Preparing for CLO induced bank failures?

Hardened - June 11, 2020

This article makes a compelling case that a 2008-style financial meltdown has already begun:

https://www.theatlantic.com/magazine/archive/2020/07/coronavirus-banks-collapse/612247/

I’m wondering about good ways to prepare for this.  An obvious way is to get liquid assets “out of the system” by moving money into gold, silver, and Bitcoin.  Would it also make sense to move cash out of banks and into local credit unions?  Perhaps they have less exposure to CLOs?  What else can we do?  Perhaps open bank accounts in foreign countries?

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I need more time to read this article but “financial collapse” is a topic I’m interested in as well.  I tend to think about this in degrees of severity and responses.  To clarify I *am not* a financial expert and this is more of a thought experiment that a fiscal theory.  I also may have gone off topic a little, I apologize if thats the case (I think I focused on gold and silver too much, but the idea applies to any resource).

The basis of this thought experiment assumes you’re “somewhere in the middle” financially speaking.  If you live in extreme poverty or have immense wealth – different rules apply to you.  To be clear – this is not fair, but I need a place to start and I don’t think its controversial to posit that the world is not a fair place.

If you’re “somewhere in the middle” economically speaking you have finite but real resources and you need to choose how to best use them.  If you go all in on gold and silver and a scenario unfolds where gold and silver is not the optimal solution, you are SOL.  This applies to any financial instrument, and is sort of why mutual funds and diversification exists.  Diversification is meant to protect you from “normal” problems so you do well when the markets do well but you also suffer when the markets suffer, but “on average” (in the middle…) you do better than putting all your eggs in one basket.  You mention bitcoin and foreign currency – those are valid diversifications to consider and markets already exist for them.  Using more than one bank (ones that aren’t part of the same system) is another good idea.

Indeed you can apply diversification to gold and silver, or ammunition, or liquor, or food and water, toilet paper even (aparently).  In effect thats what “prepping” is to me – broad spectrum diversification.

Keep in mind, diversification is to help you weather the “average” storm.  During extreme events it can fail you.  If you have (pick your own number, I need easy math) 100,000$ in assets and diversify such that 10% is in gold and silver and find yourself in an extreme scenario where gold and silver is the only solution to your continued survival (the ultimate game, here) AND 10,000$ in gold and silver is not sufficient to meet your needs – you’re still SOL – even though you’ve diversified.

So my question is – what does the scenario where you need X-amount of dollars in gold and silver look like?  To me it reminds me of the Wild West (I have a limited imagination, thats my failing not yours), where there are still farms, saloons, churches, and some sort of law enforcement.  There is a functioning economy but gold and silver are more trusted/secure than cash.  Land, livestock, equipment, and self defense is still really useful in this environment though.

In a hypothetical zombie apocalypse, what will that 10,000$ in gold and silver get you? Not much, I’d argue, but if you diversified into ammunition and guns you’re living the good life (or at least a less bad life).

So let’s say there is a market crash and everything goes sideways – people with food and water may accept gold and silver as payment – or they might hoard/price gouge.  If you have 10,000$ diversified in your own food and water you can wait them out (or wait for the price to go down).

*if* the economy rebounds though, I’d rather have 10,000$ in cash ready to invest and catch the upswing, having gold might be a liability (takes longer to convert, you miss your investing window).

I will admit for this next part, a sense of peace with fate is built into my “prepping” mind set.  In any extreme event where human mortality rates breaches 50% – I frankly don’t expect to survive.  I’m “somewhere in the middle” and for me, after a certain point, lucky and wealth take over.  I’m mildly but not extremely lucky.  I’m not wealthy.  For me, personally, the scenarios where gold and silver are key to my long term survival are also the scenarios where I’m anticipating 50%+ mortality rates and unless I’m lucky – I probably won’t make it.  Since I can’t change my wealth dramatically, I accept this as a probable fate and focus on scenarios I’m more likely to survive.

