Sir Gregor MacGregor was a Scottish mercenary, world adventurer, and conman.
He famously raised several hundred men in Charleston, South Carolina, and “invaded” the northern Florida key of Amelia Island in 1817.
There, he declared himself king of the “Republic of the Floridas.”
He printed his own currency – called Amelia dollars – to compensate those troops.
Sadly, his reign wasn’t long – about 100 days before he abandoned the island.
He left those troops to fend for themselves – with a currency worth nothing.
Three years later, MacGregor devised an even more outrageous scheme.
He’d sailed up the Mosquito Coast, a narrow stretch of now Nicaragua and Honduras that faces the Caribbean Sea.
He’d received about 8,000,000 acres of Mosquito land in exchange for jewelry and rum from a Miskito king named George Frederic Augustus I – even though it’s uncertain that the man had the power to gift the land in the first place.
The descendants of shipwrecked slaves and indigenous people had previously inhabited the region. But by the time MacGregor arrived in 1820, all signs of civilization had vanished. The jungle may have looked beautiful from the ship’s deck. But it wasn’t a place to raise animals or cultivate agriculture.
The land would kill him if he let it.
So, MacGregor devised a way to unload those useless assets, just as Goldman Sachs devised to dump worthless bonds on unsuspecting customers in 2008.
He created a fake nation as part of a massive confidence trick.
He called it Poyais, dubbed himself a “Prince,” and developed a fairytale story of a “land of opportunity” across the Atlantic Ocean.
MacGregor took this confidence game to extreme levels.
First, he created fake uniforms for the fake Poyaisian Army, fake land titles, a fake honors system, and even a fake coat of arms. By 1821, MacGregor returned to London, establishing himself as foreign royalty and a frequent recipient of high social invitations where he’d court investors and followers.
No one had Google, so they couldn’t look him up to learn of his failed adventures in Florida.
He presented himself as a wealthy dignitary, earning adulation from rich society.
The timing for MacGregor’s scheme could not have been better for him.
Interest rates had dropped precipitously as the post-Napoleonic-war English economy grew. After the Battle of Waterloo, interest rates had dropped.
Investors wanted more returns and more risk. So where did they turn?
Some turned to MacGregor, who was selling the luxurious vision of Poyais in newspapers from London to Glasgow. He bragged of black, fertile soil. He forecasted millions of dollars in crop production. He talked about ample fish and wildlife for settlers to hunt.
He described spa-like waters for sick people.
And… of course… it was all a lie.
Still, hundreds of people invested in Poyaisian government bonds and land – even though the nation didn’t exist. Roughly 250 people even moved to the region in 1822 to find it wasn’t the paradise promised. More than half of them died.
Turns out, MacGregor was one part fake socialite Anna Delvey, one part FyreFest co-founder Billy McFarland, and another part Goldman MBS broker.
He’s been labeled the “founding father of securities fraud” thanks to a real estate bubble he’d fueled across the Latin American region. But it gets worse.
The Poyais scheme – among other ill-gotten, crowded investments in Latin America- helped influence a stock market crash called the Panic of 1825 three years later. That financial Panic saw 70 banks fail.
The autopsy of the 1825 Panic is the definition of history rhyming.
The British economy experienced a big boom after the Napoleonic Wars. The central bank dramatically increased the money supply, making speculation like Poyais rampant. Then, it rapidly tightened it with interest rates.
The result was a massive run on the banks.
The Bank of England refused to act as a lender of last resort.
Until it was too late for them to act.
Bitcoin Can’t Touch This
I always wonder that when central bankers speak of the potential financial crisis, they genuinely understand which assets drive the threat of systemic collapse.
In 2021, Sir Jon Cunliffe – Deputy Governor of the Bank of England for Financial Stability – warned that Bitcoin could fuel a massive financial meltdown worldwide unless governments regulated crypto assets.
At the time, Bitcoin was trading north of $50,000.
Yes, it was clearly in a bubble – one of history’s largest ever. But Bitcoin’s run largely was fueled by massive liquidity injections from global central banks and confidence instilled by the goofy haircut of Sam Bankman-Fried (yes, I’m oversimplifying).
The central banks created a speculative problem – and now wanted to put the genie back in the bottle. Could an alternative asset – with limited institutional exposure (and very little comparative retail exposure) collapse the global economy?
But it wasn’t the risky Bitcoin asset that nearly sank the English economy, as the Deputy Governor for Financial Stability should know.
