May 8, 2014
Dallas, Texas, USA
Remember all of those credit card and loan offers you used to receive in the mail?
Bad credit? No credit? No problem. 0% APR for the first six months. Free balance transfers. No money down. And my personal favorite– no credit check.
These were all classic signs that the mother of all liquidity bubbles was upon us.
Think about it– would anyone in his/her right mind throw a bunch of money at some random guy on the street to go buy a new digital TV without so much as checking his references or requiring a sizeable down payment?
Of course not.
But if you and I wouldn’t do something so careless, then why would a bank?
More importantly, why would a bank not only make a loan like that, but do it thousands of times over? And use OUR money to make those loans?
They’re supposed to be conservative financial stewards, not drunken sailors.
We know how it turned out. This reckless lending spawned by a multitude of freshly printed money on the part of central banks nearly brought down the financial system.
Looking at the expansion of credit across the West, though, it’s happening again. Fool me twice, shame on me.
But this is a worldwide phenomenon now. My partner Tim Staermose and I were talking about it this morning, as he’s currently traveling in the Philippines.
When he went to collect the mail at his old office address yesterday, one of those credit card offers was waiting.
It was sent by a local bank, according to them because Tim is a long-standing customer.
Curiously, though, his account at the bank has less than $400. They know nothing about his ability to repay. They have no clue if he is gainfully employed, or even where he lives. But they sent a pre-approved credit offer regardless.
Another bank– a Philippine branch of a large US bank, mailed him an offer for a “no questions asked” cash loan of about US$11,000, to be paid back over a period of time of his choosing.
And of course, real estate agents are out all over town flogging Philippine investment properties, offering ‘no money down’ deals.
People only make such an offer if they
1) Expect everything to keep rising forever [which is a really baaaaad notion], or
2) They have so much money to deploy, they are forced to make rash decisions and assume tremendous risk just to be able to invest.
Both of these are incredibly dangerous and lead to disastrous consequences.
We remember the last time people thought that ‘real estate can only increase in value…’ Or the last time banks were making no money down loans.
Yet markets, bankers, central bankers, and politicians all have very short memories. This time, it always seems, will be different.
It never is.
But everything is now so interconnected that a credit unwinding in a place as small as the Philippines could actually have a substantial impact on the rest of the world.
It was the same during the Asian Financial Crisis in the late 90s, and exactly the same in 2008 nuclear banking meltdown.
The dominos in the global financial system are spaced so closely together you can hardly see any daylight between them. And a tiny central banking elite is lording over them all, clumsily and hastily cramming even more dominos onto the table.
This isn’t an environment where traditional financial thinking is going to prevail.
From ‘buy and hold’ index investing to the solvency of our banks to the basic premise of paper currency, nothing can be taken for granted any longer.
Real assets– productive land, precious metals, private businesses, etc. are much safer alternatives right now.
One of these days, someone is going to bump the table and all the dominos will start to fall. You won’t want your savings anywhere near it when that happens.