The Greater Collapse -- Part 2
I ended last week’s bulletin by saying “real estate is usually a
good place to put your money, but where should it be?” Let me
try to answer that question now.
The first problem to consider is the exchange rate risk. I
happen to think that buying real estate in foreign countries is
a seriously risky business at the moment. Under normal
circumstances exchange rates between major currencies dont vary
that much. Recently, however, they have jumped about all over
I have previously mentioned that the exchange rate between
Portugal and the UK changed enormously between the 1960’s and
the end of the century. The exchange rate went from 60 escudos
to the £ right the way to 315. That represents a massive risk to
capital. Those who bought property in Portugal at the beginning
of that period would need to see the value of the asset increase
500% just to stay in line with UK money.
The latest upset in exchange rates is the massive drop in the
value of sterling over the course of a year. This time last year
while I was living in Malta the exchange rate was listed at 1.38
euros to £1. Just a few weeks ago it was 1.10 to £1. That is a
serious drop which has led to a whole raft of pensioners stuck
on fixed incomes returning to the UK before they starve in
In these uncertain times you need to beware exchange rate
anomalies. There are various ways to deal with this problem.
The easiest way round the risk is to spend money in the same
currency that you earn it. If your money comes in sterling then
you live outside the sterling area at your risk.
The other way of dealing with this problem is: dont burn your
boats. The last thing you want to do if your income is sterling
based is to invest your home in a different currency zone. I
have for years banged on about investing in tourist ghettoes.
They are always over-priced, are geared to foreigners, which
means you usually have to sell to foreigners, which cuts out
most of your market, and the market is slow to stagnant. A quick
sale is either a dream that never comes true, or a recipe for a
massive drop in sale price.
As I said in an earlier bulletin, investing in a bankrupt
country is much the same as investing in a bankrupt company.
Just to ram home the information, the following countries are
bankrupt and you should on no account invest in them: Cyprus,
Greece, Spain, Portugal, Italy. At the moment France is in the
doldrums. To be on the safe side you should hold off from
investing there until things become much clearer.
There is one further risk in the EU, and that is that the whole
edifice may well come crashing down sometime in the next five to
Let’s look at this a little closer. I have already mentioned
that the banking system in all the countries listed above, and
also including Germany, is in a disastrous state. Because of
cross lending throughout the eurozone one failure will probably
bring down most of the rest of the system, and that includes
France. In short, there won’t be much left standing.
Let’s take a closer look at the major European banks. I dont
think most people realise what a toxic lot they are.
A great deal is made of the stress tests they undergo, tests
which have been found to be next to useless. Even after those
tests have been done two or the six biggest banks in Europe
failed. French banks: BNP Paribas, and Societe General. They
have capital shortfalls of €10 billion and €14 billion
respectively. Of course, the real shortfall is much more than
that. However, the main point is, they can’t survive another
Deutsche Bank is in a worse state and is short by €19 billion,
and that doesn’t take into account their derivatives exposure.
In May, Spain’s Banco Popular saw its share price drop 25% in
one morning after it admitted it needed to raise €2.5 billion –
just one month after claiming it had “one of the best” savings
reserves in Europe.
In January, Italy’s Monte dei Paschi (the oldest bank in the
world) admitted that its customers had started withdrawing their
savings. The bank saw its share price drop 60% in the first
three weeks of 2016.
In Germany people are so dismayed by low interest rates that
they’re taking their money out of banks and keeping it in safes
at home. Sales at one safe manufacturer were up 25% in the first
half of this year compared with 2015.
Italy’s economy is 8% smaller than it was in 2008, and is
smaller even than it was at the beginning of the century. And
what is really frightening is that Italian banks have taken on
85% more bad debts since the crash in 2008. In fact Italy’s
banks have bad loans amounting to €360 billion. That is totally
I have mentioned the system of bail-ins before. Here’s how it
impacts on the current situation. I’m quoting from one of my
“On 1 January 2016, legislation came into force
which declares that in future EU banking crises, the investors
in the bank would take the hit – i.e. the bank’s bondholders
and shareholders. And also, and this is important, the bank’s
The logic of the new law was simple: no more tax payer
bail-outs of failed financial institutions. No more repeats of
2008, when ordinary people paid the price of mistakes made by
the extraordinarily wealthy.
But the new law faces a big problem in Italy. The problem is
that bond investors in Italian banks are also savers. They
aren’t rich hedge fund managers or wealth management firms.
They’re pensioners who’ve stored their savings in what they
thought were ‘safe’ bank bonds. According to Bank of America,
14.6% of Italian household wealth is tied up in bank bonds -
amounting to €235.6 billion.
