My culinary skills are extremely limited.
For there to be any hope of the final product remotely resembling the photo, then the recipe must be followed to the letter.
But let’s be radical and throw caution to the wind.
Let’s ignore the ingredients and cook ‘freestyle’?
For the first course, we’re going to have pumpkin soup. Only, we’ll ditch the pumpkin and throw peas in instead.
Main course is roast lamb and veggies…mouth-watering. But we’ll get a bit experimental here and replace the lamb with tofu and the veggies with a salad.
And for the final course, it’s banana cake. With our new found carefree approach to food we decided to be creative…forget the banana, let’s use tomato.
Do you think anyone is going to notice that what’s served doesn’t match the stated menu?
Of course they will…unless they are blind, have no sense of smell and have completely lost their taste buds.
How on earth can you expect to make a banana cake without banana?
It’s an essential ingredient in producing the stated objective…a banana cake.
Without the right ingredients, it’s impossible to create anything that looks vaguely like the cookbook photos.
Are we agreed on that very basic point?
If we are, then please read on.
If we’re not, then please go back to reading the economic research (claptrap) from investment institutions.
Obviously, if you’re reading on, you are blessed with common sense OR an open mind OR are inquisitive OR all of the above.
Because you need to be in possession of those qualities if you’re to protect your capital from the ‘culinary’ disaster that’s about to be served up by the global economy.
Over the weekend I read the post mortems on the performance of the Aussie share market in 2017/18 financial year. This extract from The Weekend Australian made me sit up and take notice…
‘You might reasonably expect a 7 percent performance in shares in any given year (before dividends)…’
Assume dividends of (say) 4 percent, then what you might reasonably expect is 11 percent in any given year.
When the global economy is about to throw tomatoes, we’re told we can reasonably expect banana cake.
What do I mean by that?
Glad you asked.
Here’s why you can reasonably expect a 7 percent performance in shares (before dividends).
It’s this past performance (established over 38 years) of 7 percent annually, which has now conditioned people to reasonably expect this to be the case from the share market.
In spite of all we’re told about PAST performance not being a guide to FUTURE performance, it’s reasonable to expect the future to be a repeat of the past.
If we step back a bit and take in a more panoramic view, we’ll see the past 38 years is not the whole story of the Aussie share market.
The Australian share market started in 1875. The starting level was 5 points.
When you look at the 105-year period prior to 1980, you could only reasonably expect the Aussie share market to deliver 4.5 percent annually.
And when you add the performance of the past 38 years into the mixing bowl, the longer term expectation is for 5.1 percent annually.
The ingredients of the past 38 years
Here’s the recipe for a 7 percent per annum return.
- Start with high interest rates — 18 percent.
- End with low interest rates — 1.5 percent.
- Start with youthful baby boomers eager to borrow for consumption.
- End with ageing baby boomers saving for retirement.
- Start with youthful boomers having no student debt.
- Start with national (public, corporate and private) debt of a few hundred billion dollars.
- End with nearly 6,000 billion dollars of national debt.
- Start with wage accords guaranteeing indexed incomes.
- End with stagnating wages.
Demographics and debt were the major ingredients in the four-decade long growth story…establishing the belief in 7 percent per annum being a reasonable expectations.
But what if those ingredients are absent in the future?
Can we reasonably expect the economy to bake a ‘banana cake’, if we’re given tomatoes?
No way. Simply not possible.
If we look at the ingredients in today’s economic pantry, they’re vastly different to the ones of 1980.
- Start with low interest rates.
- Start with boomers entering retirement.
- Start with record high debt.
- Start with stagnating wages.
- Start with younger generations saddled with student debts.
- Start with a higher percentage of part-time (gig) employment.
The only reason, and it is the ONLY reason, the Aussie share market has risen since the events of 2008/09 is due to the excessive use of central bank ‘self-raising flour’…an abundant supply of cheap money.
And even the performance figures that extend back to 1875 may prove to be overly optimistic in the future.
The 20th century was a phenomenal period of growth.
Global population multiplied nearly four-fold.
Debt levels has soared to levels — in dollar terms and as a percentage to GDP — that have never been seen before in history.
Are we going to experience another quadrupling of global population?
No. At best we may see an increase of 50 percent…and most of that is predicted to come from Africa…hardly an economic powerhouse.
Can debt levels keep growing (at the rate of $4 for every $1 of GDP growth) while wages stagnate and the room to move interest rates lower is limited?
Without the debt and demographic ingredients, even an expectation of 4.5 percent per annum (the 143-year average return) could prove to be unreasonable.
It’s impossible to bake a banana cake with tomatoes, yet a banana cake is what people are reasonably expecting.
Here’s something to ponder.
Instead of averaging 7 percent per annum for the past 38 years, what if the Aussie market had continued to deliver its 105-year annual average of 4.5 percent?
What would the All Ords be today?
2700 points…around 60% below the current level.
What if we experience a period that delivers us a ‘reversion to the mean’?
It’s said that revenge is a ‘dish best served cold’.
Perhaps, the market is preparing a banquet of revenge for those who believed a sustained period of out-performance is a reasonable expectation.
Editor, The Gowdie Letter