EXPOSED: the critical weakness at the heart of the UK banking system

Warning: your bank does NOT want you to read this report

Deep down, you probably knew something wasn’t quite right.

It’s a decade since the global financial crisis. It was a unique moment in history – a single event that exposed just how fragile the modern financial system is.

One moment the system seemed stable… the next it had collapsed. Only massive injections of taxpayer cash saved the day.

The problem is… many of the systemic problems that caused 2008 haven’t gone away. In fact, by many metrics the global financial system is more fragile today than it has ever been.

A decade of distortions, crazy low interest rates and increasing debts – coupled with “nosebleed” valuations in stock and bond markets – have left the financial world a dangerous place.

Does that mean you should cut and run? I’d say no. But if you’re gambling your entire financial future on the current system surviving… I think you’re making a big mistake.

Already this year we’ve seen a handful of people speak out. At the Davos Economic Forum earlier this year, William White, the Swiss-based ex-chief economist for the Bank for International Settlements, said there are now worrying parallels between today and 2008:

“All the market indicators right now look very similar to what we saw before the Lehman crisis, but the lesson has somehow been forgotten.

“There is an intoxicating optimism at the top of every unstable boom when people latch on to good news and convince themselves that risk is fading, but that is precisely when the worst mistakes are made.

“It is frankly scary.”

He’s not alone.

Hedge fund manager Richard Haworth – who runs a “Black Swan” style hedge fund that made a fortune betting on the 2008 collapse – believes the fragile financial system is once again threatening ordinary investors. He had this to say:

“The financial system is a lot more fragile than it was in 2007.

“Leverage is up on every single metric, in just about every category, and debt has increased.

“The more you indebt someone, the more fragile they become, especially with variable interest rates.”

Everywhere you look, things are starting to look unstable. Red lights are flashing ALERT at almost every turn.

But today, I’m going to expose perhaps the single most worrying secret I know about the global financial system in general… and the British financial system in particular.

It’s a secret I believe the big banks would do anything to conceal. Why? Because it reveals just how fragile the UK financial system really is.

But first, I should address a key reservation. Namely, who am I and why am I writing to you today?

My name is Nick O’Connor. And I’m the publisher of the UK’s biggest alternative financial research firm: Southbank Investment Research

You see, Southbank Investment Research has a simple but profound mission.

To find alternative ways to grow your money.

To show you what’s really going on in the financial system.

To protect you from lazy groupthink from journalists, economists, fund managers and financial professionals.

To pinpoint risks – and opportunities – you won’t hear about from mainstream sources. 

And to share ideas that could change your life for the better. 

To the best of my knowledge, no other business in Britain does this quite as well, or quite as successfully. Right now more than 100,000 investors read our work every week. And globally, we’re a part of a research network with more than 4 million subscribers.

All these people follow our work for a simple reason. We share the ideas and insights of some of the world’s best connected and insightful investors… ideas you won’t see anywhere else.

Until it’s far too late to do anything about them, anyway.

For instance, in 2015 one of my colleagues, Charlie Morris (who managed $3bn at HSBC before joining us), published what I believe is THE single best “early analysis” on the rise of bitcoin. The price back then was below $300.

Charlie’s five-part guide was unlike anything else out there. Bitcoin was still a fringe idea. Lots of people dismissed Charlie’s work. But he has since been vindicated. Bitcoin has since soared 60 times over.

Or another colleague, Sam Volkering, who went on live TV in 2014 to discuss cryptocurrencies and was branded an “idiot”… only to be proved 100% correct in his enthusiasm several years later.

We get hundreds of letters from readers thanking us for our willingness to take risks and present unusual, alternative ideas.

I know of one man who made more than a million pounds from our work last year.

In short, we’re proud to share alternative ideas… we don’t care if people dismiss our work as “fringe” or too “out there”… because we know that these are the kinds of ideas that change people’s lives.

As another of our colleagues, analyst Eoin Treacy, put it:

99% of the financial world exists simply to report on what’s happening today. 

Our mission is to ANTICIPATE what the news will be next week, month or year.

With that in mind, I want to share a very important idea with you. Perhaps the most important idea you’ll hear all year.

It concerns a fatal flaw in the financial system I don’t believe you’ll hear about anywhere else but right here, in this report…

Critical weakness

At the start of my career I worked as an intern at a small advertising agency in Manchester. I was there for perhaps six weeks. I spent most of my time writing, researching… and trying to figure out why the place felt so weird.

It took until my last week to work it out. The agency had only six employees squeezed into quite a small space. But it turned out it had employed more like 60 until just prior to my arrival. Those extra staff had been let go and the space they had occupied in the office had been blocked from sight with a false partition wall.

One day I lent on that wall… it shifted… and the vast number of barren desks behind it were revealed. That explained the weird vibes. Apparently six people working in an office kitted out for 60 was too harsh a reminder of the downturn in fortunes. Makes sense.