In Britain, France, Germany and Spain ordinary investors hold
about 1.5% of their country's bank bonds."
There are two options available:
1 To bail out the country’s
banks. This seems unlikely given German PM Angela Merkel’s
recent words: “We wrote the rules for the credit system, we
cannot change them every two years. We can't do everything all
over again every other year.”
2 The Italian PM enforces the
current rules and hundreds of thousands of savers who bought
bank bonds see their investments wiped out. The longer they
dither on this option, the worse the debt problem becomes. The
International Monetary Fund summed the situation up perfectly:
“It is not clear to staff whether and how the current resolution
framework will be implemented. That said, delaying resolution in
cases of unviable banks can be costly.”
An Italian exit from the single currency would trigger the total
collapse of the eurozone within a very short period. It would
probably lead to the most violent economic shock in history,
dwarfing the Lehman Brothers bankruptcy in 2008 and the 1929
Wall Street crash.”
Why? Because Italian debt is held by banks in the Eurozone’s
biggest economies. France is by a distance the most at risk of
contagion, holding in excess of €250 billions’ worth. That
amounts to 10% of the country’s GDP. Germany is the next highest
on the list with €83.2 billion – with €11.76 billion held by
Deutsche Bank alone.”
I have no idea how long this charade can be sustained, maybe
several years, maybe only several months. When it topples the
mess will be spectacular. I currently still have half my cash in
euros. That won’t be the case by the time you read this. I no
longer own any significant real estate in the Eurozone. I think
investing in this area is tantamount to lunacy.
For a sterling investor I think the only sensible real estate
investment has to be in a good London area, but I would not buy
at the moment. I think there will be a fall when the crash
comes. That will be the time to buy real estate in rock solid
investment areas. Those of you who were following me back in the
early nineties will have bought at such ridiculous levels you
won’t have to worry about any falls. Those who will survive any
crash will be the ones who have investment grade real estate
that is rented out. Any drop in capital value will hardly affect
The other alternative, which won’t appeal to most people, is to
reverse the old saying. It’s no longer much good to ‘Go West’ to
seek the good life. From now on the best bet is to ‘Go East’.
The current economic order is actually destroying the banking
system. Banks operate on a very simple system. They take in
money, offer depositors security, and pay them interest on the
funds deposited. They then lend out money for a higher rate of
interest to commercial deals.
That scenario no longer functions. If you want to develop
properties, start a business, or expand one, you rarely go to
the bank for a loan any more. Every single investment deal I do
is via fund raisers. Your property companies now go to these
fund raisers and offer them a project with security. The fund
raisers act as middle-men between investors and business-men. On
the other side of the table, investors no longer give their
money to the banks because they are no longer safe, especially
since the bail-in agreements which put deposits at risk of being
sequestered to prop up the bank itself, but also because
interest rates are derisorily low.
All of this means that banks no longer have a proper business
model and are rapidly becoming obsolete.
We have been used to banks being the centre of our financial
world. That model is no longer functioning. What takes their
place is not yet certain, but already their business model has
been usurped. They won’t disappear, but the businesses we used
to know no longer function properly.
I am not prepared to discuss digital money at this stage despite
many sources screaming that we are heading for a cashless
society. I dont know how far off such a thing is, or whether it
will happen, but I must admit I dread such a development. It
will mean governments have total control over populations, and I
can’t begin to imagine how ghastly that would be.
What is clear is that the current currency situation cannot
continue. It is possible there could be some kind of financial
re-set, though how that would work I dont know. What I do
suspect will happen is that we will all have to pin our
different currencies to Special Drawing Rights (SDRs). This will
be the re-set of choice, but will lead to massive and sudden
I used to be a fan of gold as the ultimate store of wealth. I am
going off that idea. We are firmly entering a digital future.
Gold is about as un-digital as you can get. It is also
hopelessly inflexible. SDRs can be manipulated, and they are
digital. I firmly believe we will start to see them grow in
stature as next year marches on.
What is also wonderful for governments is that this form of
currency is not available to the general public. The currency we
will be using will be tied to SDRs, but at such a level as to
wipe out much of the current international debt. That can only
mean one thing: sudden and serious devaluations.
What will be left standing? Does this mean personal debts will
suddenly shrink almost to nothing? With a digital currency that
won’t necessarily happen. Certain debts will be wiped out, but
you can almost guarantee that personal debt levels will be
adjusted in some way. We will all be poorer. How this will
develop I do not know, but I can’t imagine for one moment that
things will be better for the average person.
Next week I’ll start to look at real estate in particular.
<<< Part One
…to be continued