Now don’t get me wrong, a hurricane, a mild global pandemic, a 6 month famine with dramatically decreased but not non-existence global food supplies, or a mini-finical collapse followed by a slow, modest recovery and I’m set.  You can’t prepare for everything, so prioritize those scenarios you are most likely to encounter, and the resources that apply to the broadest set of scenarios.

Again – I am by no means an expert.  This is a thought experiment and I would love for someone to challenge my thinking or teach me something new.  I’m not trying to harp on gold/silver, its just not in my range of preps.  Thats my choice, you make yours.  Everything provided here meant to be helpful, not critical!

 

Hi Rich,

Thanks for your considered thoughts!  I like your ideas about diversifying into tangible goods—the essence of the prepper mindset.

> If you go all in on gold and silver and a scenario unfolds where gold and silver is not the optimal solution, you are SOL.  This applies to any financial instrument, and is sort of why mutual funds and diversification exists.  Diversification is meant to protect you from “normal” problems so you do well when the markets do well but you also suffer when the markets suffer, but “on average” (in the middle…) you do better than putting all your eggs in one basket.  You mention bitcoin and foreign currency – those are valid diversifications to consider and markets already exist for them.

Agreed, good point about diversification.  I didn’t mean to suggest foreign currency—I think that’s too risky given that my expenses are in USD.  I meant holding USD in an offshore bank.

> So my question is – what does the scenario where you need X-amount of dollars in gold and silver look like?

Good question.  I’m no expert either but a possible scenario is high inflation:

“Soaring debt levels caused by the Covid-19 crisis could lead to governments putting pressure on central banks to tolerate higher inflation by holding down interest rates, the Bank for International Settlements has warned.”

https://www.theguardian.com/business/2020/jun/29/central-banks-could-face-political-pressure-to-allow-high-inflation

“So, what will happen? Inflation will rise considerably above the level of nominal interest rates that our political masters can tolerate. The excessive debt amongst non-financial corporates and governments will get inflated away. The negative real interest rates that may well be necessary to equilibrate the system, as real growth slows in the face of a reversal of globalisation and falling working populations, will happen. Even if central banks feel uncomfortable with such higher inflation, they will be aware that the continuing high levels of debt make our economies still very fragile. And if they try to raise interest rates in such a context, they will face political ire to a point that might threaten their ‘independence’. Only when indebtedness has been restored to viable levels can an assault on inflation be mounted.”

https://voxeu.org/article/future-imperfect-after-coronavirus

 

My thoughts – and what we’ve largely done:

1) Get debt-free, or as debt-free as you can. Being debt-free is one way to reduce your reliance on the financial systems.

2) Have accounts at at least 2 different institutions. We bank at a traditional large bank as well as at a credit union. This allows for the ability to pull out a different debit card if one doesn’t work, to have access to funds when travelling (why I like having an account at a large multi-national bank), and allows you to have access to some funds even if the other institution falters.

3) Cash. Have cash at home in various denominations – yeah a lot of places are getting away from cash, but ultimately, if the power/internet is out most stores will still happily accept cash for transactions, leaving those with only a card out of luck. How much cash is up to you and your comfort level.

4) Stock up on items you use anyway but could also be useful for barter – ammo, alcohol, etc.

Personally, I would look at diversifying how you access your money – electronic/online, card, cash, etc. Yes the financial systems are at risk, but what I’ve found too, with COVID-19 and branches closing or limited hours, accessing large amounts of cash was harder (more than I could get out of the ATM easily). For this same reason I’d, personally, stay away from foreign funds simply due to the logistics of conversion – in addition, international banks didn’t fare any better than U.S. banks during the last crisis.

(Side Note: I work in banking and have, in various capacities, for the last 13 years)

 

Hi Sarah,

> 1) Get debt-free, or as debt-free as you can. Being debt-free is one way to reduce your reliance on the financial systems.

