Ready for 2019? Take the Money Test

Here comes 2019. How financially prepared are you for the coming year? Christopher Coles at Atremis Capital in Austin Texas has created 10 statements you may want to consider.[1] Read each statement and tick each one you agree with. At the end add up your ticks for your final score.

[1] Page 10.

The Statements

1. Exchange traded markets are liquid and safer than over-the-counter derivatives

2. Technology is disrupting the world so the old rules of valuation no longer apply

3. Stocks and bonds are anti-correlated and provide excellent diversification

4. Stocks and real estate will always go up if you hold them for long enough

5. Passive investing offers higher returns at lower cost

6. Central banks can support markets indefinitely

7. Volatility accurately measures risk

8. Liquidity will always be there

9. Debt can be refinanced

10. Money creates value

How did your score?

If you agreed with a single statement I strongly recommend you read Christopher’s article. It may just keep you liquid.

The point Coles is wanting to make is that, like a fish swimming in water, we are so used to the current assumptions surrounding the financial system that we fail to notice them. A fish never questions the medium it swims in. It simply takes it for granted without a single thought. Coles suggests that the assumptions that have governed the financial system for the last decade may no longer apply.

If he is right we all know what happens to fish out of water.

“When the collective consciousness stops believing growth can be created by money and debt expansion the entire medium will fall apart violently…”[1]

The medium fish swim in is water. The medium that defines fiat finance is money. In particular the plentiful supply of money and credit. 2019 may look good as long as we still have this medium to swim in but what happens if it dries up? What happens if there is a liquidity crisis?

A fish is going to take a lot of convincing before it starts thinking about the medium it swims in. Coles does a pretty good job providing evidence to shake us from the complacency of accepted wisdom.

For example:

Passive Funds — In 2018 50% of all assets under management have been passively managed according to Bernstein Research. A major problem of passive funds such ETFs is that they are long only — they produce returns only if the market rises. When the market stops rising passive investors stop buying — liquidity dries up. Coles built a model that suggests that rather than passive investing being a safe place to grow money, they can create their own downfall. “Passive is just a crowded ‘liquidity momentum’ trade and its outperformance compared to active managers may be self-fulfilling and ultimately de-stabilizing in the long run.” [2]

Low Liquidity — The last 10 years have been the only bull market in history that has occurred on lower and lower trading volume. “In the U.S. stock market more than half of the 8,500 listed companies now trade less than 100,000 shares a day.”[3]

Debt — “Starting in 2019–2021 a dustbowl of debt re-financings will hit markets when they are most vulnerable to a liquidity drought. Annual combined U.S. government and corporate debt supply is expected to exceed $2 trillion each year between 2019 and 2022 (Deutsche Bank). Leveraged corporations will need to roll $1.2 trillion of high yield debt starting in 2019 and peaking in 2023 (Bank of America). For the first time in modern history the U.S. government will require a massive supply of debt to finance fiscal deficits during a period of tighter monetary policy.”[4]

Baby Boomers Golden Years — People who were born in the mid 1940s to 1962 have started to drawdown their savings for retirement. This amounts to $17 trillion in 401(k) and IRA accounts alone. The U.S. tax code requires 401(k) account holders to begin selling assets when they are 70 ½ years old. Coles notes “Demographics in the developed world will have a major negative impact on capital market flows right as passive investing, which relies entirely on flow, becomes dominant.”[5]

So if the water of the financial system is fiat money, then we may be about to find out what happens when it dries up. Because this is about the actual environment of the system it’s a hard idea to grasp. But as Coles points out, the event, if it comes, will be tangible and not just a theory.

An implication of Cole’s analysis is that THE SIZE OF THE MARKET INVESTED IN DOES NOT MATTER. Just because the SPDR, the S&P 500 ETF has a market capitalisation of $245 billion does not make it immune to a liquidity crisis. Liquidity is the absence of buyers in a market. It can, and does happen in any market.

Coles is also pointing out that a liquidity drought is systemic — its effects the entire system. It is not only an issue for passive funds like ETFs. A liquidity drought is a shortage of the medium of all finance. If the water disappears it is going to affect everyone.

In a few weeks we are going to start to see if Coles is right in his analysis. Right or wrong, the fiat financial system, built as it is with the value of one institution dependent upon the value of others, is fragile and the trigger for system-wide collapse can come from any quarter at any time. A Google Search on “The next financial crisis” on any day brings up a range of potential trigger points.[6]

So in terms of pure self-preservation, what can an investor do when the very medium of the fiat system dries up? How can you diversify away from the medium itself?

[1] Ibid page 1.

[2] Ibid page 3.

[3] Ibid page 5.

[4] Ibid page 9.

[5] Ibid page 9.


That was a tough question until 2009 when Bitcoin was launched. Bitcoin, and now Bitcoin Enhanced, are “fish bowls” of value outside the financial system. They show that however huge the fiat financial system is, it is still a fish bowl. A liquidity crisis in the fiat system is going to affect every asset in that system, but not all assets are fiat. Therein lies the opportunity for diversity.

A smart fish may want to leap from one bowl to another. Admittedly the fish bowls of Bitcoin and Bitcoin Enhanced are minuscule — Bitcoin will only ever have 21 million coins and the two Bitcoin Enhanced tokens are limited to 4 million each. This is scarcity of another kind in that very few people are going to be able to participate. But ironically if there is systemic collapse in the fiat system, the very scarcity of resource in these tiny fish bowls is likely to guarantee their liquidity.