‘Success breeds complacency. Complacency breeds failure. Only the paranoid survive.’
For six years (from early 2009 to mid-2015) central bankers successfully employed stimulus strategies to re-inflate global asset prices.
The mere utterance of ‘whatever it takes’ was enough to send share market hearts a flutter.
All Bernanke and Yellen had to do was promise more printed dollars and give a little forward guidance on interest rates — which turned out to be seven years’ worth of ‘wink, wink, nudge, nudge’ on how much they intended punishing the savers of this world.
Wall Street loved this rigged game. Safe and secure in the knowledge the all-powerful Fed had its back, the boys and girls running the biggest casino in the world knew they could not lose. The ‘house’ was on a sure thing.
All those trillions in newly minted currencies — dollars, euros, pounds, yen, yuan — flooded into markets. Any time the markets stumbled — due to a pesky crisis in Greece — an even greater stimulus package was announced.
It mattered little that this money was being used to finance all sorts of marginal activities that in the real world of properly assessed credit risk would not survive.
But this was the not the real world, this was market nirvana. Markets were told if things get a little tough out there, don’t worry — there’s more where that came from.
For six years the elasticity of Price/Earnings (P/E) ratios were stretched to levels last seen during the heights of the Roaring Twenties and the dotcom boom.
These infamous historical precedents mattered little — this time was different. The central bankers would see to that.
The leaders of the pack — the Dow Jones and S&P 500 indices — continued to post new high after new high. The All Ords was within touching distance of 6,000 points less than a year ago. With the miracle of China behind us it seemed a mere formality our market would also make an assault on a new high in the not too distant future.
With such success, what could possibly go wrong?
Printing money, punishing savers and going deeper into debt is not a long term fix for the problems ailing the world.
We were seriously overcommitted in 2008 — global debt levels exceeding US$140 trillion and an even greater amount of unfunded future entitlement payments.
Rather than taking the hard decisions to curb the excesses. The brains trust who think they run the global economy decided to opt for the instant gratification of investment banker adulation.
Investor complacency — borne from the absolute belief in the Fed having the market’s back — sowed the seeds of failure.
We are now witnessing the reaping of what was sowed.
Market forces are far more powerful than a handful of academics and their optimal computer programs.
Blind faith was severely misplaced in the printing press and suppression of interest rates to defy market gravity indefinitely.
However, while the good times were a rockin’ and a rollin’ anyone who dared question the sustainability of living in nirvana forever, was deemed to be a ‘doom and gloom’ merchant. Even a little paranoid.
Questioning the sustainability of the unsustainable is not paranoia. It is not even rocket science. It is just common sense.
If something cannot continue, then it won’t. It is such a simple concept. But too few seem to grasp the rationale.
Instead anyone who says ‘why is that so’ or ‘this can’t possibly last’ in the midst of the hedonistic period, is pigeon holed as a worry wart.
Having been around investment markets for three decades has made me paranoid. I witnessed in 1987, 2000 and 2008 how swiftly and viciously the market can turn.
On each occasion the end result were losses in excess of 50%. Delivered in a brutal fashion to those who never saw it coming or refused to acknowledge the possibility.
The cycle repeats over and over again. Expensive markets become cheaper.
In recent years my paranoia reached a whole new level.
In all my time in the investment industry I had never witnessed such an open display of market price manipulation. When coupled with an almost God-like reverence to central bankers and their powers of market redemption, it just felt all wrong.
However, year after year my concerns were beaten down by a surging share market and never-ending reports of China’s miracle economy.
According to the spin, a handful of Communist conditioned politicians had managed to do what no other empire had — grow continually without even the considered possibility of interruption in the growth trajectory.
During this time my BS meter was off the scale, but somehow the world continued to defy logic.
The higher the market went, the louder the ridicule that was reserved for those of us who suffer from paranoia.
In early 2016, during the market’s seemingly never ending ascendancy, I sat down to write a book about the world I believed was awaiting us in the coming years.
The End of Australia — The Real Story Behind Australia’s Coming Economic Collapse and What You can do to Survive it is not really the book people want to read in the midst of such a ‘successful’ recovery.
People want to read things like ‘Dow 36,000 Points’ to be assured the good times will continue.
Wowsers be damned.
The last few months have started to shake people out of their complacency. However the programed response is ‘what will the central bankers do to arrest the market slide?’
More QE, lower interest rates, money from helicopters, ban short selling, perhaps even ban selling altogether (that’s a new one they haven’t tried).
Who knows what measures they will resort to. But I suspect the game is no longer in their hands.
The market cat is now going to play with the central banker mouse. A flick here and a claw swipe there before moving in for the kill. If you think the recent falls are a ‘buy the dip’ opportunity, perhaps you will be right in the short term. But in the longer term this market is headed much, much lower. Unearned success made us (society) fat and lazy.
This is an extract from The End of Australia:
‘The girth of the global economy has expanded decade after decade on a high calorie intake of credit. The level of sugar build up in the system has rendered the global economy sluggish and extremely unhealthy.
‘Going ‘cold turkey’ to a vegan diet will be a massive (but essential) shock to the system. The withdrawal symptoms are going to be far more painful than people are prepared for.
‘Unfortunately the economy has to suffer this ‘dietary’ extreme before we can return to a more balanced, stable and sustainable economy.
‘There’s not doubt the ‘she’ll be right mate’ attitude has served Australians well when the chips are down. Most Aussies have a quiet confidence in our ability to overcome and capitalise on whatever challenges are put to us as individuals or a nation.
‘However, with what I believe awaits the country within the next decade, Australia and Australians will need much more than the Aussie spirit to survive.
‘The prospect of our ‘lucky country’ entering a prolonged period of extreme hardship— or Long Bust — gives me no joy. However, the facts are what they are.
‘No amount of wishing it could be different will change the facts…imbalances, unfortunately, must be corrected.
‘An attitude of ‘she’ll be right’ may assist in providing us with a coping mechanism…putting on a brave face amidst a world of turmoil.
‘But behind closed doors, the brave face will give way to the inner demons of:
– Is my job safe?
– How will we cope on one wage?
– Will I ever find employment again?
– Will we be able to keep our house?
– Why did we borrow to buy that second property?
– How much more will my superannuation lose?
– Are we going to be able to keep the business open?
– Can we afford to keep the children in private education?
– Will there be a job for me after uni?
– Will we be able to retire?
– What if the government cuts back on the age pension?
‘These are questions framed by fear…the fear of losing lifestyle, assets, employment, business and entitlements.
‘The coming collapse of the global debt super cycle…and its ensuing Long Bust here in Australia…means everything we’ve assumed as being normal is going to be challenged. Hence the title of this book: The End of Australia.’
Please take the time to exercise a little paranoia — ask yourself the relevant ‘what if’ questions.
What if the market falls 50% or 60%, will my retirement be ok? What if I lose my job, do I have sufficient cash reserves in place? What if property values fall more than expected, do I have enough equity to avoid bank foreclosure? What if the Government cuts back on entitlements, how will I make ends meet?
Do not be complacent. Take the time to prepare now for a world that is going to be vastly different to the central bank nirvana of recent years.
What I think is coming to our shores in the next months and years is not going to be pretty. Perhaps this is paranoia. However it would be prudent to take the necessary steps to protect your financial position.
Editor, Markets and Money