Hoarding Too Much Cash May Backfire

If you don’t understand what’s coming…you’ll lose more than just your shirt before 2020.

On the global stage, we’re facing an emerging markets debt crisis. Global sovereign debt defaults. Sovereign wealth and pension fund collapses. Thousands of bank collapses. A gigantic stock market crash. And a massive property market crash. Indeed, the word you’re looking for is contagion.

I don’t mean to sound alarmist. There’s just no escaping the future we face before 2020.

Thankfully, there’s a way to avoid what’s coming. You need to be in the right asset class at the right time. That said, if you think you can protect yourself by holding cash in any bank account across the world…think again!

Global politicians had plans on taking 10% of everyone’s bank accounts during the next financial crisis. Indeed, Aussie politicians were in on this game. Sound outrageous? Yes, but the terms of this game have become much worse…

You have to understand that governments everywhere are dead broke. The only thing politicians have on their mind is how they can take more of our money. They’ve been increasing taxes for years. And now, they’ve gone one step further — or shall I say, one step too far.

Thanks to the IMF, the rules of the game have changed — deposit holders globally are no longer safe. Expect banks and governments to take a lot more than 10% of your savings. What I’m about to show you is a very serious problem for people who deposit cash in the bank.

Recent history shows that looming bank collapses weren’t a concern for deposit holders during the financial meltdown of 2008/09. Billions of dollars in government bank bailouts saved deposit holders. Bailouts meant that the government (AKA the taxpayer) provided liquidity (bailouts) to keep the banks alive. Your savings were safe.

The days of bailouts are over. Welcome to the new world of bail-ins.

The EU has already enacted bail-in legislation — Cyprus was the test case. Bail-ins are coming down under soon. It’s far worse than you could ever imagine. When Cyprus’ sovereign debt collapsed in May last year, European politicians thought it would be a great idea to steal 10% of everyone’s bank accounts to pay for it.

But this wasn’t enough for the money hungry politicians…

After the G-20 meeting in Brisbane earlier in November 2014, the rules of the game changed forever. You may or may not wish to read the following…legal jargon. According to an International Monetary Fund (IMF) paper titled ‘From Bail-out to Bail-in: Mandatory Debt Restructuring of Systemic Financial Institutions’ (with my emphasis):

[B]ail-in . . . is a statutory power of a resolution authority (as opposed to contractual arrangements, such as contingent capital requirements) to restructure the liabilities of a distressed financial institution by writing down its unsecured debt and/or converting it to equity. The statutory bail-in power is intended to achieve a prompt recapitalization and restructuring of the distressed institution.’

If your head is spinning from the legal talk, here’s my translation of the new bail-in laws into simple English:

If banks seem like they may be in financial distress (i.e. financial crisis of 2008/09). That is, if they don’t have enough capital to live another day, banks will be allowed to ‘steal’ all unsecured deposits. The term ‘unsecured deposits’ includes every bank deposit — the largest class of unsecured debt of any bank.

Said more simply, the cash that you deem ‘savings’ is no longer yours. ‘Your’ cash, under the new rules, belong to the banks. The insolvent bank is to be made solvent by turning our money into their equity. Indeed, your savings will be turned into bank shares. Bank shares that could become worthless on the market or be tied up for years in resolution proceedings.

This means that if a bank’s capital and share price crashes by 80%, the bank could meet this capital void by taking 80% of your savings!

The Australian government has attempted to ratify IMF bank bail-in laws. Joe Hockey, Australia’s Treasurer, and David Murray, Financial System Inquiry Chair, believe that the bail-in law is a great policy. They are in the process of shipping the new rules to Australia.

Australia’s big four banks control around 80% of household mortgages. This total is worth roughly one-third of Australia’s gross domestic product. There’s no doubt that Australia’s big four banks are winners of the ‘too big to fail’ status.

Aggressive Chinese stimulus policies saved Australian banks from the global financial meltdown of 2008/09. These policies ensured that there was plenty of work for everyone. And, for this reason, Australian property did not experience a crash.

However — and this may be news to some — the supposedly ‘sound’ Australian banks nearly went bankrupt during the financial meltdown of 2008/09.

Some of the big four banks were unable to repay their enormous foreign debts. The banks needed to roll over existing loans to live another day. They had to beg the government to go guarantor for new foreign borrowings. The banks told Rudd that without the government guarantee, ‘they would be insolvent sooner rather than later’.  

Things haven’t changed to this day. In fact, I’d argue that the banks are more leveraged than ever before.

Don’t expect smooth sailing next time around. China is highly unlikely save us from the next financial crash. Considering the coming financial storm, there’s a real risk that we could see massive financial losses stem from the big four banks. And this could lead to one or more of the big four banks collapsing.

Assuming a collapse, under Australian laws, the government guarantees $250,000 for every deposit holder. But is this really something to celebrate?

Understand that superannuation funds, property offset accounts, and business bank accounts all hold funds well over the insured limit of $250,000. Most state and local governments also keep far more on deposit than $250,000. These are the deposit holders at risk the most.

The next financial crash could evaporate a lot of savings. The new bail-in laws will destroy jobs and the financial system. These new rules will lead to more deflation and higher taxes.

This means more money for politicians and less for you. Sometimes I think have I chosen the wrong career path. Maybe it would have been better to become a politician.

But then I remember I need not resort to evil; it’s possible to avoid what’s coming by investing wisely. This means, first, investing to avoid the massive sovereign debt defaults coming 2016/17.

You can do this by buying quality equities and gold stocks at the right time — the time to buy is coming. Diggers and Drillers readers will know when this time comes. First, though, I see gold falling to US US$931 per ounce.

This year will mark a tremendous buying opportunity for quality resource stocks. After getting crunched this year, the resources bull market will restart in 2016. You make big money buying quality when everyone else sells in panic. Check out Diggers and Drillers to see what sectors I’m bullish on this year…though I’m bearish on almost everything.

The bottom line is that the Dow is making a very bullish setup for 2015. The market is extremely bullish. Sometime around 22 January 2015, you’ll see an explosive blast to the north as we head towards 26,100 points by year’s end. The Aussie market should follow…to the 6000 point level.


Jason Stevenson
for Markets and Money

Jason Stevenson is Markets & Money’s resource analyst. He shares over a decade’s worth of investing and trading experience across resource stocks and commodity futures and options. He originally studied accounting and finance at Curtin University, where he was awarded a first-class honours degree. His professional background stems across high-net-worth, top tier accounting (corporate finance, tax and auditing), and sell-side equities research. Before joining the team at Markets and Money, Jason worked at boutique firms which advised fund managers and high-net-worth clients on where to invest. Whether it’s gold, crude oil, copper or an obscure metal like vanadium, you can rely on an in-depth analysis in Markets and Money. Jason also brings you extensive macro, political and geopolitical analysis from around the world. He leaves no stone unturned when it comes to telling the truth. Jason is also the lead analyst of Gold Stock Trader, a premium service for investors serious about precious metal stocks. Websites and financial e-letters Jason writes for:

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