WILL THIS DECISION DESTROY YOUR SAVINGS? Find out here what it is, and how simple timing can leave you and your family safe.

Global liquidity, in the form of new lending by banks, continues to increase across the globe.

Front running the interest rate cut campaign most of the world’s most important central banks are about to undertake.

Today I am going to talk about a $40 billion market you may never have heard of, but which your portfolio might be invested in. In fact, it’s highly likely you do have some exposure to this market via investment in bank fixed income, ETFs, or certain listed stocks, without realising it.

However, a recent decision made here in Australia is about to fundamentally affect over $40 billion AUD worth of bond assets held by ordinary retail investors, maybe even your own.

If this decision goes ahead, it will virtually guarantee the complete destruction of this market and those who hold these same bonds!

What’s more, I can prove it. So, you need to be across this.

Sounds inconceivable, hyperbolic; but hear me out.

Then tell me if you think I’ve lost the plot.

Let’s start with the basics. What are hybrid securities and why do you need to know about them?

Their official name is “Additional Tier 1 Capital” or AT-1. They were created out of the ruins of the financial system after the global financial crisis. This new form of capital was a fundamental pillar of the new bank regulations put in place to stop the next financial crisis (the Basel III accords).

A key element of these reforms was to raise the quantity and quality of capital to improve banks’ financial resilience in periods of crisis. This included AT1 capital.

The Australian Prudential Regulatory Authority (APRA) introduced these to Australian banks in 2013. Led by the big four and Macquarie banks, which account for over 85% of AT-1 issues to the amount of over $43 billion.

Now, to spare you the endless explanations of different tiers of capital and hundreds of acronyms, let me instead show you the following image.

Reading now from left to right, we see the investment/risk returns are higher the further down the capital structure you go. With a consequent increase in priority on insolvency the more secured the debt. Pretty self explanatory. Notice the tier 2 capital hybrid is highlighted grey; more on that in a moment.

If there is such a thing as some good to come out of the GFC, then this is a prime example.

Since 2013, in spite of the many financial scandals and shocks that the world has seen since then (and there have been some doozies!), your life savings, your term deposits, and everyday savings have been largely protected from them thanks to this structure.

Think of them like levers that banks can use to mitigate risks during crises by sacrificing the higher risk debt to protect their depositors and secured debt – all the while remaining solvent.

Meanwhile, during the experimental phase of central bank zero interest rates, money managers globally were able to offer their clients some way of earning interest via these higher risk hybrid bonds.

So far, so good. Most major banks have been able to ride out recent storms while retail investors could secure higher than normal interest rates for accepting higher risks and diversify their own investment portfolios.

So far so good. So what has happened recently that could bring financial catastrophe to investor portfolios?

Take a look at the following headline.

In a nod to the “too much of a good thing isn’t healthy”, APRA announced that they believe too many retail investors are exposed to these hybrid securities. It’s time for the punchbowl to be removed.

So, what is the thinking behind this? Below is an excerpt from the above article. The Bold text is my own.

Ever since, hybrids have been enthusiastically bought and sold, and the corporate regulator (APRA) has been worried that retail investors mistakenly view them as simply higher yielding bank deposits.

But the prudential regulator had a different concern: they weren’t risky enough. And so, on Tuesday, the Australian Prudential Regulation Authority called time on bank hybrids. The phasing out will begin in 2027 and by 2032 all $43 billion of bank hybrids on issue will be repaid.
Oh dear. Houston, we have a serious problem here.

So, what IS the problem here? What are we worried about? I said I could prove to you how this results in the holders of these hybrids being wiped out.

Holders like you, your parents, your grandparents. Let’s go back a bit, to March 2023.

A small detail I’ve not explained to you about these hybrids yet. You see, they don’t exist to produce income or security for holders. They are designed to protect the bank, pure and simple.

And in March 2023, holders of Credit Suisse hybrid securities learnt this in the harshest way possible. One of the “too big to fail” banks mind you.

In one fell swoop, UBS pulled off one of the heists of the century by buying up their rival for pennies on the dollar. For Credit Suisse’s shareholders and hybrid investors, the outcome was less rosy.

