‘Success breeds complacency. Complacency breeds failure. Only the paranoid survive.’
For nearly seven years (from early 2009 to late 2015) central bankers successfully employed stimulus strategies to re-inflate global asset prices.
The mere utterance of ‘whatever it takes’ was enough to send share market hearts a flutter.
All Bernanke and Yellen had to do was promise more printed dollars and give a little forward guidance on interest rates — which turned out to be seven years’ worth of ‘wink, wink, nudge, nudge’ on how much they intended punishing the savers of this world.
Wall Street loved this rigged game. Safe and secure in the knowledge the all powerful
Fed had its back, the boys and girls running the biggest casino in the world knew they could not lose. The ‘house’ was on a sure thing.
All those trillions in newly minted currencies — dollars, euros, pounds, yen, yuan — flooded into markets. Any time the markets stumbled — say, a pesky crisis in Greece — an even greater stimulus package was announced.
It mattered little that this money was being used to finance all sorts of marginal activities that in the real world, one of properly assessed credit risk, would not survive.
But this was not the real world. This was market nirvana. Markets were told if things get a little tough out there, don’t worry, ‘there’s more where that came from’.
Since 2009, the elasticity of Price/Earnings (P/E) ratios has been stretched to levels last seen during the heights of the Roaring Twenties and the dotcom boom.
These infamous historical precedents matter little. The central bankers are determined to make sure ‘this time is different’.
The leaders of the pack — the Dow Jones and S&P 500 indices — continued to post new high after new high…until earlier this year.
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All Ords is On a High
The All Ords is closing in on its 2007 high.
If success is measured by market indices, then the central bankers have succeeded beyond their wildest dreams.
What could possibly go wrong from these giddy heights?
Printing money, punishing savers and going deeper into debt is not a long-term fix for the debt and demographic problems ailing the world.
The events of 2008 were a result of serious over-commitment — at that time lobal debt levels exceeded US$140 trillion and an even greater amount of unfunded future entitlement payments. Today, global debt is around US$250 trillion…and counting.
Rather than making the hard decisions to curb the excesses, the Brains Trust, who think they run the global economy, decided to opt for the instant gratification of investment banker adulation.
Investor complacency — borne from the absolute belief in the Fed having the market’s back — has sowed the seeds of failure.
We are now witnessing the reaping of what was sowed.
A crisis in Turkey that threatens European banks. Defaults mounting up in China’s shadow banking system. The Banking Royal Commission exposing the contempt financial institutions have for their customers. Over-indebted household under mortgage stress. The system is rotten to the core.
The one thing history teaches us is that — in the fullness of time — market forces are far more powerful than a handful of academics and their optimal computer programmes.
Blind faith in the capacity of the printing press and suppression of interest rates to defy market gravity indefinitely is severely misplaced.
However, while the good times are ‘a rockin’ and a rollin’, anyone who dared question the sustainability of living in this fool’s paradise forever, was deemed to be a ‘doom and gloom’ merchant. Some would even say ‘a little paranoid’.
Questioning the sustainability of the unsustainable is not paranoia.
It is not even rocket science. It is just plain common sense.
If something cannot continue, then it won’t. It is such a simple concept.
But too few seem to grasp the rationale.
Anyone who dare asks ‘why is that so’ or ‘this can’t possibly last’ in the midst of the hedonistic period, is dismissed as ‘the boy who cried wolf’.
Having been around investment markets for three decades has, I confess, made me paranoid.
In 1987, 2000 and 2008 I witnessed first-hand how swiftly and viciously the market can turn on investors…the ones who believed that past returns could be projected into the future.
On each occasion the end result were losses in excess of 50%. Delivered in a brutal fashion to those who never saw it coming or refused to acknowledge the possibility.
The cycle repeats over and over again. Expensive markets become cheaper…without exception.
In recent years, my so-called paranoia reached a whole new level.
In all my time in the investment industry I have never witnessed such an open display of market price manipulation.
The markets have bestowed upon central bankers an almost God-like reverence. There is genuine belief that central bankers have harnessed the powers of market redemption.
It not only feels wrong, it is wrong.
However, year after year my concerns have been beaten down by a surging share market and upbeat analysis on global economic fortunes.
Since 2008, China has been the economic poster child.
