The triage operations conducted to stabilize regional banks in the United States and Credit Suisse Group AG (CS) in Europe won’t solve the underlying business problems plaguing those institutions. But it is unrealistic to expect a permanent solution in a financial system weakened by decades of policy errors that encouraged a global debt explosion, rampant moral hazard, and wildly irresponsible speculative behavior. The powers-that-be (governments and too-big-to-fail institutions) can’t simply wind back the clock to a time when real rates were positive or when global debt levels were remotely sustainable. Stuck in an endless cycle of Ponzi finance (as Hyman Minsky described it), the survival of the financial system now depends on its ability to refinance indefinitely the debts it can never hope to repay.

Most of the time, markets shut out this reality and focus on the immediate future. But when accidents happen, like the collapse of a major bank, they start thinking existential thoughts and seeking out so-called safe haven assets. But as we learned with SIBV, one man’s safe haven is another man’s IED. Any investment in the wrong hands can cause financial destruction.

There are three investments that are either acting like safe havens right now or being recommended by some pundits as safe havens.

FAANGs. Some pundits are recommending large cap tech stocks - the so-called FAANGs - again after watching them get pasted in 2022. To be clear, nothing has changed regarding these stocks and tech stocks in general. They remain infinite duration assets whose value is diminished by higher interest rates even before taking into account the specific business challenges each of them faces. But for some reason, some investors seem to think that buying AAPL or MSFT is no riskier than buying a Treasury bond (not in the sense that SIBV bought a Treasury bond of course). That is a serious misperception. These stocks are the farthest thing in the world from Treasury securities and are subject to serious risk of price decline in the current environment. I would avoid falling into the trap of buying these overvalued securities.

Gold. Gold is proving its worth as a safe haven alternative to fiat money. Governments and their central banks really have no choice but to destroy the value of fiat currencies in order to reduce the value of the debts they are incurring and can’t repay in constant dollars. Gold is one of the best ways to protect against their actions. Fears about the banking system naturally send investors looking to alternatives to holding fiat currencies in bank accounts and gold is an obvious and sensible alternative. Gold as a generational investment to protect against the inevitable long-term destruction of fiat money’s buying power by central banks. Buy gold and save yourself. Over time, the value of gold will increase significantly against the US dollar and other fiat currencies as it has since the United States exited the gold standard in 1971.

Bitcoin. Bitcoin is a more interesting and controversial alternative to fiat paper and has rallied strongly recently. Nobody knows what Bitcoin is worth; its value is not based on the backing of a sovereign but instead on adoption by other users. But despite the collapse of FTX and numerous crypto exchanges and several crypto-focused banks, Bitcoin has rallied by ~50% so far in 2023 (Ethereum, the other major cryptocurrency, has also rallied strongly this year). I believe Bitcoin’s price was driven to a peak of $64,800 in April 2021 by leveraged buying of the token at the height of the bubble. As the leverage supporting Bitcoin’s price unwound and the infrastructure of undercapitalized, poorly (if not fraudulently) managed and unregulated crypto exchanges collapsed, the price of this highly speculative asset (in the sense that its price cannot be determined by reference to any external referent) declined. Today, Bitcoin is owned using much less leverage and the price seems to have bottomed around $20,000 before rising to the $25,000 - $26,000 range as more investors seek it out as an alternative to fiat money. It could easily sell off on any large volume sales because the market is not particularly deep but for the moment it seems to be attracting people looking for alternatives to the banking system.

The behavior of safe haven investments is a good indication of whether we are experiencing a true crisis or a short-term panic. If we move into crisis mode, FAANG stocks will be the first to start falling. Gold and Treasuries will hold up the best. What happens to Bitcoin nobody knows. For the moment, we will just have to watch governments try to patch things up long enough to calm everybody down. But don’t be fooled into thinking they are solving any of the underlying problems because they aren’t even close.