Our Investing Environment is One of No Gain, All Pain

Perhaps it’s just me, but something just doesn’t feel right.

Complacency is high. Markets are even higher. And the outlook for economic growth is lower.

Volatility on the US share market has all but disappeared.

A Financial Times headline on 2 June 2017 reads: ‘Wall Street’s “fear gauge” at historical low as US stocks surge’.

No one is too worried. Investors are rather nonchalant about risk to the downside…even though the US market is at an all-time high.

CNBC on 1 June 2017: ‘Dow, S&P and NASDAQ post record close ahead of jobs report’.

The US share market is bulletproof. The US Federal Reserve has done an excellent job in assuring investors that they ‘have their backs’.

In Australia, our property market has the same Teflon coating as the US share market. This from Domain on 1 June 2017 (emphasis is mine):

‘Australia must fix its “spectacular housing bubble”, Citi chief economist warns’

A shortage of housing, coupled with record-low interest rates, has made Sydney the world’s second-most expensive property market. The city’s home prices jumped 16 per cent in the 12 months through April, helping stoke record household debt and putting ownership increasingly beyond the reach of many.

Households are taking on record household debt to invest in a ‘sure thing’. The real estate experts say ‘Bubble…what bubble?’ At worst, in their ‘unbiased’ opinion, property prices may only rise 2% over the next 12 months. No downside here, apparently.

Yet we look at some other headlines and they are at odds with this unbridled optimism.

Here’s a snapshot of some recent headlines and extracts (emphasis is mine):

The Financial Times on 2 June 2017:

‘Disappointing US jobs growth jolts markets’

Markets were jolted by disappointing jobs numbers on Friday, as sluggish hiring and tame wage growth in the US overshadowed a fall in the nation’s unemployment rate to a 16-year low.

The Financial Times on 25 May 2017:

‘UK economy slows more than expected in first quarter of 2017’

Economists had expected that consumer spending would slow this year as higher oil prices and more expensive import costs began to be passed on to shoppers at a time of low wage growth.

CNBC on 5 June 2017:

‘Australians curb spending as household debt balloons’

Real wages growth turned negative in March quarter. Mortgage costs, food, electricity prices ticking higher.

ABC News on 15 May 2017:

‘China’s economy slows from recent bounce’

China’s economy has slowed from its recent bounce, with retail sales, urban investment and industrial output all posting slower growth in April than the previous month.

Sky News on 7 June 2017:

‘Concerns over [Australian] economy growth’

However, wage growth continued to be anaemic, resulting in households running down their savings. The household savings rate slipped to 4.7 per cent in the quarter, and is now down more than 2 percentage points over the last 12 months.

‘“The wage, consumption, and household savings dynamics remain worrying. Highly indebted Australian households continue to save less to fund expenditure,” Royal Bank of Canada economist Su-Lin Ong said.

Anaemic wage growth. Low wage growth. Tame wage growth. Costs going higher. Savings going lower. Debts rising to record levels. Economies slowing.

Is the disconnect between asset prices and the economy a permanent or temporary phenomena?

As far as I can see, none of these economic symptoms are fleeting.

Wage growth is going the way of the dinosaur. The world has way too much capacity, cheap labour and automation. Just keeping a job will be a challenge.

Fixed costs are going higher as governments, utility providers and banks all scramble for dollars.

And, unless you have a benevolent lender, debt levels are set in stone. A wave of defaults could change that but, then again, that wouldn’t be too good for markets.

Eight years of priming the pump has delivered us what?

Record asset prices and sluggish economies. The only thing that trillions of newly-minted dollars has bought central bankers is…time.

What an abject failure these so-called ‘stimulus’ policies have been. We’re in a far more dangerous position than we were in 2008.

If something cannot go on, it won’t.

If the economic symptoms are not going anywhere, what gives?

You guessed it…asset prices. Markets can plummet 50% or more in a matter of days or months. We’ve seen this happen in living memory.

We are living in a world of suspended animation. Logic dictates that this lunacy will not last.

There’s still time to act rationally to avoid capital-destroying losses. Losses that could take a decade or more to recover from.

Unfortunately, in times of rising markets, most people focus on returns.

Far too little thought is given to risk…until it’s too late.

The heart rules the head.

My investment approach is based on 99% investigation and 1% implementation. More than 30 years in the investment business has taught me that long-term wealth creation and retention is about identifying trends and being on the right side of the trend.

The divergence between asset prices and the real economy is a trend that can only end with one outcome…a severe correction. History, unequivocally, supports this view.

Successful wealth management is 99% investigation and 1% implementation.

Implementing a buy or sell can be done with a few key strokes. Whereas the investigation process to determine the ‘what’ and ‘when’ to buy, sell or hold requires tremendous amount of research, thought and planning.

This considered approach on ‘how’ and ‘where’ to allocate your precious capital runs counter to the adrenaline-hit most investors seek. Daily lives are fairly humdrum. Same routine. Same bored faces on the train. Same lunch hour. Same lunch. Same news channel. Same news stories.

The thrill of backing a ‘winner’ or participating in a strongly-rising market adds some excitement to the daily grind. The ‘hot tip’ or ‘get-rich-quick scheme’ or ‘once-in-a-lifetime opportunity’ offers (temporarily) the chance to feel alive. This type of investing is 99% implementation and 1% investigation. Hence the high failure rate.

These mostly doomed attempts to escape the humdrum and follow the crowd invariably lead to being trapped for longer in the daily grind. Losses have to be recouped by extending your time in the workforce or making a significant adjustment to your lifestyle.

In the investing business, there are two distinct options: making gains and avoiding losses.

At present, my assessment is that risk far outweighs reward by some considerable margin.

The following table shows you the level of gain required to offset a loss.

gain needed to cover loss

Source: FTM Limited
[Click to open in a new window]

As unlikely as it sounds today, mathematically, the US market has the capacity to fall 75% or more in value. Ridiculous. Can’t happen. Well, it has…and it can.

Should that unlikely prospect actually become reality, it’ll take a 300% return to make an investor’s dollar whole again.

A gain of that magnitude could take decades to achieve. That’s a huge part of your life wasted. Better to avoid the loss and participate in the gain.

The tried and true wealth-creation technique of ‘sell high and buy low’…a technique that far too many implement in reverse — buy high and sell low.

Identifying trends in society (including social mood) and the impact these may have on markets is where my 99% of investigation is focused on.

Record all-time-high asset prices are a warning writ large: REDUCE RISK NOW.

The investment environment we’re in today is one of ‘no gain and all pain’.

Take the time to investigate how much potential risk exists in your portfolio. Can you afford to incur losses of 50% or more without disrupting your plans?

If you can’t, implement a strategy to exit those positions.

This is not the time to be complacent.


Vern Gowdie,
For 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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