The line it is drawn
The curse it is cast
The slow one now
Will later be fast
As the present now
Will later be past
The order is rapidly fadin’
And the first one now will later be last
For the times they are a-changin’
Bob Dylan’ anthem of change was released in late 1963. The civil rights and peace movements were gathering momentum. Dylan’s lyrics tapped into the prevailing social mood of the youth. The times were indeed changin’.
One month after the release of the song, President Kennedy was assassinated. Less than five years later, Martin Luther King Jr was killed.
President Kennedy’s successor, Lyndon B Johnson, transformed US military assistance in Vietnam into a full-scale war.
Nearly two decades of post WWII productivity came to a grinding halt in the late 1960s.
The US share market (S&P 500 index) peaked around 100 points in 1968 and didn’t make any meaningful gain above that level until 1982.
The low inflation and low interest rates of the 60s were replaced in the 1970s by double digit inflation and 20% interest rates.
Dylan read the mood correctly…the times did indeed change.
Fifty years after the release of Dylan’s prophetic song, we are on the cusp of another historic period of change.
The ‘line it is drawn’ and ‘the curse it is cast’ relates to the global debt crisis.
There’s always a line in the sand with the curse of debt. When that line is crossed, forces are unleashed that correct/alter/change the imbalances in the system.
‘Over the more than two thousand years of economic history, a clear record emerges regarding the relationship between the level of indebtedness of a nation and its resultant pace of economic activity. The once flourishing and powerful Mesopotamian, Roman and Bourbon dynasties, as well as the British empire, ultimately lost their great economic vigor due to the inability to prosper under crushing debt levels.’
Hoisington Management Quarterly Review 2015
The 1960s was a decade of experimentation — love, drugs and long haired freaky people.
In the 1980s, 1990s, and 2000’s we experimented with a drug of another kind — debt. The debt drug is every bit as addictive as heroin and as hallucinogenic as LSD.
Buying on credit gave an instant high and created the illusion of wealth. The injection of debt into the veins of the economy produced magical growth results…much to the delight and financial enrichment of the ruling class and bankers.
The removal of the gold standard, the de-regulation of banks, the abolition of the Glass-Steagall, separation of commercial and investment bank activities, and finally, central banks willing to print enough paper to cover the banking sector’s multitude of sins have all contributed to the curse of debt being a pox on the global economy.
The line in the sand was crossed with the subprime lending debacle. Times should have changed then. The academics, bankers and politicians chose not to heed the lesson, and they’ve cursed us with a debt crisis that is without historical peer.
‘The slow one now, Will later be fast’ — cautious, prudent, wary investors who have endured paltry returns from cash and term deposits may be the slow one now. Those in the share market’s fast lane (with implied asset protection from central bankers) are for now racing ahead. However, when (not if) the debt crisis finally has its reckoning, an investment vehicle in the fast lane hitting the brick wall of reality is destined to become a smouldering wreck.
The cashed up investor then becomes the fast one…taking advantage of the bargains on offer from the market carnage.
The present now will later be the past. When the bell is finally rung on this period of insanity, the market’s present gains are going to be but a distant memory…just like the gains from the dotcom and housing bubbles.
Only this time, the future that awaits us is going to be far worse than anything we have ever experienced. Thirty years of debt drug abuse is collapsing the economy’s veins. The system is slowing down and vital organs (the banking system) could fail…why do you think GE is selling its finance business?
Central banks have nothing left to fight another, more serious downturn with. Yes, interest rates can go further into negative territory. But if rates go too far into the negative, investors could decide the cost of holding physical cash in secure deposit boxes is the lesser of the two evils. Unless of course governments outlaw physical cash.
QE is a horse that’s been flogged to within an inch of its life. Each time the central bankers trot out QE, it has to be bigger, better and longer than the one preceding it. Poor old QE has no chance of staying the distance against the power of the next market downturn.
The central bankers could (and most probably will) drop money from Ben’s helicopter. However, you can take the horse to water but you can’t make it drink. What happens if people decide to bank the cheques and sit on the cash? More public debt and no economic stimulus will be the result.
When the inevitable crash comes, we’ll see ‘the order is rapidly fadin’’. When things go pear shaped, victims always look for the perpetrators of the crime.
In 2008, Alan Greenspan (former Fed chairman) faced a Congressional hearing into the subprime collapse and was asked:
‘You had the authority to prevent irresponsible lending practices that led to the subprime mortgage crisis. You were advised to do so by many others. Do you feel that your ideology pushed you to make decisions that you wish you had not made?’
The system didn’t tank in 2008-09, so central bankers and Wall Street executives were never held fully accountable for their reckless actions.
Instead, both parties colluded to create another even greater bubble…theoretically termed ‘the wealth effect’.
The old order remained. However, when the next crash happens there’ll be no bubble reflation to mask the incompetency, larceny, greed and stupidity of the Fed and Wall Street.
Social mood will be one of anger and hostility at being duped by those who mouthed their hollow assurances of being there for the little guy.
Political opportunists eager to capitalise on this social unrest will publicly name and shame these former masters and mistresses of the universe.
The old order rapidly fades and those who once were first ‘will later be last’. The high and mighty of today will fall as hard, if not harder, than the market.
Now is the time to reassess your investment strategy.
A cautious approach provides you with the opportunity to ‘live to fight another day’. Being cavalier is an almost certain path to capital destruction from which you may never fully recover.
To paraphrase Dylan:
Come investors throughout the land
And don’t accept blindly what you may not fully understand
The decisions on your capital are with your command
The old debt dependent system is rapidly ageing
Take this opportunity to get cash in your hand
For the times they are a-changing.
Editor, Gowdie Family Wealth