Mongol general: what is best in life?
Conan the Barbarian: to crush your enemy, to see them driven before you, and to hear the lamentations of their women.
For most of human history, war has been the go-to wealth transfer system. Defeat your opponent and you get to take all their stuff.
War also tends to be very good for traders with the risk tolerance to run blockades and evade sanctions.
And while the illegal flow of US technology to Russia and China is quite valuable, and protectionist policies handpick winners and losers, the modern financial system has come up with a much more palatable (less bloody) way to tip the scales and get a good wealth transfer going.
It’s the financial crisis.
There have been two significant American financial crises in my lifetime: the slow-rolling S&L Crisis of 1985-1995 and the Great Financial Crisis (GFC) 2007-2008.
People tend to rank the GFC as the crisis to end all crises, but the Savings and Loan crisis was no slouch.
Like the GFC, it featured mass bankruptcy (32% of U.S. S&Ls failed), so-called “impaired” assets changing hands for literally pennies on the dollar, and unsuspecting average Americans getting wiped out.
My uncle helped himself to a Richmond Virginia S&L — one of 757 banks put on firesale by the Resolution Trust Corporation between 1989 and 1995. I never asked if he got better terms than Great Western Bank, who gave the RTC $12 million for 28 former Lincoln Savings & Loan offices and $1 billion in deposits in 1991.
In 1991, my mom bought the 6000 sq. Ft. clubhouse of a bankrupt Georgia coast subdivision for $175k: 5 acres of land with a 50,000-gallon pool on a deep water creek at the mouth of the St. Mary’s River, between Amelia and Cumberland Islands.
To the Victors…
The difference between the S&L crisis and the GFC was mostly scope. The S&L crisis was regional, the south and southwest. The GFC got the entire US housing market.
The root causes were the same type of excess: too much leverage and too much arrogance that the highly unlikely event in their models simply wouldn’t happen.
The results of a financial crisis are always the same: some rich people get richer, other rich people don’t and have to subsist on whatever bailouts they can get.
Average Americans tend to lose because it’s our funds that the arrogant bastards deploy, leverage and then borrow against, setting up a massive margin call on the middle class.
I didn’t realize it at the time, but I played the GFC all wrong. I got a divorce in 2008. Man, talk about getting vanquished by the enemy. It was an epic pillaging – though I will say the house I bought in 2005 put a good roof over my kids’ heads for nearly 20 years.
Like many Americans, I was forcibly downsized the same year, signing an apartment lease at the same time Warren Buffett’s Berkshire Hathaway was buying up home seizures and foreclosure to build a real estate empire.
Buffett is a master of buying when there’s blood in the streets.
White Collar Wars
The lesson of modern wars should be that it’s not so easy just to take somebody else’s stuff anymore. And even if you do “win,” like with Iraq, unintended consequences like Syria and ISIS end up spoiling the spoils.
A good financial crisis is so much cleaner.
Make no mistake: a financial crisis is still warfare. The troops love the smell of Overleverage in the morning. They will always rally at the promise of a solid payday.
And the Overleveraged usually know their history as well as their balance sheet, so, pretty quick to start waving the white flag—terms of surrender brokered by the Fed and the Treasury.
It’s all gotten so neat and clean.
Most people barely remember the last time the overleveraged came under siege. 14 months ago, Silicon Valley Bank and First Republic Bank waved the white flag so fast, that the Fed had brokered a $250 billion wealth transfer to JP Morgan in a matter of days.
JP Morgan scooped up First Republic and its $173 billion loan portfolio, $30 billion in assets and $93 billion in deposits for…$10 billion.
In its last quarterly earnings report, JP Morgan acknowledged that First Republic contributed $2.4 billion in net profit to the bottom.
Pennies on the dollar indeed.
A New Crisis
I know a former hedge fund manager who mortgaged his house to buy stocks in 2009. I like to think if I hadn’t just “transferred” my greatest asset, I’d have done something similar.
I did the best I could with the pandemic financial crisis – got a darn near 6-figure tax bill for buying when there was virus in the streets.
As weird as the pandemic was — there was a solid lesson. When the Fed steps in as it did in late March 2020, that’s all you need to know. You can research masks all you want, read books on the Spanish Flu and model out the death rates and whatever else strikes your fancy…
Or in 2008, you could’ve read up on collateral debt obligations and credit default swaps. Or you could’ve bought stocks when the Fed pulled the tarps (!) off its bazookas.
I don’t know when the next financial crisis will come. But it will. And the way to take advantage is very simple.
Don’t get overleveraged with mortgage or car payments. People typically leverage up in good times. You’ll get a raise, or a better job, or a refi. The truth is that the time to leverage up is during times of crisis. That’s when you’ll get the most bang for your buck. Always have some dry powder.
Don’t Fight the Fed. The Fed takes a lot of heat. And they make mistakes. But — the Fed is the money. When the Fed decides it’s time for the crisis to end, it will. Period.
Buy the Leaders. Look, I like speculating as much as the next investor. But in times of crisis, just buy the leaders. Microsoft was $140 in March 2020. Google was $60. Bank of America hit $20. Yeah, there will be stocks that do a lot better. But if you have to explain to your spouse that you just leveraged your home equity to buy stocks “because, the Fed,” you’ll stand a better chance of not getting pillaged if you buy the best.
Godspeed,
Briton Ryle
Chief Investment Strategist
Outsider Club
X/Twitter: https://twitter.com/BritonRyle