In general this makes sense but if indeed high inflation is coming then this may be a good time to take on debt, e.g., a 30 year mortgage at a fixed low rate.  This is something I’m looking into.

> 2) Have accounts at at least 2 different institutions. We bank at a traditional large bank as well as at a credit union.

Good idea.  What are the benefits you see of banking at a credit union?

> 3) Cash. Have cash at home in various denominations – yeah a lot of places are getting away from cash, but ultimately, if the power/internet is out most stores will still happily accept cash for transactions, leaving those with only a card out of luck.

Yes!  In the 2001 crash in Argentina people would spend all day driving around to find an ATM that had cash in it.  It was extremely hard for people to get their own cash out of the banks.

> in addition, international banks didn’t fare any better than U.S. banks during the last crisis.

Interesting point.

 

The key is the difference between “good” debt and bad debt. A historically-low interest rate on a mortgage is fine debt, assuming you didn’t take on more than you should’ve.

 

I just read thru these posts and believe most of the info was pretty good.  Sarah’s stood out to me the most though.  For the average person out there debt is the number one thing I believe should be taken care of first. I am fortunate enough to be in a better financial situation than most, but am far from being considered rich.  That being said, I am luckily debt free.  Not only does that free me up to be able to put every dollar I earn  towards productive things but it gives me a peace of mind that is worth more to me than money.  I know that no one is going to take my car or house from me if I get hurt and can’t work for a while.  I have always been pretty responsible with money and while I’m far from what anyone would call a financial expert, I have known the value of saving most of my life.  One thing I am certain of is life will have unexpected emergencies, or surprises.  If you have some savings then you can cover those unexpected hiccups without having to go further in debt.  I do believe in being diversified with investments, once you are debt free.  Up to that point I believe it’s more important to invest in yourself by getting out of debt.

just my 2 cents worth here….

 

I suspect the article is correct, however I’m not changing anything about my asset allocation. A large fraction of my net worth is in index funds. They will probably tank if that article’s predictions come to pass, which again I think is likely.

But, as they say ‘time in the market beats timing the market’. In other words, a market-average return from index funds is likely to yield a higher long-term rate of return than moving money in and out according to whether I think it will go up or down (because I will frequently be wrong). Also as a relatively young person from the perspective of my retirement savings (which I won’t use for decades), a huge recession just means something I buy every month (stocks) is on a big sale and I get more for my money.

Now if the value of my index funds goes to zero, our civilization has ended and I don’t think it will matter if I moved my stocks (index funds) to gold, cryptocurrencies etc. Not to say you shouldn’t have assets in those things, just that you shouldn’t reallocate heavily into them due to fear of some impending event. At that point, you will be relying on assets like long-term food storage and water purification systems. Maybe one percent of your net worth into physical preps seems like a great diversification to me.

No one has ever paid me for my financial advice, so I guess I’m not a professional and yadda yadda yadda disclaimer yadda yadda yadda.

 

I appreciate your advice and I agree that having a large portion of one’s portfolio in index funds is the right approach to long-term thinking.  Gold, silver, and cryptocurrency are not assets—unlike equities they don’t grow and people often confuse them for investments.  To me they are useful as semi-liquid hedges against problems with USD, e.g., inflation.

 

Replying to my own post, I discovered this:

“Banks have big problems and are facing big losses. But you need to take CLOs off your problem lists for banks (except Stifel).

JPM has $3 trillion in assets — commercial and residential real estate loans, auto loans, credit card loans, subprime loans of all kinds, commercial and industrial loans, loans to shadow banks and hedge funds, loans to billionaires secured by shares of their companies, all kinds of trades, and what not.

That’s where the risks are — in its $3 trillion portfolio that is chock-full with loans and trades and deals. Just 1.3% of that portfolio are senior tranches of CLOs. Minuscule. JPM is taking bigger losses on its energy loans RIGHT NOW than it ever will on its CLOs.”

Who Will Get Hit When Collateralized Loan Obligations (CLOs) Blow Up? Banks or Unsuspecting “Market Participants”?

