How Long Can the Government Charade Continue?

13 is meant to be an unlucky number. However, 2013 has been lucky for share investors, with the Australian market up over 10%.

If we hark back to 2012, that year started with investors feeling far from lucky. The uncertainty facing Europe had markets on a knife-edge. Thanks to the ‘unlimited’ and ‘indefinite’ money-printing rhetoric of US and European central bankers, 2012 ended in a state of near euphoria – as highlighted in this Financial Times article:

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The bulls have indeed reigned supreme in 2013.

However the year is not yet over. A little look back at history tells us the number 13 and the last four months of the year have been decidedly unlucky for investors.

In 1974, the S&P 500 index started the year around 100 points. In September 1974 the market fell 35% to 65 points (hard to believe it was ever that low).

From its 1974 low the S&P 500 climbed to 335 points – guess when? August 1987 (13 years later). We all know what followed – October 19, 1987. The day they call Black Monday triggered a fall of 33%.

The share market phoenix again rose from its 87/88 low of 220 points to reach 1520 points in August 2000 (bingo, 13 years later). The tech wreck started the slide and over a year later the market ground its way 46% lower.

Here we are today, 13 years later and the S&P 500 has risen from its 2000/01 low of 800 points to over 1700 points.

Note to superstitious share investors: perhaps you should consider taking some profits while the S&P is riding high.

There is still time for 2013 to be the year the market finally meets its long-awaited fate with economic reality. If this does eventuate, be assured central bankers will cease all talk of ‘taper’ and increase the rhetoric to ‘tamper’ further with market mechanisms.

Besides death and taxes, the only other certainty is that desperate governments and their sycophant bankers will do all they can to maintain the illusion of economic recovery.

Debt and deception are the fraying ropes holding this whole rotten mess together. Yet, for now, the vast majority is happy for the charade to continue. So 2013 may or may not be the year the ropes break and the extent of the deception is revealed.

Lance Armstrong’s deceit also happened to last 13 years (1999 to 2012) so Bernanke and Co. could easily mask their use of Economic EPOs for a little while longer.

Complicit in this deception are various government agencies. Over the past three decades the official reporting mechanisms on unemployment, inflation and other economic indicators have been doctored so much they bear no resemblance to the truth – I refer to them as Michael Jackson statistics. is a website dedicated to ‘keeping the bastards honest’. John Williams (who publishes ShadowStats) produces data using the pre-tampered methodology. Williams’s data shows the US is in its seventh consecutive year of recession and US unemployment rate as 20%.

God forbid if the public knew the real state of the economy. More mushroom treatment awaits the uninformed.

Deficit spending is another part of the deceit. Governments spending money they don’t have creates an illusion of health in an economy. To highlight this fact, look at those European countries that have been forced to adopt austerity measures (live within their means).

All of them are either in recession or depression. This is the harsh reality of the underlying economic conditions in those countries. Governments’ spending money they don’t have (temporarily) hides this reality.

This would not be a major problem if the world were not already awash with private and public debt.

Running annual $1 trillion deficits is why the US continually encounters fiscal cliffs and debt ceilings. The enormity of the debt problem means it just keeps raising its ugly head on a more frequent basis.

Groundhog Day is here again with the next US debt ceiling due to be hit in mid-October. The political players will all muscle up for a very public show of brinkmanship and at two minutes to midnight guess what – the debt ceiling is raised another few metres. Why bother with the whole charade?

Given the lack of political will to address this issue it’s going to continue to fester and at some stage no amount of lying, statistical trickery and useless dollars notes will hide this monstrous gaping wound from the public’s view.

According to Professor Laurence Kotlikoff of Boston University the total US government debt and unfunded pension and healthcare liabilities is approx. $222 TRILLION (this is 14 times the official government debt of $16 TRILLION). Baby boomer retirees are only going to further increase this liability. Clearly this situation is untenable.

  • Either welfare and health entitlements are reduced or
  • Future generations gladly agree to pay higher levels of taxation to fund the excessive consumption of an era they did not live in or
  • Successive US administrations embark on a path of high inflation to dilute the level of debt or
  • A combination of some or all of the above.

This dilemma is not unique to the US; it is a problem facing all western governments.

In a token attempt to address this looming welfare disaster and get the US budget back in the black, agreement was reached to ‘raise taxes and decrease spending’ by 31 December 2012.

Remember the US ‘fiscal cliff’ debate dominating the news late last year? As it turned out, it was more like a ‘pothole’. They went straight over the top of it. The following chart from ZeroHedge shows you how much the agreed tax increases will raise compared to the extent of the deficit problem.


After all the posturing nothing really changed and it is business as usual – continue spending more money (courtesy of the Fed’s printing press) than you raise in taxes and keep adding to the official US$16 TRILLION debt pile.

At the time, the compromise to avert the ‘fiscal cliff’ gave Wall Street sufficient reason to push markets higher. Dig yourself deeper into debt and the markets rejoice. Go figure.

However this pattern of behaviour has been repeated time and again throughout the year. The mere hint of restraint sends the market into a temper tantrum. Conversely, confirmation the ‘money candy’ is not going to be withdrawn is greeted with great delight. To be fair, irrational behavior is not confined to Wall Street.

Have you ever wondered why rational thought and basic common sense does not prevail in the hallowed halls of power? My guess is rational people are not hypocrites. Without this character trait they are therefore unsuited for high office.

Prior to being elected President in 2008, Barack Obama was a US Senator. In 2006, President Bush requested an increase in the US debt ceiling.

Senator Obama’s response to this request was: ‘Increasing America’s debt weakens us domestically and internationally,‘ and ‘Leadership means that ‘the buck stops here’. Instead, Washington is shifting the burden of bad choices today onto the backs of our children and grandchildren.

In conclusion, Obama said ‘raising the debt ceiling would constitute a failure of leadership. Americans deserve better. I therefore intend to oppose the effort to increase America’s debt limit.

The following chart shows just how expensive that failure of leadership (hypocrisy) has been and continues to be.

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Another six trillion dollars of debt and seven years later, Senator Obama’s common sense approach was replaced with President Obama warning Congress the markets will go ‘haywire’ if US Debt Ceiling is hit and not extended. My layperson interpretation of this comment is, ‘The markets will throw a big fat tantrum if we don’t keep spending money we don’t have.’

I sincerely hope Obama exercises a more disciplined approach in his parental role than he does with his economic reasoning. Feeding the markets more sugar may provide a short-term feel good, but longer term it leads to decay.

So expect more of the same hyperbole in the coming weeks as the mid-October debt ceiling deadline approaches. The debt sand pile continues to mount up – not just in the US but also in every other major western economy.

The GFC should have been the wake-up call on an era of excess – those responsible for taking us to the brink (Wall Street banks) should have been punished, not rewarded. Instead, it provided the impetus for a bunch of professional academics and spineless, self-serving politicians to impoverish a country while enriching those on the inside.

Time will soon tell us whether the 13-year cycle repeats itself in the next few months or not. However each day this charade of economic stability continues, we are one day closer to it being a very unlucky day for investors who believe you can manufacture prosperity out of thin air.


Vern Gowdie+
for The Markets and Money Australia

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Vern 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.

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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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