You’ve seen this plot play out in alien movies, but now we might witness it in the banking industry. A space crew investigates a planet where all the crewmembers are infected with an alien parasite and begin dying. A backup crew comes in to help, hoping to rescue the first crew, but instead of helping end up getting infected themselves. The contagion is spreading and will eventually return to the crew’s home planet. Could we be witnessing the same thing in the banking industry?
This week saw the collapse of two major banks – the second and third largest collapses in U.S. Banking history – with a third teetering on collapse before being rescued by some larger banks.
Last Friday, Silicon Valley Bank (SVB) collapsed, followed shortly after that on Sunday with the collapse of New York-based Signature Bank. The SVB collapse was the second biggest failure, and Signature Bank was the third biggest in U.S. banking history. These were the biggest bank failures since the Financial Crisis of 2008.
After SVB and Signature Bank collapsed, a third bank, First Republic Bank, teetered on the verge of collapse before a group of the nation’s biggest banks stepped in to shore up its deposits, including JPMorgan Chase, Bank of America, Citigroup, and Wells Fargo. The intervention by some of the country’s biggest banks was intended to stave off the contagion from spreading to the entire banking industry. Still, at least one critic of the move wondered if these intervening banks were making a mistake and were just spreading the contagion to their institutions.
Would this move play out like in the alien movies where the rescuers become the victims?
Spreading the risk of financial contagion to achieve “a false sense of confidence” in First Republic Bank is “bad policy,” Pershing Square’s Bill Ackman said in a tweet.
The intervention by the banks may give the public a false sense of confidence and security, but it doesn’t address the problems at the root of these banks’ failures, and that root is speculation. These banks stray from traditional lending norms and finance high-risk startups and crypto firms with little assets or security to back up the loans they receive. By rescuing a bank like First Republic, are these bigger banks just encouraging these bad lending practices? Are they subsidizing bad behavior?
The contagion in the banking industry is not contained to banking. It makes the broader markets nervous and could potentially thrust the whole economy into a recession as investors liquidate their stock holdings and bank deposits.
Smart investors insulate themselves from the chaos and contagion plaguing the broader markets by turning to tangible assets shielded from market volatility and confusion. Sophisticated investors have historically relied on one particular asset to insulate their portfolios in turbulent times – land. Land not only insulates from turbulence but also quietly builds value over time.
Here are the reasons why land is a valuable asset to possess during uncertain and volatile times:
Besides capital preservation, here are the merits of land banking as an investment strategy.
Held long-term, the land is largely unaffected by broader market uncertainty and downturns. It is ideal for capital preservation because it’s a tangible asset that nobody can make more of. It’s scarce and, as the world’s population grows, is only becoming more valuable and is ideal for capital preservation because it will not lose value.
Because land is a finite resource, it organically appreciates over time. Unlike public equities, where prices are determined by hype and hysteria, land has a solid underlying value that grows over time no matter what’s happening in the markets. Holding onto land long-term gives investors the luxury of cashing out of this asset at a profit when appropriate.
Even when compared to other real estate investments, holding land is relatively low risk because there is little maintenance required and no issues involving tenants.
Holding land gives investors options in the future. An investor has many options regarding what to do with the land at appropriate times:
- They can do nothing and continue to hold onto it and capitalize on appreciation in the future.
- They can cash out and allocate capital to other real assets.
- They can subdivide the land to increase the value of their holdings.
- They can develop the land for a specific purpose.
Savvy investors seek to put their portfolios on solid ground in turbulent times. By investing in land, investors can shield their portfolios from broader market volatility with a tangible asset that appreciates over time, is unaffected by investor whims, and offers flexibility for future uses.