It looks like CLOs are perhaps a bit overblown as a concern but that the banking system will indeed experience great stress in general as a wide variety of loans default due to COVID-related changes to our economy.

 

Thanks for following up with this. After reading your OP, my first reaction was that big banks were likely safer than small banks in this regard. It shouldn’t be that way (it’s intuitive that a local bank would be more ‘honorable’), but given the history of Too Big To Fail and so on, given the conditions on the ground right now, I think I’d rather be at a larger bank (but still FDIC insured.)

 

That’s good logic.

 

My retirement was mostly Vanguard index retirement funds, and when the market bounced back, I took the opportunity to move half of it into money market. I’ll reevaluate that decision after the election, but I’m glad I had a second chance to get out.

As for prepping for financial meltdown, the key is diversity. I have several sources of income, a big garden, my own chickens, natural resources, some cash on hand, and a few precious metals. Most importantly: no debt other than my mortgage.

 

Diversity is good!  Keep in mind that money market funds are not FDIC insured.

 

When it comes to Bitcoin and metals, I agree with the Prepared’s official recommendation to think of them as hedges against localized economic problems (such as a US-centric crash due to COVID being out of control here) and less so as a post-collapse store of value https://theprepared.com/prepping-basics/guides/cryptocurrency-blockchain/

I’ve touched crypto for close to a decade now, and for what it’s worth, I’d point you to Ethereum instead of Bitcoin. Likely more stable, and I think it will appreciate more in the long run because it has more utility than standard Bitcoin.

I’ve been selling off my market equities as the recovery brought me into the green this year. The standard advice of “don’t try to time the market” of course applies, but I just couldn’t shake the feeling of being overexposed.

Unfortunately, Vanguard’s VMMXX money market fund is no longer paying good yield 🙁

Already had gold and silver and have not been increasing my position, but if gold drops to $1,400 or so again, I’ll pick up more.

All in all, metals and cryptos are usually <10% of my portfolio.

Foreign bank accounts: Read up on FBAR if you haven’t yet. I’ve gone through this and due to recent US laws that added all kinds of paperwork bureaucracy, I’ve found it’s not worth the hassle unless you have enough of a balance to make it worth it. I’ve even had Americans friends — who have lived full-time in EU for decades — lose their local bank accounts because the non-US bank didn’t want to deal with “the US bullshit” anymore.

Until I have a balance that justifies the extra compliance overhead, I think of crypto as my “international safety.”

 

Bullion (gold, silver, platinum, palladium) are solid go-to’s. Bear in mind that pricing is based on 1 ounce of $preciousmetal, prices fluctuate daily, and is dependent on demand. So, timing is important if you’re going to buy. More on that in a bit…

Bitcoin relies on electronics and its ability to synchronize with the blockchain (at some point or other). In the short term, it has decent potential for payment of goods and services not available to everyday, surface-dwellers; probably better for use while actual preparing. I, personally, don’t regard it as a solid long-term strategy, especially if your prepping includes scenarios like power outages, lack of cell service, or EMPs. Also, not everyone accepts BTC.

A bird walk, but still on topic. I hope this helps.

I spent the better part of the past two weeks going through change jars. The impetus (at least initially) was do reduce things we don’t need here at the fort and have more cash in hand. Also, banks are hurting for coins right now. Each side wins.

What I’ve learned:

Just sitting there in a change jar were a handful of collectable coins (a mercury dime, a handful of wheat pennies). We also found old silver coins (mostly Kennedy half-dollars, quarters, dimes -over $300 worth!). In the end, these were sold to some local coin/stamp collectors.

Above: Finding silver among your coins is relatively easy. Silver coins don’t have two-tone rims (usually you’ll see a copper color and a silver-like metal color side-by-side. Not the case with these silver dimes). 

– Sold silver coins were sold for cash (eg., Silver quarters fetched $3.50/ea; Kennedys fetched $1.50-$7.00/each).

