Real Eyes Realise Real Lies (Part 3)

The story so far

In 1971, Richard Nixon removed the remaining link between money and gold.

Abandoning the gold standard was the thin edge of the wedge.

Without accountability, little lies turned into bigger lies. The lies are now so big, that no-one dares to speak the truth.

People have built lives — taken on student loans, massive mortgages, business debt, margin loans, retirement plans — based on a massive con job…every generation can (and must) borrow their way to prosperity.

Charles Ponzi would be so proud.

After almost 50 years, the truth has been buried so deep under a pile of debts and unfunded entitlement promises.

Maintaining the lie has come with a cost. Our futures have been mortgaged to the hilt.

To stop this giant Ponzi scheme from collapsing requires a couple of things.

More and more people going deeper and deeper into debt AND for the growing band of retirees to continue spending almost every dollar they earn.

But how is it possible for the already highly indebted private and corporate sectors (that have borrowed at ultra-low interest rates) to maintain the exponential growth in debt?

And, with lower birth rates in the developed and developing worlds, how do we expand the base of the pyramid scheme…with sufficient people who possess the financial means to take on debt?

The lie we have been living, and the truth we’ve been ignoring, is oh so close to being revealed…unless of course the existing base of borrowers experience a real increase in household income.

What’s the likelihood of…

Rising real incomes

Globalisation — the outsourcing of employment to lower cost nations — is the reason why US wages have stagnated over the past 40 years.

Average hourly wages in the U.S.

Source: Pew Research Center

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‘Making America Great Again’, means returning to a period when US manufacturing dominated the world…in the immediate Post WWII decades.

Prosperity achieved on the back of productivity priced US goods out of the market.

In stepped the low-cost nation of…Japan.

Baby boomers will remember from their childhood the ‘Made in Japan’ labels.

Japan also became a victim of its own success. Capital then moved to Taiwan.

Now manufacturing is outsourced to China, Vietnam or Bangladesh.

Every ‘cheap’ country eventually becomes more expensive as the export income improves living standards.

Financial expert Vern Gowdie explores why a credit collapse could occur in 2018, and how you can protect your assets. Click here for free action plan.

Global manufacturers and service providers move on…sourcing out a ‘new’ place of cheap labour.

However, in the age of technology, countries that have tasted higher living standards are finding a new way to lower labour costs.

Automation and artificial intelligence (AI).

For example, China is not about to relinquish its hard won (and heavily financed) export gains without a fight.

Why China is spending billions to develop an army of robots to turbocharge its economy’

CNBC 28 June 2018

The future will be won or lost on this technology. I’m very concerned’: The co-founder of a $9 billion company warns that China is on track to dominate the US in AI

Business Insider 20 August 2018

In the struggle for AI supremacy, China will prevail’

The Economist 27 September 2018

These snippets give us an insight into China’s determination to invest in AI and automation.

And China is not acting in isolation.

Western economies are also embracing the new technology.

These competitive forces are putting downward pressure on salary and wage growth.

Rich-world wage growth continues to disappoint. Low unemployment has not pushed up incomes as much as theory would predict

The Economist 11 September 2018

And it’s not only the jobs and incomes of the unskilled that are in the firing line (emphasis is mine)…

If they don’t want to lose their jobs to a machine, doctors will need to become compassionate “human connectors”

“AI Superpowers” author and former Google China president Kai-Fu Lee predicts that medicine will undergo radical changes in the next few decades.”

Recode 17 September 2018

Without significant increases in real (after inflation) income in all occupations, households lack the financial means to take on additional debt.

The domino effect of this will result in flatlining income tax revenues for Governments.

Therefore, Treasury will resort to increasing indirect taxation — GST, sin taxes, levies, duties, superannuation.

Irrespective of which pocket the Government picks, the end result is we’ll have less to spend and/or to fund further borrowings.

The uptake of automation and robotics is rapidly increasing. As prices decrease and functionality increases, the pace of adoption will gather speed.

