Is this the end?
Yesterday the Australian share market once again played follow the US leader. Our market fell 4% compared to the Dow’s 3% drop on Friday.
Yesterday was also China’s own ‘Black Monday’, with its stock markets finally giving up all their 2015 gains.
Then, overnight, the bleeding turned into a full-on bloodbath…
£74 billion was wiped off the value of the FTSE 100. At one point the Dow Jones Industrial Average plummeted by a record of more than 1,000 points. At the time of writing Wall Street is in its last hour of trading. The Dow is down another 3.6%. Nasdaq down 3.7%. S&P 500 down 4.2%.
How will our market fare today? Nothing is certain.
What happens from here? Is this 2008 all over again?
We can’t say for sure at this stage. What I can say is that the timing for this is rather uncanny.
For most of this year I have been engaged in a project at the urging of my friend and colleague Bill Bonner.
That project is a book. Its concern is simple: to help you understand what the next big crisis will look like. How it will impact Australia specifically. And what protection measures you can put in place before, during and after the crisis. So you lose the least…and potentially gain the most from its aftermath.
The book is called The End of Australia: The Real Story Behind Australia’s Economic Collapse and How to Survive It. The hard copies are arriving from the printer by the end of the week. Starting on Saturday we will be shipping copies to any Port Phillip Publishing subscriber who requests one — free of charge.
When Bill Bonner and I had our last planning meeting for the book in Paris in June, we knew this would be a timely, urgent and unique instruction manual for Australian investors. We sensed change in the air. That ‘The End’ was, perhaps, closing in…
We did not, however, anticipate putting this book out on a week where the FTSEurofirst 300, the pan-European share index, saw its biggest one-day drop since late 2008. Or a few days after Shanghai’s composite index shed a massive 8.5%, its biggest drop since February 2007.
Things may settle before the book’s release on Saturday. But the last 48 hours have shown, dramatically, what the early stages of the next ‘big one’ will look like. How violently the markets react when stimulants stop working. And how important it is you don’t get caught up with the herd when the panic sets in.
The End of Australia is a book that contains strategies for dealing with the next big one. You can claim your free hard copy on Saturday.
Of course, you’re seeing the predictable clamor of economists to the podium, all saying this is not 2008. That there is ‘limited risk to China’s real economy’.
Julian Jessop, the Chief Global Economist at the consultancy Capital Economics told The Guardian: ‘The current panic is essentially “made in China”. The recent data from other major economies, including the US, eurozone and Japan, has generally been good… Aside from the bad news from China, there is very little to support fears of a major global downturn.’
As Bill Bonner writes in the foreword of my book:
‘Good luck to you if you believe any of that. It is all nonsense. Nonsense on stilts. Nonsense on steroids. Nonsense with broadband.
‘But in the financial press and the mainstream press you will hear nothing different. Nor will political leaders give you a hint that there might be something wrong. Because if you admit that today’s sales, profits and asset prices are tricked up by excess credit you also have to admit that the whole system is vulnerable to a disastrous correction, like 2008, but worse.
‘That is the sort of financial crisis that no one wants to think about…especially the people who are responsible for it. So you will hear nothing about it from the New York Times. Nor the Wall Street Journal. Nor from Congress or president Obama. Nor Janet Yellen. Nor Jamie Dimon. Nor Paul Krugman. Nor the banks.’
The Fed might manage to increase the tempo for a while, but the funeral march will soon be this market’s theme song.
The Great Credit Contraction has a vice-like grip on the global economy and is crushing any prospect of global growth. We have had a long boom, now we must prepare for the long bust.
Sadly, most people are oblivious to what is happening…because they fail to ask the right questions.
Unless you are over 50, few will recognise this person.
Professor Julius Sumner Miller was the quirky and entertaining physics professor of the ABC TV series Why is it so? The series ran for over 20-years and taught a generation about the magic of physics. Professor Sumner Miller was always asking ‘why is it so?’ and would then proceed to answer the question with a demonstration.
The most powerful questions in the world always begin with why.
Prefacing a question with ‘why’ makes you think, makes the other person think and also reveals the depth of one’s knowledge.
The media is full of reasons why the US share market is convulsing.
The typical mainstream response is:
‘Global markets have come under pressure this week on growing concerns about a slowing Chinese economy and slumping oil prices. Fresh data from China Friday showing weaker manufacturing added to the worries.’
USA Today, 21 August 2015
Throw in some uncertainty over whether the Fed will or will not raise interest rates in September — a whole 0.25% — and you have the reasons why the market wobbles. Or at least you think you have the reasons.
In addition to mainstream media, you have The Donald (as in Trump) on the campaign trail putting his own spin on recent events:
‘I think you have to do something to rein in China. They devalued their currency today. They’re making it absolutely impossible for the United States to compete, and nobody does anything. China has no respect for President Obama whatsoever, whatsoever.’
Plays well to the xenophobic crowd, but is complete nonsense.
My theory is the average person — busy raising children, paying off a mortgage, fighting peak hour traffic, trying to make a dollar stretch further, worried about their job — takes these reasons and political spin at face value. They rarely ask themselves ‘why?’
When you ask them (as I have done many times) why the market is going up or down, the standard response is virtually a word for word repeat of what they have read or heard on the news.
Then you ask them — why are these factors influencing the market?
Invariably the response is ‘what do you mean, why?’