– All money received from the collectible coin sales was split between cash and buying bullion.

– The rest of the non-collectible coinage was rolled and exchanged at a local bank for cash. And, yes, they were grateful!

Advice: Help yourselves and the banks now. Look into your loose change, you never know what you’ll find. Wikipedia is a great source for identifying silver coin years.

Bullion.

I’m fortunate to have relatively easy access to a US Mint -approved bullion dealer in the vicinity. My advice: If you’re considering investing in bullion, go big or prepare to pay. ONLY purchase bullion from official government or private mints (US Mint, Canadian Mint, Scottsdale Mint, PAMP, etc) or coin dealers with an established reputation; and avoid purchasing from Amazon or eBay. My bullion dealer showed me examples of the kinds of coins brought to him that were convincing fakes bought off eBay or wherever, but the moment they’re tested, they’re proven fake. Avoid sales tax by purchasing bullion in amounts over $1K. Now, that isn’t practical for me, personally, because times are tight —you did just read that I went though a change jar, right? LOL.  So, whenever I’ve purchased bullion, I’ve paid sales tax, PLUS his commission (≈$7 over spot – spot being the market price/oz).

Above: Verifying a PAMP gold bullion [card] using a Sigma Metalytics tester. A gas chromatograph may also be used to verify metal composition.

Banking.

I’ve been weighing the pros and cons of moving money away from banks. I’ve even looked at my current retirement and, honestly, I haven’t come to any difinitive conclusion right now. At the moment, I’m in ‘wait and see’ mode, but while I’m waiting and seeing, I’m also researching means of quickly liquidating assets (eg., retirement), wire transfers, offshore accounts, and transferring funds to vaulted precious metals overseas.

I’m open to others’ thinking on banking, specifically.

 

Years ago I went to my bank and asked for hundreds of dollars in coins in the hopes of “coin roll hunting”. 

Dimes seemed to be the most successful. I would get like two or three boxes of dimes ($250/box) and I would open up all the rolls and you can quickly just look at the edges of the dime to see if there are any silver ones. I averaged about one or two silver dimes per box. I then would take the extra coins back to the bank with an automatic coin sorter and they deposit it into my bank account. 

Today though, with the coin shortage, I doubt this is possible. 

It sure was fun though, and I got quite a few silver dimes. 

It is a lot easier to just go on ebay and look up Junk Silver though. This will pull up a bunch of silver US coins. Be careful though and do the math. Consult different silver calculators and make sure you aren’t getting totally ripped off. 

I personally like junk silver because everyone can recognize that it is legitimate and is in very small denominations. And i’m too poor for anything bigger haha

 

Thanks for your thoughts. It actually sounds like getting boxes of coins would be a nice mental vacation, especially nowadays. I mean, I did find myself going all “Zen” while doing this -which was great because it kept me from doomscrolling and doombuying.

A few other preppers I know insist on keeping their silver dimes, quarters, etc. for small transaction purposes. It kinda makes sense, but only if you’re looking at SHTF transactions being in the form of $valueablemetal for {$thing,$need,$service}. So, I also find it important to invest in knowledge and skills as another means of barter.

My bullion dealer had an interesting take on small silver coins (and perhaps [unwittingly] about the whole ‘prepping by buying bullion for post-bank world’):

“Bullion is an investment. I have doubts about how bullion would play into a SHTF situation. Hey, he says, How much for water? And, so, what do I do, buy it with one of my Silver Eagles [1 troy ounce pure 99.99% silver]???” Then he grimaces. “If I want water, I’m likely to use my gun if things are that desperate. Screw silver coins.”

So, my ultimate takeaway is something along these lines:

Investing in bullion is a long-term strategy. In a world where banks have collapsed, it would be good to know your hard-earned money is in a commodity that won’t lose its value -at least not like the paper money does. And while it may not be easy, convenient, or even beneficial to carry it around in a BOB, if you can secure your bullion and keep it safe until things reboot or rebound, you’ll basically be better off than you were when all your money was intangible, electronic and held in a proprietary system that told you when and how much of your own money you could withdraw.

