Harry identified that many of the world’s largest banks are in deep trouble but regulators, even the vaunted European Supervisory Authorities are apparently ignoring the problem.
How big is the problem?
Italy’s banks have 18% non-performing loans. That means bad loans are over two times larger than their systemwide collective capital. I can tell you from personal experience (as the founder of Georgia’s largest community bank – one that failed in the Great Recession, I can say this with no risk of contradiction) that a bank has no hope of survival in this condition. And this is the entire Italian banking system. Italy is part of the EU. Losses of this magnitude could wipe out the entire capital base of the EU.
But Italy only takes third place in the deficit Olympics. Greece has 34% non-performing loans and Ireland has 19%! No slacker, Portugal has 12%.
If regulatory bodies had the resources to shut these institutions down, they would. The fact is they are also undercapitalized. It’s a house of cards that everyone hopes will miraculously remain standing but it simply can’t. Our own FDIC operated in the red for a couple years but there was nothing anyone could do about it. The option was to shut it down and start over. Every bank in the U.S. would have had a run that day. The next day, all banks would have failed. Global financial meltdown. We have been 48 hours away from this scenario a few times. The first time was in September 2007. I remember it well. There was briefly no LIBOR. Banks would not lend excess reserves to other banks overnight because they were afraid they would not get their money back the next morning. The Fed and the European Central Bank engaged in coordinated flooding of over $250 billion into the financial markets over one weekend to maintain market liquidity. I told my bank board that this had never happened before. That was just a precursor of the tidal wave barreling down on all of us.
The Greater Recession
Enough doom and gloom. I write about this so that it might give rise to the thought about what to do when the Greater Recession starts. In the last one, the Great Recession, cash was king. One client called me and excitedly exclaimed, “I just bought my four million dollar loan from the FDIC for eight cents on the dollar!” He wasn’t bragging, he was genuinely excited at saving 92%. He had just saved his company from certain financial ruin.
Be prepared. Cash gives you optionality. You can choose to spend it or invest it or you can simply hold it. If another recession hits, you will have your pick of assets to purchase at very deep discounts if you have cash that you can access. This is a great time to be building your reserves. And if we miraculously avoid another recession, you have the option of investing in assets that have a more certain future.