The reason I’m telling you is this: the hammer blow that lead to this situation had come earlier in the year. Two clients who made up the majority of revenues had – within half an hour of each other – suspended business (the timing was a terrible coincidence rather than anything untoward).

That smashed the business’ balance sheet to smithereens, so far as I can tell. It’s a lesson in overconcentration: if you rely too heavily on a handful of customers, you’re exposed to sudden, shocking shifts in business conditions.

The same is true on a local and national economic level.

Rather than a single customer business, you get single industry towns. The classic example of this are coal mining towns in Wales and the North East. Towns that rely heavily on one industry for employment, jobs and prosperity are uniquely exposed.

It’s fine when that industry is booming… not so great when things turn around.

Another example: Detroit in the US. For most of the 20th century Detroit was one of the wealthiest cities in the US. Its automobile industry was the envy of the world.

By the 1960s, the people of Detroit were richer than New York… Los Angeles… or Houston. In fact, they had the highest per capita income in the US. Virtually all of that wealth was dependent upon Detroit’s car manufacturing industry.

Then the industry went into decline… and Detroit collapsed in a dramatic fashion.

The city has gone bankrupt. It owes more than $20 billion to over 100,000 creditors. Manufacturing jobs have collapsed 90% since the 50s.

The social knock-on effect from those financial problems is perhaps even more shocking. One third of the city has literally been abandoned, left to rot. There are 78,000 empty homes. A house can cost just $500… essentially nothing.  According to one report I found, nearly half the population can’t even read.

I’ll take that figure with a pinch of salt. But the point I’m making is clear: overreliance on one industry leaves you exposed to critical vulnerabilities if that industry goes under.

The same is true on a national level for Britain with banking and financial services. I see a crisis in the financial industry as one of the core threats to economy and way of life in the next decade.

There are two interlinked risk factors that worry me when it comes the UK banking and financial services industry.

1) Just how big it is.

The industry employs more than 7% of the entire UK workforce (2.2m people). It is our largest tax paying industry (11.5% of the tax take).

It’s also our largest exporter, with a £72bn trade surplus.

But what’s more worrying is how much the industry subsidises the rest of the country. Financial services are predominantly based in the South East and London… which are coincidently the only regions that produce a fiscal surplus. Every other region in Britain takes in more in government expenditure than it produces in tax take.

It’s effectively a subsidy from the financial industry to the rest of the country. That won’t go down well with some people, I know. I’m not saying that all bankers are saints and we should be eternally grateful to them. But it is a fiscal reality. The revenue generated from finance is key to Britain’s economic health.

That brings me to worrying point #2:

2) How interconnected it is.

There’s a myth that developed during the financial crisis.

It’s that the banks were “too big to fail”. It’s not true. Or it’s only partly true. The British banks were too connected to fail – it was the complex web of dealings between them and other international institutions that led to the crisis.

The UK banks are both an enormous part of the British economy and vital nodes in the global financial system. They’re what might be termed “super spreaders” – banks that can transmit toxic problems from one part of the financial world to another via their complex system of connections.

That’s a risk. Before the financial crisis a complex financial system was seen as a strength – the greater the numbers of connections, the more widely risk is spread. The 2008 crisis proved that thinking 100% wrong.

The more connections between financial institutions… the greater the risk of crisis. A New Economics Foundation report into the stability of the UK financial system last year put it this way (my emphasis):

Before the financial crisis of 2008, conventional wisdom held that greater interconnectedness led to more stable systems by dispersing risks: in the event of a shock, each bank takes a small hit, the impact is dispersed and there is no contagion.

However, whilst this may be true for small standalone shocks, it is now acknowledged that highly interconnected structures can in fact be more vulnerable to extreme shocks cascading around the system.

As the 2008 crisis demonstrated, it is particularly dangerous when large, too-big-to-fail banks are highly interconnected with the rest of the financial system and act as ‘super spreaders’ of contagion.

It’s worth noting, this refers to connections between financial institutions. Not between banks and “real” businesses. Those kinds of connections are normal (and arguably a sign of a sound economy).

But the more complex the web of transactions between banks and other financial institutions, the greater the risk of problems cascading through the system. What starts as a remote crisis can suddenly strike closer to home.

The “super spreader” metaphor works nicely. It refers to how diseases spread. Certain places and people are super spreaders of disease. Imagine an epidemic of some terrible virus rears its head in Italy or New York or Hong Kong. How long before someone passes through Heathrow airport? Not long. Now map that on to the financial system. The City is like Heathrow times a billion.

What all this means is this: the UK’s financial system – vital to our economy remember – is uniquely vulnerable to crisis. Do some digging into just how vulnerable the system is and you get quite a shock:

**The UK financial system makes an enormous number of loans to other financial corporations. As of 2014 (the latest figures I could find) this figure stood at 34% of our entire GDP – five times more than the G7 average.

**In fact, the UK financial system has the highest exposure to foreign debt in the G7.

**It is by far the most bloated sector, compared to the size of our economy, of any G7 nation. Banking assets total 400% of our entire economy.