The equity investors lost 89 per cent of their capital (based on trading levels 12 months ago) and the hybrid investors were wiped out. Significantly, Credit Suisse’s depositors, and senior and Tier 2 bondholders, were fully protected: they did not lose a single cent.
Recall the above simplified capital structure image.

The truth however was this; those hybrid bonds are supposed to either be bailed in or destroyed. That’s their job – to protect the bank.

APRA’s regulations stipulate that after equity (shareholders) holders are liquidated in a crisis, it must be the hybrid holders who are converted into equity before tier-2 bonds are put at risk. Given its recent press releases, what occurred here with Credit Suisse has shocked APRA into action.

My take is they do not want to witness a whole heap of retail investors get wiped out to the tune of billions on its watch. Particularly with so many retail investors in Australia owning such instruments in their personal portfolios.

So the equation for them is this. For a slightly reduced interest rate, the hybrid security holder will be rolled into tier-2 bonds at expiry with the pay-off being they now have greater security as legitimate tier-2 bond holders (see the greyed-out box in the image above, which is where tier-2 bond holders sit).

On paper this appears to be a fair exchange between risk and reward, plus it thickens up the Tier-2 capital buffer for our most important banks while not adding too much of an increase to banks funding costs.

The complications however begin once you know your timing.

Overlay your knowledge of the 18.6-year Real Estate Cycle. When does history suggest the US land markets will peak? (US land markets are always the first sign that the cycle is peaking). What does it suggest will happen to markets next?

Then add in the timing that APRA wishes to mandate these conversions between hybrids to tier-2 bonds? You simply could not time this any worse.

Should history repeat, the peak then fall of the 18.6-year Real Estate Cycle means pressure upon the best sort of collateral that banks love to borrow against for their loan books (land) will quickly transfer into the wholesale bond markets.

This kicks off the great panic where everyone is asking “Who owes precisely what to whom?” as the many on-book and off-book bets begin to unwind.

This happens as loans start to be called in and with no clear counter-party (given the complexity and multi-layer use of derivatives that underpin the financial system) the panic spreads everywhere. These moments are chaotic.

The risk then starts to eat their way higher up the capital structure of financial institutions both in Australia and globally. One of the most liquid global bond markets out there is for Tier-2 bonds.

I ask you now – what do you think happens when liquidity disappears from this market? How do you think Australian banks convert their hybrid investors to Tier-2 bonds in such a setting?

I’m deadly serious here. You or many of your family members may have large exposure to these assets.

Today, many Super funds, even your own, have massive amounts of customers’ funds invested in ETFs exposed to hybrid securities. Many fund managers have steered their clients into these as part of an income producing portfolio (mainly those now retired).

There is nothing the above market participants can do to influence this, they must sit tight and await the APRA mandated conversion process to play out.

During a land-price led depression, with a melting bond market underway, this then reverberates across all the exposed ETFs and derivatives that rely upon the coupon these hybrids pay.

What should you do? How much time do you have left? How can you avoid the fate of the Credit Suisse hybrid holders? It comes down to this; do you understand how the land markets actually work, and are you privy to the unique way they can time the movement of the economy?

If the answer is no – here is your solution. A membership to the Boom Bust Bulletin (BBB).

This is how you learn and discover the hidden order of the economy, its inherent timing and why the real estate cycle continues to repeat, 200 years and counting now.

Each month you will receive all the latest research and news as it pertains to the turning of the cycle. This will give you increased confidence in your ability to time your most important financial decisions using over 200 years of history as your guide.

APRA has now decided that Australia’s financial system will be different to the rest of the world. This policy means banks will now have more debt than before, in the form of Tier-2 bonds.

What if credit rating agencies downgrade them, and by extension, Australian banks? Do their bail-in levels now change? No-one can say, cause this is a first-of-its-kind.

The pending real estate cycle bust will coincide with all this.

With no one willing to take on these hybrids, they will be written off. So will $43 billion dollars worth of ordinary Australians’ wealth. If you are relying on these for your retirement, can you survive such an enormous hit?

Protect yourself and your family with our world-class knowledge of the timing of the real estate cycle.

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