Just one year later, government bonds nearly collapsed the British system – and in many ways – the nation is still feeling the heat of the 2022 Gilt Crisis.
The British Gilt is considered a “low-risk,” low-rate of return bond issued by the British government. In October 2022, the world’s sixth-largest economy experienced a dramatic surge in bond yields.
This increase in yields raised concerns about the sustainability of the country’s public debt and its ability to finance government spending. Pension systems had purchased significant sums of these “low risk” bonds, only to find out that when their yields spiked, the value of these assets dropped – quickly.
As a result, funds that needed capital had to sell these bonds at a loss, fueling a price spiral and a further yield spike.
The ensuing liquidity crunch fueled a rush to safe assets (including the race to cash on the U.S. dollar. As the lender of last resort, The Bank of England had to take immediate action to control bond yields and inject liquidity into markets to stabilize those bonds.
But these injections signaled an effective soft default on the nation’s debt. Inflation continues to run very hot in the United Kingdom, but the central bank needed to provide liquidity to stabilize the system.
You see, there’s a misunderstanding of most policymakers around the globe about what’s dangerous.
It’s not going to be Bitcoin. It’s not extreme risk assets like Zombie stocks.
It’s the safe assets… the things we take for granted. And the leverage that builds around them. Like housing. Or GILTS. Or mortgage securities.
So, we should all be concerned when we see what’s happening in the U.S. economy today. The so-called “safe” risk-free asset in global finance has become very dangerous.
Markets are on edge as the U.S. 10-year Treasury Bond continues to spike.
This creates a similar situation for banks and other institutions holding long-duration bonds. In March, the Fed had to open its discount window to provide emergency capital for banks holding long-duration bonds that they couldn’t sell.
But now – with the U.S. national debt exploding, Treasury bonds are spiking much higher. China and Japan are cutting their holdings in U.S. debt, leaving many to worry that bond prices will only increase as the Treasury Department seeks buyers. The Treasury Department needs to refinance $7.6 trillion in debt in the next year while financing a more than $1.5 trillion deficit, and we remain worried that bond yields are heading higher.
But that’s new debt.
Let’s talk about the existing debt held by so many funds.
A few years ago, when the Fed cut interest rates to zero… a lot of banks and large institutions purchased these bonds to guarantee a return, but also because these bonds are considered safe collateral.
But three years later, bond prices have cratered. Firms that own a large portion of these duration bonds now have an asset that is a weight on their balance sheets.
U.S. 30-year bonds due in 2050 are currently off 56%.
ZeroHedge notes that U.S. banks held roughly $5.436 trillion in debt securities… these securities lost $140 billion in value during the quarter… Cumulative unrealized losses were $558.4 billion in Q2 and have now surpassed the previous peak of $689.9 billion in Q3 2022.”
The author projects that those unrealized losses are on the verge of surpassing $700 billion. To put that into perspective, that’s catching up with the size of the America Recovery and Reinvestment Act of 2009, a massive government stimulus package in the wake of the 2008 financial collapse.
And while all this is happening, money market assets have climbed above $5.71 trillion, a move that continues to see banks nationwide see their deposits dry up quickly.
As you can see, these so-called safe government bonds are getting as dangerous as the “safe” mortgage-backed securities of the 2008 Great Financial Crisis.
Would a move to 6% be enough to crack this system?
The End Game
Everyone has a theory on what comes next.
I think that we’ll see some level of coordination by the Federal Reserve or central banks. It’s inevitable because the problem in the system is liquidity and collateral quality.
If I were a gambling man, I’d suggest that the Fed will let this situation run for a while, creating ample tension in the markets. We’ll likely see a few +/- 2% days in the months ahead.
But when the Fed chooses between stability and inflation, it will choose the former.
Just like it did in 2009 and 2018.
But I don’t want to dabble in speculation because I won’t be trading anticipating what I expect to happen next. I’ll react when it happens.
You see, I’m sitting heavily in cash right now.
I spent the day eating ribs and watching Season 4 of The Wire.
I saw my doctor. I walked on the beach.
In 2008, I was worried. I stayed up thinking about my investments. I worried about what the world would look like the next day. But 15 years later, I’ve developed a relatively simple system that taps into my defensive nature as a trader and investor.
When momentum goes red, I move out of the way.
Our Equity Strength Signals went negative on September 13. With my energy holdings, I set tight stops on Friday and started selling calls on existing positions over the last two weeks.
Will the market crash? Fall another 20%? Maybe more?
We’ll find out.
Now, if you’ll excuse me…
I need to see a man about a jungle property.