According to the spin, a handful of Communist conditioned politicians have managed to do what no other empire has ever achieved — grow continually without even the considered possibility of interruption in the upward trajectory.
During this period of suspended belief, my BS meter was registering off the scale readings. Yet, the world continued to defy logic.
The higher the market went, the louder the ridicule that was reserved for those of us who suffer from the paranoia of experiencing permanent loss of capital.
In early 2016, during the market’s seemingly never-ending ascendancy, I sat down to write a book about the world I believed was awaiting us in the coming years.
‘The End of Australia: The Real Story Behind Australia’s Coming Economic Collapse and What You can do to Survive it’.
This is not the book people want to read in the midst of such a ‘successful’ recovery.
People want to read things like ‘Dow 36,000 Points’…to be reassured the good times will continue for longer.
Wowsers be damned.
The last few months — Facebook’s share price plunge; Turkey’s woes; the Dow struggling to make a serious assault on its January 2018 peak; Aussie property prices falling — have started to awaken people to the risks that exist within the system.
If push comes to shove, and markets suffer a sustained downturn, the question on everyone’s lips will be ‘what will the central bankers do to arrest the market slide?’
More QE, lower interest rates, money from helicopters, ban short selling, perhaps even ban selling altogether (that’s a new one they haven’t tried).
Who knows what measures they’ll resort to.
But I suspect the game is no longer in their hands.
It’s time for the market cat to play with the central banker mouse.
If history is a guide, we’ll see a flick here and a claw swipe there, before moving in for the kill.
If you think the recent slump is a ‘buy the dip’ opportunity, perhaps you will be right in the short term. However in the longer term this market is headed much, much lower.
Unearned success has made us (as in, society) fat and lazy.
This is an extract from what I wrote in The End of Australia:
‘The girth of the global economy has expanded decade after decade on a high calorie intake of credit. The level of sugar build up in the system has rendered the global economy sluggish and extremely unhealthy.
‘Going “cold turkey” to a vegan diet will be a massive (but essential) shock to the system. The withdrawal symptoms are going to be far more painful than people are prepared for.
‘Unfortunately, the economy has to suffer this “dietary” extreme before we can return to a more balanced, stable and sustainable economy.
‘There’s no doubt the “she’ll be right, mate” attitude has served Australians well when the chips are down. Most Aussies have a quiet confidence in our ability to overcome and capitalise on whatever challenges are put to us as individuals or a nation.
‘However, with what I believe awaits the country within the next decade, Australia and Australians will need much more than the Aussie spirit to survive.
‘The prospect of our “lucky country” entering a prolonged period of extreme hardship— or Long Bust — gives me no joy. However, the facts are what they are.
‘No amount of wishing it could be different will change the facts…imbalances, unfortunately, must be corrected.
‘An attitude of “she’ll be right” may assist in providing us with a coping mechanism…putting on a brave face amidst a world of turmoil.
‘But behind closed doors, the brave face will give way to the inner demons of:
– Is my job safe?
– How will we cope on one wage?
– Will I ever find employment again?
– Will we be able to keep our house?
– Why did we borrow to buy that second property?
– How much more will my superannuation lose?
– Are we going to be able to keep the business open?
– Can we afford to keep the children in private education?
– Will there be a job for me after uni?
– Will we be able to retire?
– What if the government cuts back on the age pension?
‘These are questions framed by fear…the fear of losing lifestyle, assets, employment, business and entitlements.
‘The coming collapse of the global debt super cycle…and its ensuing Long Bust here in Australia…means everything we’ve assumed as being normal is going to be challenged. Hence the title of this book: The End of Australia.’
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Ask Yourself the Important Questions
Please take the time to exercise a little paranoia — ask yourself the relevant ‘what if’ questions.
What if the market falls 50%, 60% or more, will my retirement be ok?
What if I lose my job, do I have sufficient cash reserves in place?
What if property values fall more than expected, do I have enough equity to avoid
What if the Government cuts back on entitlements, how will I make ends meet?
Don’t be complacent.
Take the time to prepare now for a world that is going to be vastly different to the central bank nirvana of recent years.
What I think is coming to our shores in the next months and years is not going to be pretty.
Perhaps this is just me paranoia or it could be our reality.
In my opinion, it would be prudent to take the precautionary steps to protect your financial position before the mob is woken from its stupor.
Editor, The Gowdie Letter