The Biggest Asset Bubble in History

asset bubble

Same issues, different country.

The third largest bank in France has announced another round of job cuts. The Financial Times reports:

Societe Generale will close 15 percent of its branch network and cut up to 900 jobs in France by 2020 as the bank looks to cut costs and accelerate its move into digital banking.

“I am convinced that the European Banking sector is going through a kind of industrial revolution, which will take the next 10 years,” Frederic Oudea, chief executive of Societe Generale told the Financial Times.

Last year Societe Generale announced that it was shedding 2,550 jobs.

Digital banking is destroying jobs in both the northern and southern hemisphere.

To make a tough situation worse, those wielding the axe think this destruction of livelihoods could continue for another decade.

How many more individuals around the world will be made redundant by digital disruption in the coming years?

Millions.

The deflationary forces at play in the global economy (automation, excess productive capacity and ageing population) have mystified central bankers. Which in itself is a puzzle…surely they are not that clueless?

It’s not supposed to work this way…at least according to PhD theorists.

The RBA has all but ruled out the prospect of an interest rate increase anytime soon.

No great surprise there.

My unwavering view is that predictions of an interest rate increase have been, and will continue to be, misplaced.

Our economic outlook doesn’t warrant the optimism of a rate increase. Things just aren’t that good. Especially when China’s insatiable appetite for debt poisons their financial system.

The RBA’s next interest rate move is likely to be down — not up.

The front-page headline from The Australian on Wednesday, 22 November was: ‘RBA flags the end of certainty’.

The headline provides an insight into the hubris that exists in the corridors of the RBA.

Since when has anything related to the economy and financial markets ever been certain?

Anyway, the article went on to say:

Australia has entered an uncertain chapter of its economic history, marked by meagre wage growth, intense global competition among retailers, high household debt and elevated house prices, the Reserve Bank governor declared.

In a speech in Sydney last night, Philip Lowe said automation and growing foreign competition from foreign workers were sapping worker’s wages — now growing at their slowest pace in 50 years — and dragging down prices in ways that had confounded Reserve Bank’s economist.

Seriously, why do we pay these people — the RBA governor and his staff — the big bucks to be confounded by something we’ve been warning about for years.

This type of official admission so late in the game is another reason why I think the final siren is ready to be sounded.

Based on past performance, those charged with keeping us out of harm’s way rarely see a problem until it is too big to solve…and ignore.

The problem is: They are the problem that created the problem.

The deflationary outlook is the central theme of The Gowdie Letter model portfolio.

While cash doesn’t earn much, I’m confident it’s value is going to rapidly increase in the not-too-distant future.

The coming collapse in credit, share and property markets is going to start the dominos falling. China will go into overdrive to generate revenues to offset a wave of debt defaults…a hugely deflationary force. Other nations will be forced to act out of self-interest.

What this means is that the buying power of cash is set to increase significantly. 

Another article I read recently, written by Robert Gottliebsen, took me by surprise.

Here’s an extract:

The first [piece of research] came from Credit Suisse, which said that ever since the Federal Reserve pushed rates to very low levels corporations have been incentivised not to invest in growth and the allocation of funds to capital allocation. Not surprisingly this has caused an unprecedented decline in capital spending.

As a substitute, American-listed corporations have engaged is extensive stock buybacks — so much so that the biggest buyer of equities since the market low in 2009 has been ‘non-financial corporates’, I find that a stunning revelation.

I have a great deal of respect for Robert Gottliebsen.

However, I must admit to being taken aback by his admission that the level of buyback activity by corporate America was a ‘stunning revelation’.

The extent of US corporate buybacks and the impact this has had on the markets is a subject I’ve discussed at length before.

It appears that the reality of the situation we’re confronting — global deflation and highly-manipulated markets — is finally starting to dawn on people.

None of this will come as news to readers of The Gowdie Letter.

This is an extract from the 24 February 2017 edition of The Gowdie Letter:

Very few people have financial intelligence…

‘“No one sees what we are seeing… Are we blinded by our bias or are they oblivious to what’s going on?”

And so went a recent conversation with a good friend about the rise and rise of the US share market.

Are we missing something or is it a case of being patient for the switch to be flicked from boom to bust?

To help rationalise this disconnect between what we think is a fait accompli and what the herd is doing, we draw inspiration from acclaimed psychologists, Kahneman & Tversky.

In their book, On the Psychology of Prediction, they wrote:

“For if we can explain tomorrow what we cannot predict today, without any added information except the knowledge of the actual outcome, then this outcome must have been determined in advance and we should have been able to predict it…

“The fact that we couldn’t is taken as an indication of our limited intelligence rather than of the uncertainty that is in the world.”

Based on the data we have — record debt levels; downward wage pressures; historically high PEs; unfunded and unaffordable welfare promises; the sheer volume of boomer retirees; ultra-low interest rates; QE used to inflate asset prices; excessive corporate debt funding for buybacks and not for capital investment; too much supply and not enough demand — the outcome of this financially irresponsible experiment, by a handful of central banker PhDs, has been determined in advance.

The outcome is the system will collapse.

The lack of recognition of this actual outcome, is an indication of limited intelligence…more specifically the fact that very few people possess financial intelligence.

When markets are running hot, how many people ask the question “why is this so?”

The majority simply accept that this is the “way it is”. Questions are rarely asked in boom times. No one wants to jinx the market.

The failure to recognise previous patterns of human nature is the reason history is doomed to repeating itself.

Make no mistake; the central bankers, with their misguided stimulus policies, have blown the biggest asset bubble in history.

This is not just a run-of-the mill share market bubble.

It’s a bubble in property prices.

It’s a bubble in credit markets — corporate and sovereign debt.

It’s a bubble in artwork — US$450 million for a painting that may or may not be fake.

It’s a massive bubble in cryptocurrencies — you want to be standing well back when that baby blows.

It’s a bubble in personal debt — mortgages, credit cards, student loans, and auto loans.

This is massive.

Yet it is still largely unseen by those who should know better.

The fact that they don’t see it should tell you just how nasty this surprise is going to be for almost everyone.

Regards,

Vern Gowdie,
Editor, The Gowdie Letter

Vern Gowdie

Vern Gowdie

Editor at Markets & Money

Vern Gowdie has been involved in financial planning in Australia 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 magazine as one of the top five financial planning firms in Australia.

He is a feature editor to Markets and Money and is Founder and Chairman of the Gowdie Family Wealth and the Gowdie Letter advisory services.

Vern Gowdie

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