A Market Correction Or Something Far Worse?

The US markets helped steady the nerves with only a modest 13 point loss last night. Gold held its ground above US$1190 per ounce. Oil remained under the psychological level of US$30 — with a price of US$28.36 a barrel.

Our market should see a bounce today. Sighs of relief all round.

Daily movements up or down are but threads in the overall market tapestry.

To appreciate the story, you have to stand well back and take in the bigger picture.

For nearly seven years there’s been a disconnect between financial markets and the underlying economy. Markets have benefited greatly from central bankers passing the stimulus baton to each other.

The economy on the other hand was adjusting to the deflationary forces — ageing population, debt fatigue, automation, excess supply and weakening demand — working their way through the system.

After an all-expenses paid first class holiday lasting seven-years, the markets are suddenly realising there’s a real world out there. And it is far removed from the fairyland they’ve been wandering around in for the best part of a decade.

market correction

Little wonder they’re in shock and want their sugar-daddy back.

Markets are no longer capable of standing on their own two feet…central banks are now the first port of call the minute things start to revert to reality.

Yesterday afternoon Kris Sayce was on the Gold Coast and we spent several hours chatting about the recent volatility on global share markets.

I could be reading too much into it but it has the feeling of being something much deeper than previous ‘buy the dip’ corrections.

My conservative investment approach meant I missed the market’s recovery from its March 2009 lows.

My error was in not appreciating the resolve of the central bankers to (allegedly) reflate the economy. QE and low interest rates did precious little for the economy, but boy oh boy didn’t it put a rocket under asset prices.

The Australian share market hit a low of 3100 points in March 2009. By October 2009 the All Ords was back to 4860 points…a gain of 57% in seven months.

Yesterday our market closed at 4882…the next 64 months delivered a measly gain of 0.4%.

Over the past seven years, all our market gains came in those early months. Since then it has been a roller coaster ride for investors. Less than a year ago the prospect of breaking through the magical 6,000 points had the taking heads salivating. I think you’ll struggle to find even the most optimistic analyst predicting our market will see that level anytime soon.

Kris asked me what my thoughts are on the current action — ‘is this a correction or something worse?

My gut feel is it’s the start of a much deeper (and long awaited) rout. However, my intestinal readings have been wrong before.

Central bankers have shown just how determined they are to keep confidence in markets — negative interest rates, ‘whatever it takes’ type statements, more QE.

These announcements generate an initial ‘sugar hit’ but a day or two later the bounce gives way to reality.

A case in point is the Bank of Japan’s (BoJ) recent decision to push rates into negative territory.
Prior to the BoJ announcement on 29 January 2016, the Nikkei 225 was 17,000 points. The two days after the announcement, the Nikkei headed towards 18,000 points…yesterday it fell to 16,000.

The central bankers are running out of ‘known’ stimulus options. More QE and even lower interest rates just do not provide the high they once did.

Even the insiders are belatedly realising this fact.

Former Dallas Federal Reserve president Richard Fisher made this startling admission to CNBC on 6 January 2016 (emphasis is mine):

The Federal Reserve is a giant weapon that has no ammunition left. What I do worry about is: It was the Fed, the Fed, the Fed, the Fed for half of my tenure there, which is a decade. Everybody was looking for the Fed to float all boats. In my opinion, they got lazy. Now we go back to fundamental analysis, the kind of work that used to be done, analysing whether or not a company truly on its own, going to grow its bottom line and be priced accordingly, not expect the Fed tide to lift all boats. When the tide recedes we’re going to see who’s wearing a bathing suit and who’s not. We are beginning to see that.

Perhaps this is true.

But my concern is those that are still employed at The Fed and other central banks cannot be so frank in their admissions. They are wedded to a model that is seriously flawed but they cannot admit it…otherwise their life’s work in economic academia has been for nought.

No these inept, useless, egotistical and very dangerous people will do a Google search on ‘even more desperate measures to save the world’ and find a crackpot theory or two they can spin into some twisted form of economic rationalism.

Don’t laugh, it’s not far from the truth.

What I said to Kris is it’s this ‘unknown’ stimulus that really concerns me. The ones that are locked away (for very good reason) behind an inch thick glass panel that says ‘break only if you are stupid and desperate enough to use in case of emergency’.

The system relies on confidence. These self-appointed mistresses and masters of the universe will do all they can to portray confidence.

Once people loses confidence in banks, their retirement plans, governments — the economy grinds to a halt.

What we’ve witnessed over the past seven years has literally been one big confidence-trick.

Maintaining the illusion that it is business as usual has kept the wheels of commerce turning…albeit it at a slower rate of rotation.

But all cons and Ponzi schemes get found out in the end. And that, folks, is what’s happening in the markets. The truth about the real economy is being revealed and it does not accord with the values being placed on businesses and, in due course, real estate.

Will this market correction turn into something far worse? I’ll hedge my bets and say probably. Although I think it’ll get really ugly, I’m hedging my beds because of the unknown stimulus package. The Fed’s ‘chemist’ may have cooked up some market super-drug that’ll take it to a high you’ll never want to come down from.

In the absence of this ‘super-drug’, yes, we are headed much, much lower. In typical market fashion it will be a staircase fall — down three steps and up one.

The front page of today’s The Australian carries the headline‘After 10 years, shares are back where they started.’

Readers of The Gowdie Letter were made aware of this on 15 January 2016. I said then,

The All Ords is back to a level it first breached nearly a decade ago. Our share market is struggling to gain any traction due to wave after wave of soft economic data.

When this unwinding of Neverland valuations is finished I expect we’ll be reading the headline: ‘Share markets are back to levels reached nearly 30 years ago.’

Impossible. Can’t happen. The Fed won’t allow it.

History begs to disagree with you. There are a number of market examples where decades of gains have been wiped out. This market correction is only just beginning.

All those who bought into the industry spin of ‘shares for the long term’ had better hope they live to a very ripe old age to see that previously unchallenged mantra come true.


Vern Gowdie
Editor, Markets and Money

Vern Gowdie has been involved in financial planning since 1986. In 1999, Personal Investor magazine ranked Vern as one of Australia’s Top 50 financial planners. His previous firm, Gowdie Financial Planning was recognized in 2004, 2005, 2006 & 2007, by Independent Financial Adviser (IFA) magazine as one of the top five financial planning firms in Australia. He has been writing his 'Big Picture' column for regional newspapers since 2005 and has been a commentator on financial matters for Prime Radio talkback. His contrarian views often place him at odds with the financial planning profession. Vern is is Founder and Chairman of the Gowdie Family Wealth advisory service, a monthly newsletter with a clear aim: to help you build and protect wealth for future generations of your family. He is also editor of The Gowdie Letter, which aims to help you protect and grow your wealth during the great credit contraction. To have Vern’s enlightening market critique and commentary delivered straight to your inbox, take out a free subscription to Markets and Money here. Official websites and financial eletters Vern writes for:

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