Posted September 15, 2023
By Sean Ring
How to Protect Yourself from the Coming Banking Tornado
- If you’re concerned with the banks, there are many ways to minimize your risk.
- But the best ways are the ways rich people protect their wealth.
- You can mimic the rich even if you have less resources and capital.
Good morning from overcast Asti!
And Happy Friday! May you break out a cold one tonight and enjoy it. You deserve it.
In this edition of the Rude, I re-answer a question I was asked about two years ago. If Jim Rickards is right, and we’re in the “eye of the storm” banking-wise, you must protect yourself.
I’ll give you some ideas on how to do it.
Rude reader Geoffrey H. wrote me this great question:
Now that most banks have adopted "bail-in" rules for their used-to-be depositors, now-lenders, is it wise to spread deposits around multiple banks, have lower deposits in the banks, keep cash or gold or silver out of the banks or some combination? Or am I just an alarmist?
P.S. I enjoy your work!
Thank you, Geoffrey, and you are by no means an alarmist!
Let me tell you about my time in Hong Kong.
From Sales and Trading to Private Banking
I spent most of my banking career in an investment bank’s sales and trading division. That means I had hedge fund managers and other institutional money managers shouting down the phone at me all day.
It's not as glamorous as you think, trust me.
But the intellectual caliber of the workforce there, amoral though they may be, is staggering.
Almost everyone has a top degree - which used to mean much more to me than it does now - and is incredibly intense.
So, you can imagine my shock when I got to the private banking side, where relationship managers know almost nothing about the products they sell.
Now, I’m not claiming all investment bank traders and salespeople knew that CDOs-cubed were a terrible idea.
Watch The Big Short for confirmation on that.
However, private bankers, known inside the industry as relationship managers (RMs), are not known for their product knowledge. As their title says, it’s all about the relationships with them.
In Asia, guanxi is the most essential thing an RM can have with a client. That’s the network and connections that create mutually beneficial business opportunities.
Guanxi is closely intertwined with the Confucian philosophy - a philosophy that has shaped many Asian cultures - that self is extended to family, friends, and society to create a harmonious community. Guanxi implies an obligation that one has to another. In China, it is stated that the wheels of business are lubricated with guanxi.
To be fair, the Chinese coined the term, but the West expanded upon the idea.
Through English Common Law, the West built a legal system that extended this trust to entire nations.
That’s one of the reasons what we may call “bribery” is just “a gift to a friend” in the East.
Interestingly, the distributed ledger technology upon which the blockchain is built extends trust without custodians. There need not be a middleman like a banker if the peer-to-peer networks work independently.
It eliminates the age-old question, Quis custodiet ipsos custodes, or “Who watches the watchmen?”
Eliminating some go-betweens would free up valuable resources regarding fees and time.
After all, you probably don’t need an RM if you can articulate your wants to a client advisor. Or, if you’re expert enough, you can do much of this yourself.
Not knowing more about your position, I can’t offer advice. (Well, I’m not allowed to provide advice anyway.)
With all this in mind, let’s discuss five ways to protect yourself.
Keeping Your Cash on Hand
You’ll set off alarm bells at your bank if you withdraw $20,000. That’s for sure. But you certainly want to keep a certain amount you feel comfortable with in your safe.
And put that safe underground. (The first place thieves will look is behind a painting.)
You don’t need to go all John Wick, but my parents had a cool safe in our old house. It was small, but they put it under the rug in their closet.
If there’s a master thief in the world that would look there, kudos to him. I wouldn’t.
Besides the cool factor, you’ll know your notes are as safe as possible.
Keeping Your Cash in Multiple Banks
The average high-net-worth individual in Asia has at least five bankers.
On average, one banker gets half his “wallet.”
“Wallet share” is bankerspeak for how much of a client’s assets they manage. The bankers never know for sure, but they can guess.
The next four bankers will get a piece of the rest. So, it’s essential to be a good banker.
What does this mean for you?
First, retail and mass affluent clients often think one bank is enough… and the banks count on it.
When I teach retail banking during the graduate season, I teach that retail deposits are “sticky.” That means ordinary folk pick one bank and put all their money in it.
This isn’t an issue since the average American has about $500 to their name.
But if you’ve got a chunk of cash, you should spread it between 3 to 5 institutions.
I know opening bank accounts isn’t as easy as it used to be, but it’s certainly something you should invest time in.
That way, you can keep up to $250,000 in each bank, and all those deposits will be insured.
But even if you only stick $10,000 in each bank, you’re much better diversified.
Keeping Your Gold and Silver in a Safe Place
I could be wrong, but I don’t see why anyone would keep their gold and silver in a bank. Maybe a safe deposit shop that’s separate from a bank. But I wouldn’t even do that.
My good friend Michael once mentioned he has enough gold, silver, and ammo to defend his keep until the end of his days.
I’d keep my gold and silver in a super safe under the floorboards in my house and never mention it to anyone. Or dig a hole in your backyard. Just don’t forget where you dug it!
If Biden or his successors outlaw privately owned gold and silver in the coming years, and your stash is in a bank, it’s game over - at whatever price they decide.
Investing in Crypto
We’ve talked about this a lot.
Owning crypto is an intelligent bet, even if it’s just 2% of your portfolio. You can’t lose your house but can participate in the upside.
And that currency is practically untouchable.
Especially if you plan to live abroad, just keep the crypto in cold storage.
“Cold storage” is cryptospeak for a device that resembles an old USB stick where your crypto can be kept off-exchange.
Just always remember your password and key - and never lose it!
You don’t want to wind up like this guy:
Wrapping Your Assets in a Company
This is too little spoken about.
If you own a company and structure it correctly with the help of your lawyer and accountant, you can use it to shield your assets.
Remember, you control your company, but the company owns your assets.
It’s one of the best ways to protect yourself from lawsuits. It also keeps away unwanted bankers who’ll try to manage your wealth.
I’ve long written in this newsletter that you ought to start an internet business that grooves with your passions.
Once it starts to make money, leave the money in there until you need it.
You can use the company as a savings vehicle.
If you build it big enough, you can sell it for a chunk and move to Switzerland, whose private bankers understand the meaning of “discretion.”
I hope that helps.
Have a wonderful weekend!