The New Big Short
Wednesday, 16 December 2020
By Ryan Dinse
[6 min read]
When I was growing up, there were some simple, time-honoured truths you could rely on.
‘Work hard, spend less than you earn, and save for your future’ was a big one.
My granddad was a bank manager in the highlands of Scotland — back in a time when bank managers were a central part of the communities they lived in.
Through him, I inherited all sorts of piggy banks, full to the brim with old coins, many of which weren’t legal tender anymore.
Halfpennies, crowns, farthings, florins…money put aside for a rainy day that never eventuated.
I remember one memorable Christmas when me and my kid brother, Marc (who was about nine at the time) decided to see if we could sell these old — and surely valuable — coins.
Unbeknown to me, while I was looking up their values on the internet, Marc got out the bleach and scrubbed the ‘dirt’ off our collection.
You can imagine my face when I came through to see all these shiny ‘new’ coins I was hoping to sell as antiques!
Luckily — or unluckily — the coins didn’t have the grand values we thought they’d have. And they’re back in their piggy banks, gathering dust once more.
But my point is this…
These days, does the old advice still make sense?
Should I tell my kids to ‘work hard and save their pennies’?
The strange truth is I probably shouldn’t.
This headline from Domain.com is the new reality:
Frugal saving, it seems, is a fool’s errand. Accumulation of debt, the new norm.
And Aussies are world beaters at it, as you can see here:
Source: Macro Business
This debt pile-on is happening at every level, not just in households.
Companies and governments are borrowing their way to ‘prosperity’ too.
The debt load is already out of control, but the powers that be can’t let it stop. Otherwise, we’ll see an almighty collapse, as decades of leveraged trades unwind.
So, the money printing continues, interest rates will turn negative, and the debt pile will grow.
This process advantages those with assets like property and shares — assets propelled along on never-ending waves of debt — and disadvantages those with a basic wage or cash savings — no debt.
It’s why I said before that saving today is a mug’s game.
As Ray Dalio recently put it, ‘cash is trash’ and it will continue to be until the eventual day of reckoning.
And there will be one. A debt-based system is untenable. It can’t grow forever and it will collapse.
That’s the trickier part to work out.
Given this, what should you advise the kids of today to do?
And what can you do yourself, faced with such a manipulated and dangerous system?
You need an exit plan…
Betting against the system
OK, so if you agree that the system is unsustainable, what can you do?
Well, when Dr Michael Burry — one of the misfit investors featured in the film The Big Short — shorted the US financial system prior to the GFC in 2007/08, he had to get Goldman Sachs and Deutsche Bank to actually create a new product for him!
He persuaded them to create something called credit default swaps (CDSs).
It basically allowed him to bet $60 million on the housing market going down. An act unthinkable to the establishment of the time.
They thought he was crazy and happily took the other side of the trade. ‘What a mug’, they thought!
And it certainly looked bleak for him for a while.
His fund initially bled money — he started in 2005 and was early — and his nervous investors started to ask for their money back.
But he couldn’t give it to them as the money was locked in.
There’s a famous scene in the film where two of these investors confront the good doctor in his office:
Investor: ‘So Mike Burry of San Jose, a guy who gets his hair cut at Supercuts and doesn’t wear shoes, knows more than Alan Greenspan and Hank Paulson.’
Michael Burry: ‘Doctor Mike Burry. Yes, he does. (Chuckles.)’
It’s my favourite scene in the film as it reminds me that investing isn’t a game of who has the fanciest title. But of those who can connect the dots best.
And luckily for Dr Michael Burry’s investors, they were locked in whether they liked it or not!
The rest is history.
The GFC hit and his fund made a motza…
Your exit plan for our debt-riddled economy
Back to your exit plan for our current conundrum…
There are a few options people talk about when they think markets will crash. But like Mike Burry, you’ve got to make sure you’re in the right one.
You could stay in cash and await the inevitable.
But in my opinion, that could be a very stressful move if the debt-fuelled boom goes on for a few more years yet.
And what if cash never comes back and instead morphs into new forms of money?
You could try and ride the debt-fuelled stock market and time your exit.
That’s very hard to do, even for experienced traders, as a ‘rigged’ market is a very volatile beast to trade.
Load up on solid ‘brick-and-mortar’ investments.
But remember, property, especially here in Australia, is very vulnerable to any eventual deleveraging process.
And as a pretty illiquid asset, you mightn’t be able to sell if everyone else wants to as well!
You could buy some gold, which is probably not a bad idea in some ways.
However, the paper market for gold is very much part of the existing financial system. So, unless you’ve got physical gold, systemic risk remains high.
In fact, all these assets suffer from the fact that they’re tied intrinsically to the debt-fuelled money system we operate under.
No, if you want to short — that is, bet against — this market, you need something else. You need an asset that exists outside the existing financial system.
And the only asset in the world that fulfills this role is bitcoin and cryptocurrencies.
Thought of as an ‘asset apart’, you’ll see that it makes absolute sense for crypto to form a small part of your portfolio today.
It’s a hedge against a collapse of the existing financial order.
To be clear, I’m not saying that this will definitely happen. But it is a growing risk.
And if it does, plan B — a basket of cryptocurrencies — will be your only escape…
Cryptos: The ‘plan B’ option
Cryptocurrencies have several key characteristics that keep them outside the legacy financial system:
- Bitcoin and cryptocurrencies aren’t backed by debt. They’re sovereign to themselves.
- You don’t need to use the existing financial system infrastructure to transact or store them.
- You can maintain direct custody of your crypto assets. You don’t need a broker or bank to store them on your behalf.
What this all means is that, if the current financial system falls apart under the weight of its own debt, cryptocurrencies are the only asset class likely to be immune from the fallout!
Simon Dixon, co-founder and CEO of BnkToTheFuture, and author of the book Bank to the Future, explains it like this:
‘Personally, I believe that we’re locked into the Great Depression of 2020. I think that’s an inevitability, we’re here. I think we’re going to see a big monetary renegotiation, which no one knows where that’s going to go.
‘Initially, they’re going to get through the social unrest, they’re going to get through this health crisis, and then next is the financial crisis. We’re going to see a ginormous monetary renegotiation like we’ve seen in previous years.’
He then concludes:
‘If you believe the traditional markets, that governments will always figure out a way, and I do believe that they will figure out a way, then you can have 80% of your money in traditional markets and a small percentage of your money in an alternative.
‘But I believe that everyone needs a plan for what if the traditional financial system doesn’t get repaired in a way that we’re used to. So, to me, that’s where a Bitcoin-based portfolio comes into play.’
Like Simon, I’m certainly not advocating anyone to go ‘all in’ on crypto.
What I am saying is that as an investor looking to manage your risk, thinking about systemic risk is important.
And as far as I know, bitcoin and cryptocurrencies are the only asset class not exposed to the fault lines of debt overload.
It’s time to take action
We’ve talked about a lot today.
But the thread through it all is a slow shift in the fundamentals of money. This shift has taken place in the background of my life.
For most of the time, I didn’t even recognise this was going on. And I’d bet 99% of people still don’t.
But it’s now clearer to me than ever that some big changes are coming to money. And in my opinion, cryptocurrencies are an essential component of any rational investor’s portfolio.
In a way, it’s a ‘short’ on the current system.
But it’s actually a bet on the future, too. A bet on technology and innovation. I barely scratched the surface of that angle today.
But hopefully you’re starting to see what I see.
If you are, look out for a special invitation from me in your inbox tomorrow…
For The Insider