Competition in one sector is certain to spill over into other parts of the economy.

Robotics — with a spiralling effect of lower cost and higher capability — are set to have a profound impact on the global economy.

Uncertainty of employment and pressure on incomes plays havoc with the debt-funded economic growth model.

Automation and AI are deflationary forces.

Central banks will fire everything from their arsenal to defeat the deflationary enemy

But, as we have seen in Japan, deflation is a formidable foe…not easily defeated by even the most desperate, concerted and relentless of stimulus efforts.

But what about retirees’ ability to keep spending? 

Can share markets keep compounding at 7% per annum?

That’s a question that all pending and current retirees need to ask themselves.

Basing your retirement on stock market returns achieved from a period of population and debt expansion is, in my opinion, seriously flawed.

What has been is not necessarily what’s going to be.

Certain conditions create certain outcomes. If those conditions no longer exist, then it brings into question whether the same outcomes can be achieved.

And so it is with investment returns. Which is why every Product Disclosure Statement contains the warning, ‘past performance is no guarantee of future performance’.

The conditions of the past 47 years — continued debt accumulation, substantial interest rate reductions and vast amounts of QE — have been to share markets and property markets what a tailwind and downhill run are to a cyclist…progress is made at a far greater speed than your ability would normally permit.

As outlined in this series, there’s a valid argument to suggest that those conditions no longer prevail.

Markets may now be facing a steep uphill climb into a fierce headwind.

If that’s the case, it’s going to be tough going in the coming years.

The following chart of the Shiller PE 10 — with a current reading of 33-times — brings into play a couple of important points of note.

Shiller P/E Graph

Source: guru focus

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Firstly, PE (the multiple paid on earnings) expansion from 7-times (in 1982) to 33-times has been a major contributor to the market’s exceptional period of performance.

A company earning $1 million in 1982 was valued at $7 million whereas today it is valued at $33 million…without a dollar extra in earnings.

Will the PE10 ratio expand by a further factor of 4.7 (33 divided by 7) to produce the same uplift in value? If it does, the PE10 would need to expand to 155 TIMES!

Not even the heady days of the dotcom era took the PE10 remotely close to this number.

The absence of this multiplier effect on earnings is the stiff headwind markets are running into.

Secondly, history shows the average ‘Implied future (next eight years) annual return’ from the current PE10 level is MINUS 3.2% PER ANNUM.

This means, on average, an investor in the US share market is likely to lose, for the next eight years, 3.2% each year. That’s a far cry from the desired positive 7% per annum.

And remember, what happens on Wall Street ripples out to the rest of the world.

Losing money — on average for the next eight years — is the steep hill that confronts us.

The US market has (and the operative word is ‘has’) enjoyed the longest bull market in history. The current market is living on borrowed time.

One of the most expensive markets in history is ripe for a spectacular fall…taking the well-laid plans of unsuspecting retirees down with it.

History is firmly against markets repeating the stellar performance of the past anytime soon.

Retirees, with much lower portfolio values, will tighten the purse strings.

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Summary…time to pay the piper

Without the ability of working households to borrow (significantly) more and for retired households to spend more, the Ponzi scheme collapses.

The real lie we’ve been living will be exposed with a credit crisis of biblical proportions.

The damage caused by wave after wave of defaults and debt restructuring will be beyond salvation from even the most creative initiatives dreamed up by central bankers.


Because we have pushed the system to the limit…interest rates cannot go any lower; the population base cannot expand sufficiently enough; debt levels are already beyond anything we’ve seen in history and the multiples being paid for assets are at — or close to — historic highs.

This is a system that’s ripe for a massive fall.

The time is fast approaching when we must pay the piper.

Realise the real lies and take whatever defensive action you can to avoid the fate of those who are too blind to see what’s staring them in the face.


Vern Gowdie,
Editor, The Gowdie Letter

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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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