‘Why is China slowing? Why is the oil price falling? Why is the Fed “umming and aahing” over interest rates?’
Most respond with a look and turn of phrase that says ‘How am I supposed to know!!!’
Some respond with ‘China’s share and/or property market is suffering’, ‘An increase in oil supply from fracking and/or the Iranian peace deal’, ‘The Fed is waiting to see the latest inflation, wage or unemployment data before deciding’.
Then you ask, ‘why are these events taking place?’
Usually the second ‘why’ is enough to determine the depth of people’s knowledge about a subject that is not their particular area of interest.
Imagine going to a medical specialist with a health issue and you asked them the why’s and wherefores relating to your area of concern.
And they responded with ‘how am I supposed to know?’ or gave you an answer that still did not get to the source of the matter and you followed up with another ‘why?’ And this time they look at you blankly or used big words to baffle rather than enlighten you. How confident would you be in placing your health in their hands?
Unfortunately this is what happens to the majority when it comes to their wealth.
In all seriousness, the average financial planner knows just a little more than you. They can probably get to the second ‘why’, but a third ‘why’ leaves them floundering. They resort to using generic terms and statements such as: it’s a market correction; P/Es based on forward earnings are below average; Chinese officials will restore economic growth, or they use a Buffett, Keynes or some other quote. They gloss over the fact they do not know why the market is really doing what it is doing.
How do I know this? Recently I took up an invitation from a bank (where we have a term deposit) to sit down and chat with their financial planner. According to the bank employee, the planner would show me how to invest our money to achieve a higher return. Ok, I’m up for a no obligation chat.
The interview went along the standard lines — name, date of birth, marital status, assets and liabilities, income etc.
Then I asked the planner what their financial position was. To which they responded with, why?
‘Well if I am going to have confidence in your ability to advise me, I need to know you have sufficient experience in successfully managing your own financial affairs.’
Obviously no-one had asked this question before. To me it’s perfectly reasonable. Would you agree to an invasive procedure with a surgeon who had no operating theatre experience? Hell no. We saw the horrific results of this in Queensland with Dr Jayant Patel.
Why would you trust your wealth to someone with no practical experience?
Anyway we pressed on with the interview. The end result was the planner believed wholeheartedly in the mantra ‘in the long term share markets go up’, ‘corrections represent buying opportunities’ and, I quote; ‘the US Federal Reserve will put in place the correct policies to maintain economic growth.’
Seriously, this is what passes as mainstream advice from one of the nation’s major banks.
The planner had obviously read the latest update from the bank’s economist and this constituted their view of the world.
The economic content is repeated back to clients with enough authority to sound convincing.
The end result is the planner looks and sounds like they know what they are talking about. Until you ask — ‘why is it so?’
When pressed on the reasoning behind their views, the look I received was one of disbelief…as if I had questioned a priest on the existence of God.
We had ventured into territory the planner was clearly not comfortable with. Having your beliefs challenged is confronting. If you accept the challenge, it means thinking, researching and questioning for yourself. The planner had a mortgage to pay and children to raise. There was little time or inclination to do this. And more importantly, why run the risk of rocking their employer’s boat.
And in a commercial world I understand that.
But it does make me very concerned for the average investor who is relying on below average advice and expecting an above average outcome.
Not even the good professor could make sense of that equation.
Why am I so concerned about the sub-standard quality of financial planning advice?
The end of the debt supercycle — the massive credit expansion trend that has underwritten our way of life for at least three decades — is flashing in neon that it is coming to a spectacular end.
This is the real reason why the markets are cracking up. China, the oil price, direction of interest rates are all symptoms, they are not the cause.
If people and those advising them, do not know why the world they’ve become conditioned to is under serious threat of collapse, then they and their capital are going to be at the mercy of a market in full rage.
If you understand why the system is verging on self destruction — defaulting on trillions of dollars of debt — you can at least take the precautions necessary to bunker down and attempt to protect your wealth.
Why should you heed my warning?
If I’m right, then saving 100% of your capital from a Great Depression-style market collapse is going to be a life changing decision.
If I’m wrong, and the world miraculously goes on each year adding more and more debt to the already heavily indebted system, then you’ll still have 100% of your capital intact. Albeit that the earnings on that capital will be modest. Granted you could earn more if the system does not collapse under the weight of its debt…but that is a brave call.
The equation is this: would you prefer to have 100% of your capital earning 2% or risk losing up to 80% of your capital to possibly earn 6% to 8%?
You need to think seriously about these choices…your future depends on it.
Understanding the dynamics at play in the global financial system right now, and the impact on Australia is why I have written a new book The End of Australia: The Real Story Behind Australia’s Coming Economic Collapse and What you Can do to Survive it.
This is not a book the financial planning industry would or could write. They simply do not see what is coming. Even though this crisis is even more readable than the 2008 one.
Unlike in 2008, interest rates are already at zero. That weapon is no longer available. Budgets are already shot. China has four times more debt than seven years ago. Even if central banks inject more QE, it’s a drug that is fast losing its potency. And, crucially for Australia, there is no Chinese white knight to save us this time.
My book, which will be available for free this Saturday, looks at what happens next. And what you can do about it. Keep an eye out on Saturday for a video that introduces the book, and gives instructions on how to get it mailed to you. (Because of the nature of the markets this week, we will also make free digital copy available for you to download. That way you can read The End of Australia while the hard copy is in the mail.)
Editor, Markets and Money