**We’re second only to Canada when it comes to exposure to consumer debt. Consumer debt is expected to reach 150% of GDP by next year.

**We have the lowest “useful lending” ratio (lending to real businesses not other financial institutions) in the G7.

**We have the highest “risky assets” ratio of any G7 nation (the ratio of safer “core” assets to riskier “non-core” assets).

**The highest level of “securitised assets” in the G7 – complex securities that helped create the last crisis.

**The highest leverage (borrowing) ratio of any G7 banking system.

And finally…

**According to the New Economics Foundation, the UK financial system is the least resilient financial system in the G7.

And not just by a little bit. The foundation ranked each country by resiliency. The UK came last. The next least resilient system was Italy… with a score almost twice the UK’s.

In other words, the UK financial and banking system makes up an enormous portion of our economy, subsidises the rest of the UK fiscally and is simultaneously the most fragile modern financial system in the world.

That’s a risk. A big risk – to our economy, our way of life and to our wealth.

Why?

Because most of us have the lion’s share of our wealth and assets tied up or locked within this system. Our current accounts, business accounts, pensions, mortgages, brokerage accounts – it’s all connected to a financial system that is vulnerable to outside shock.

No one knows what the fallout will be when the next crisis strikes. But my guess is it won’t be pretty.

I’m going to go on record. I think in the next 12 months we’ll see a major bankruptcy – or the imminent threat of one – that will push the system to the brink again. I believe I have credible evidence as to exactly where the bust will start. And I want to share it with you.

In fact, I’ve prepared an urgent briefing on the whole situation, including what I believe you need to do immediately with your money. This is the very first time I’ve shared this research. And I recommend you read it right away.

Just click on this link to get the full story on what could be the biggest bankruptcy in history.

Why am I sharing this with you now? Because what all this proves to me is that it is now urgent you start (at the very least) planning for the next major systemic bust. If I’m wrong, no harm done. If I’m right – and I believe all the evidence suggests I am – you’ll be relieved you moved early and positioned your money carefully.

Disclaimer: I fully expect this briefing to rub some people up the wrong way. Some people don’t like having their worldview challenged. Others believe that anyone who claims the world of next week or month might be drastically different to today are wrong.

And you know what, some people just don’t like getting bad news. Fine. If you’re the sort of person who thinks bad stuff never happens and “the time to buy stocks is always today”, as the financial services industry would have you believe, you won’t like what I have to say. Let’s agree to disagree.

Personally, I think if you see someone stood in the road with a truck barrelling towards them you shout RUN! The same is true in the financial markets. What’s the truck this time? Find out more here.

By the way, I know lots of you read our work at Southbank Investment Research BECAUSE it challenges conventional wisdom and BECAUSE we’ll say things others won’t and discuss ideas other people have dismissed. That’s our mission. We’re the alternative and proud of it.

I received a very nice email to this effect earlier in the week. I don’t always share the hundreds of nice messages I’m lucky enough to get as a result of our work. But in this case it’s pertinent:

As a contradiction to the ‘you’re a paranoid scaremonger’ messages you may sometimes get, I want to make sure you know that I am so grateful that you/Southbank think the way you do.

These questions you ask, I’ve been asking for many years… and when I found Southbank it was an utter breath of fresh air. Thank goodness you ask the questions that no other publication asks, because in our lifetime I am certain they will be more than relevant.

I feel that ‘Southbank’ have my back, and after years of institutional investing that’s a new feeling!

Keep doing what you do, keep asking the hard questions, keep giving us solutions to the scary potentials that exist.

I love what you do and I am very grateful.

Well, messages like this certainly make getting up each morning and “thinking the unthinkable” a lot easier! Thank you!

I’ll repeat. Our work isn’t for everyone. I don’t expect you to agree with everything I say. But you can always expect our research to challenge you, provoke thought and open your eyes to threats, risks and ideas you won’t find elsewhere.

This just published briefing is a great example.

Most media outlets don’t even cover stories like this. That’s because the “establishment” has a vested interest in the status quo.

Most analysts would rather toe the line and pretend the academics, politicians and economists in charge of the system have everything under control… that they haven’t completely ruined the financial world through money printing, excess debt and intervention.

People don’t want to hear what’s really going on.

Government doesn’t want to hear it. They’re the biggest debtor on the planet. They don’t want to hear the end of the credit bubble is coming because they won’t be able to borrow any more!

There are almost no serious financial actors who want to see the truth and want to talk about the truth.

It’s only we… the independent financial publishers… that can honestly report on what’s going on. And show people how to prepare.

We don’t take advertising. We’re not part of the financial industry. We’re not economists who are paid to look the other way. And we’re not big government.

We’re the only ones who are willing to tell the truth. That’s why more than 4 million people worldwide pay to read our work.

And it’s why you need to follow this link now and see my urgent warning.

All the best,

Nick O’Connor
Publisher, Southbank Investment Research

Category: Central Banks

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