The Beginning of ‘The End of Australia’

The US market has developed a minor case of the wobbles. Don’t be surprised if we see a slightly deeper correction in the coming weeks.

But I don’t think this is going to be the BIG one. This is just a tremor before the Richter scale goes ballistic.

Gold has staged yet another recovery. This, too, is not unexpected. Expect to see gold go through the US$1,300 an ounce level…defying the experts who, late last year, predicted further falls in the precious metal in 2017. Although, in my view, gold will not be the portfolio saviour many think it will.

When the BIG one hits, gold will be sold off to raise much-needed US dollars to service US-dollar-based debts…debts that are in the trillions of dollars.

It seems like every man and his dog is weighing in on the Aussie housing bubble:

The banking regulator [APRA] has confirmed it had “discussions” with Commonwealth Bank surrounding the lender’s accelerating growth in lending to investors, as its chairman flagged concerns about rising vulnerabilities in the housing market.

The Australian, 2 March 2017

The head of Australia’s corporate watchdog has again sounded the alarm over Sydney and Melbourne’s housing markets, saying they’re in the midst of a price bubble.

Australian Securities and Investments Commission chairman Greg Medcraft issued the warning at the regulator’s annual forum in Sydney…

The Sydney Morning Herald, 20 March 2017

The house price boom is putting financial stability at risk, the Reserve Bank has warned…

The Australian, 22 March 2017

The gnashing of teeth by the ‘Big Three’ — ASIC, RBA and APRA — is a classic case of ‘too little, too late’.

The RBA warning is almost laughable. By dropping interest rates to ‘accommodate’ growth, the RBA was complicit in creating the bubble.

When you bring a truckload of cheap booze to a teen party, what do you think is going to happen?

It’s a bit late in the day to start issuing warnings about sobriety when the party you hosted has been raging for this long.

The RBA should hang its head in shame for the lives it’s going to destroy in the coming years. All this has been done in the pursuit of ‘growth’.

We, as a society, are addicted to ‘growth’. I’m all for growth, provided it’s genuine. But we have deluded ourselves into believing that going deeper and deeper into debt somehow translates into economic growth. It’s a fraud that hardly anyone ever questions. We have been dumbed down to think that this abnormality is normal.

There are times when I want to shout from the rooftop: Wake up and see where we are headed…this economic model built on ever-increasing levels of debt is not sustainable!

But it would be of little use.

How many teenagers with access to cheap booze would listen?

Folks, we are in the midst of the greatest pyramid scheme in history, and Aussie house prices are just one of the building blocks in that pyramid.

Putting good money after bad

The recent rumblings on the US share market are another part of the pyramid coming under pressure.

In The Markets & Money on 13 February 2017, I wrote:

The US share market is registering new highs on nothing more than the “bigger fool theory”. Did you know that since 2012, the US market is up 75% on nothing more than an expansion of the PE (price/earnings) multiple? Earnings have gone nowhere. Investors (and I’m loathe to use that term because no sane investor would simply bid up prices without an improvement in the basics) are paying more and more for a dollar of earnings. Madness.

The recent market ructions indicate that some — and I stress, some — people are regaining sanity. However, I’m not naïve enough to believe that all inmates in the asylum have wised up to what’s going on.

Based on nothing more than the observation of the stupidity and madness of crowds, I expect to see any future downturns greeted with the usual chorus of ‘buy the dip’. And, in the short term, they’ll be proved correct.

But, in the longer term, ‘buying the dip’ will become synonymous with ‘putting good money after bad’.

If we take a stroll around this debt-pyramid, we see the debt expansion in the US corporate sector. In 2008, investment grade and high-yield bonds, in addition to leveraged loans, totalled US$3.5 trillion. Today that market is north of US$8.1 trillion. Purely for nostalgic purposes, the subprime debt market, before it detonated so spectacularly in 2007–08, was US$1.3 trillion.

Any slowdown in the US economy — resulting in lower earnings — will trigger corporate defaults on an unprecedented scale.

The End of Australia was written to warn about the instability in the pyramid structure that’s been supporting our way of life.

Now the pyramid is starting to crumble.