 

You are right! It was very zen. I loved doing it while listening to an audiobook, or just doing nothing. Plus you would get a little rush of excitement when you found one, like a treasure hunt. 

You are also right about using bullion to barter with. I guess if I was very desperate I would trade my silver for food or water, but im 99% sure it will just sit in my safe and never be used and go to my kids when I die. Maybe one day i’ll turn it into cash if I am desperate, but it is just a way to hold assets and money in another form.

 

On a bit of a tangent, I recently had the opportunity to acquire a small living space near where I live. I bought it for a couple of reasons — to control who lives near me, as a place for ailing family members or friends now or in the future (where proximity would make it easier on me as a support person), as a temporary respite site for even potentially members of this community or like-minded people, as something that I could “barter” down the road, as additional storage space for supplies, as financial diversification into real estate (on a small scale). Thanks to everyone who put together this site and who posts on it.

 

Lots of good advice already.  I like up to 10% in gold.  Keeping lots of cash where you can get to it even if the banks are closed since money in a bank no longer earns interest anyways.  Pay off your house and car and credit cards.  Homestead exemption so it’s even harder to take your house.  Have barter goods like alcohol, coffee, etc.  Have a one year supply of food and water.  If you ever have to use it and can manage to hang onto it… in some scenarios 90% of the population will have already perished and it will be time to rebuild.  Heirloom seed vaults.  Mass water purification.  

 

You mention a lot of good advice here!

Could you maybe expound a bit more on the Homestead exemption part? Have you done it? What did you have to do for it? Is it just to protect your house a bit better for your wife if you die?

I’m wanting to buy a house soon, so I want to make sure I don’t miss anything!

 

Homestead exemption is just a simple one or two page form that can normally be filed out and filed any time of the year.  Can often be found online for your county or picked up and handed back in at your local county property tax appraisal office.  It is often retroactive up to two years, meaning they will actually send you a refund.  They will also send you a corrected version of whatever you currently owe on property taxes.  Most pay two separate property taxes… one for roads essentially and the other for schools I believe.  It will cut each down by somewhere around 25 to 30 percent every year and you dont have to reapply unless your primary residence changes.  It’s my understanding that it may also offer some additional protection from home seizure in the event that you find yourself unable to file your property tax payments in a timely matter for whatever reason.

 

I’m also reminded of the fact that somewhere around the time people were hoarding toilet paper… the local branch of my bank closed its doors completely.   (To avoid person to person transactions.)  They also instituted a 500 dollar maximum withdrawal limit on the drive up teller machine.  Meaning that if my vehicle had broken down during that time period and my neighbor had a vehicle for sale for 2500 dollars… it would have taken me 5 days to get the money together.  That is an offense to my sensibilities since it’s my own damn money that I am trying to access.   Aside from keeping enuff money in the bank to take care of necessary transactions, banks stopped giving interest on deposits years ago and I dont have much use for them.

 

GLD is an ETF that allows you to invest in gold without needing the physical asset. Also allows you to liquidate quickly if need be

 

I’m more inclined to buy physical gold.  The ETF has easier liquidity and likely transaction fees but the security if owning physical gold makes more sense to me.  I guess I don’t trust that the company owning the gold ‘paper’ actually has enough gold to cover all the investments.  Of course owning physical gold that could be stolen has some risks as well.  Overall though I trust my own instincts than an investment company any day.

 

ETF is actually backed by physical gold bullion in Swedish bank. 

 

Nathan Tankus has posted what a lot of econ types I follow consider to be a pretty definitive takedown of the Atlantic piece: https://nathantankus.substack.com/p/is-there-really-a-looming-bank-collapse

Essentially, he argues there is no CLO-induced financial crisis looming, and that we have enough genuine economic bad news to worry about without getting distracted by the financial crisis stuff.