It is well documented that Australian households are one of the most indebted in the world per capita. Hardly the international recognition we want.

If you know anything about finances, you know that the more debt you have, the more vulnerable you are. We saw that with the 1980s entrepreneurial boom. Alan Bond and Christopher Skase were prime examples of how debt can make you appear wealthier than you really are. And how, when the world turns, debt can savage you, leaving your asset position and reputation in tatters.

There are no free lunches with debt. You can look like a winner on the way up…and a real loser on the way down.

What we’re witnessing at present is the upside of debt…anyone who can access debt looks like a champion.

In Australia’s case, our preferred asset of choice in the global pyramid scheme is property.

The real beneficiary of record levels of debt

This is an extract from The Economist, dated 9 March 2017 (emphasis mine):

To gauge whether prices are fairly valued The Economist measures house prices against two metrics: rents and income. If, over the long run, prices rise faster than the revenue a property might generate or the household earnings that service a mortgage, they may be unsustainable.

On this basis homes are fairly valued in America by an average of our two measures. But across Australia, Canada, New Zealand, and to a lesser extent, Britain, they look severely overpriced.

global house price

Source: The Economist
[Click to enlarge]

This chart shows the beneficiary of Australia’s record level of debt: a severely overpriced housing market.

In simple terms, the equation supporting this illusionary growth is:

Income x Interest Rate = Loan Amount.

Everything, and I mean everything, in this giant pyramid scheme — housing, car sales, corporate buybacks, government debt, China’s economic mirage and stock market valuations — is completely and utterly dependent on persistently-low interest rates.

Let’s assume the central bank echo-chamber of clueless PhDs can engineer to keep rates persistently low; the only way that more debt can be added to the system is via increased incomes.

How do incomes grow if more debt cannot be added to the system?

When growth slows, costs are cut and prices are slashed. This is not really the environment to go to the boss and ask for a pay rise.

But what happens if incomes stagnate or fall, and interest rates (due to the bond market demanding a higher return for the increased risk) rise?

This is one case when a double negative does NOT make a positive.

While interest rates have trended down since the early 1980s, there have been periods when rates did rise against the trend. On each occasion, financial distress was the result.

Never before in history has the world accumulated a level of debt of this magnitude. It is TOXIC.

Should interest rates move up — even a modest amount — the global financial system would be at risk of toxic shock.

The considered wisdom to defend against a market downturn is diversification…spread your eggs around different assets.


All that cheap money has flowed into housing, shares, government bonds, corporate debt (hybrids) and commodities.

Every asset class, bar one, has been elevated in value by the greatest debt bubble ever seen. This was the specific intention of the Fed’s ‘wealth effect’. Push up prices to make people feel wealthier, and they’ll spend more. Remember that stroke of genius?

When the ‘wealth effect’ bubble bursts, all those assets that were tethered together in the boom will come crashing down in the bust.

The ‘bar one’ asset class is cash.

It’s the only asset that’s been pushed lower by the central bankers’ grand asset-reflation scheme.

Cash is the kryptonite to debt.

Countercyclical investing, in its simplest form, is selling out of assets that have appreciated well beyond fair value and moving the realised capital into assets that have underperformed.

Sadly, most investors act counter to countercyclical, plunging headlong into the recent winners — the failed and familiar strategy of ‘buy high and sell low’.

The end of Australia as we know it is approaching…possibly faster than we realise.

It is not a good sign when the very people who set the system up to fail start issuing warnings to protect their hides.

They say that ‘success has many fathers, but failure is an orphan’. These official warnings are code for ‘this bubble…it’s not my child’.

Unless your money is in the bank, the wealth you’ve created on paper during this prolonged period of artificial growth is an illusion.

Believe me; it can disappear far quicker than it took to accumulate.

The recent wobbles on Wall Street saw a few bits fall off the pyramid. But the (self-interested) financial engineers have declared ‘the structure is safe, no worries here, you can come back.’ And the crowd believes them.

The structure is inherently unstable. Get out now while you can — watch this massive debt edifice come crashing down from the safety of cash.

To learn more about what you can do to protect yourself from the fallout of what awaits us, click here.


Vern Gowdie,
Editor, Markets & 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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