Signs The Economic Model Your Retirement Is Based on Are Flawed

Sign, sign, everywhere a sign
Blockin’ out the scenery, breakin’ my mind
Do this, don’t do that, can’t you read the sign?

Five Man Electrical Band

In 1971, the Five Man Electrical Band hit song was a stand against the establishment putting up signs saying ‘do this’ and ‘don’t do that’. The mushroom-like sprouting of these signs blocked out nature and played havoc with your thought processes…what can and can’t I do?

These days, we call it ‘sign pollution’, and just accept it as part of living. We’ve been both numbed and dumbed by signs…they are everywhere.

sign pollution

Source: Pinterest
[Click to enlarge]

Which way do you go?

Signs can be both clarifying and confusing.

Here’s a classic case of misleading signs in the financial world:

At this juncture, however, the impact on the broader economy and financial markets of the problems in the subprime market seems likely to be contained. In particular, mortgages to prime borrowers and fixed-rate mortgages to all classes of borrowers continue to perform well, with low rates of delinquency.

US Federal Reserve Chairman Ben Bernanke,
28 March, 2007

The Federal Reserve is not currently forecasting a recession.

Ben Bernanke, 10 January 2008

They [Fannie May and Freddie Mac] will make it through the storm.’ Two months later, both institutions collapsed and were nationalised.

Ben Bernanke, January 28, 2008

I could have seen the sub-prime crisis coming earlier,’ US Treasury Henry (Hank) Paulson confesses to the New York Times on 23 October 2008.

‘[emphasis mine]…I discovered a flaw in the model that I perceived is the critical functioning structure that defines how the world works. I had been going for 40 years with considerable evidence that it was working exceptionally well.

That comes from former US Federal Reserve Chairman Alan Greenspan, in testimony to US Congressional hearing into the subprime crisis (October 2008).

All the signs — based on 40 years of considerable evidence that it was working exceptionally well — were wrong. The officials went left, when they should have gone right. That would be fine if all they did was take themselves over the cliff, but they took the world with them as well.

Some investors have never recovered. They lost everything because they followed people blinded by their own egos and academic prowess.

In this past week, I have seen signs that, in my opinion, indicate we are in a very long period of adjustment. Expectations of the future being anything like the past are going to be shattered in the coming years.

Here are a few stories from The Australian:

­‘Weak wages knock economy pick-up hopes’ — Thursday, 17 November 2016.

Jeff Dean [co-founder of Google Brain] says he is worried that the world is ill-prepared for the technological revolution that will be unleashed by artificial intelligence.’ — Saturday, 19 November 2016.

‘[Age] Pension access cuts loom as nasty surprise for many’ — Saturday, 19 November 2016.

The pressures are building within the system. Without wages growth, the only way an economy can grow is to take on more debt…and Australian households have just about reached the limit.

Wages growth is not going to happen in a world that is highly competitive and on the cusp of an automation/artificial intelligence/robotic revolution.

Age pensions are being cut on 1 January 2017. This will not be the end of the reductions aimed at trimming our welfare bill.

The past and future collide

Decades of growth created a mindset of prosperity.

Real estate values rose. Wages increased. Share markets went up. Superannuation balances generally increased. Employment opportunities grew.

It also created a mindset of entitlement (government dependency) — indexed age pensions, childcare payments, family benefits, disability payments, free health cover and so on.

Whenever the promise of prosperity is not delivered on, government is asked to make good and fill the gap. Not enough super to fund a retirement? Then age pension levels should be increased. Rising unemployment? Government should do more to stimulate the economy. Cost of raising children increases? Government needs to increase family allowances. Housing market slumps? Government needs to increase the first homeowners grant. Economy slows down? Government needs to build more school halls. And the list goes on.

Politicians past and present have made a rod for their own backs, but, then again, the majority, who are drawn to politics, are those who are habitual over-promisers and chronic under-deliverers…so I have no sympathy for them.

Telling people the harsh truth is a guaranteed career killer for anyone aspiring to political life.

The past promises, born from an era of unprecedented prosperity, have created a high-cost society.

Welfare and healthcare are expensive — consuming more than 50% of the federal budget.

Minimum wage rates with penalty allowances — and all the attendant entitlements (sick leave, holiday leave, bereavement leave, parental leave, stress leave, etc.) — are all very good when there was plenty to go around; but, in a contracting economic environment, they are an impediment to employment opportunities.

Add to this the workplace health and safety regime, environmental regulations, and the near impossible task of dismissing wayward staff…and you have a serious amount of overhead before a business even opens its doors.

The private, and even public, sector can only bear so much employee cost.

We have reached a stage where undoing these high costs is unthinkable — the public backlash would be deafening. Everyone has built a lifestyle based on these high costs continuing.

Compare our high-cost society with emerging economies, where there is no welfare, healthcare, or minimum wages (and all the add-ons). We can’t compete. Yes, we have a first-class and civilised system by comparison, but the truth is that, as a society, we can’t afford it.

Western governments the world over are bleeding red ink due to a mismatch between revenues and expenditures.

Many households are on such tight budgets that the only thing separating them from insolvency is next week’s paycheque.

In a globalised world, our high-cost structure makes us uncompetitive with low-cost countries where there are factories, call centres and software developers staffed by employees on a few dollars a day.

The outsourcing of Western jobs to low-cost developing countries has done two things:

  1. Exported low inflation/deflation to the Western world, and;
  2. Suppressed wages growth in the Western world.

Both of these factors help explain why Western government budgets are struggling on the revenue side of the equation.

Past promises cannot be met by current conditions.

Just when you think it can’t get tougher in the jobs market, along comes the future. Technology and robotics.

Technology is delivering fewer (full-time and part-time) jobs, and a good percentage of those that are on offer are at the lower end of the spectrum…waiters and kitchen hands.

When high labour costs meets lower (and going even lower) technology costs, guess which one wins? Businesses, from McDonalds to BHP, are replacing labour with automated processes.

Recently, I was speaking with a fellow who has moved to Australia from China to implement a robotic meat packing process for one of Australia’s largest retailers. It’ll be rolled out in Melbourne first, then in Sydney and Brisbane. Hundreds of jobs will be replaced by this 24/7 process.

Look at the stevedoring business. Cargo handling has come a long way since the Patrick’s dispute in the 1990s. Automation has made wharfies redundant.

As technology gathers pace, it is destined to place greater downward pressure on wages and more upward pressure on unemployment.

One of the great economic furphys that emanated from the era of prosperity was the concept of a ‘natural rate of unemployment’. According to Galbraith, this idea originated in the 1960s. Economic forecasting models are hardwired for a ‘natural rate of unemployment’; in theory, after a recession, the unemployment numbers will revert back to this ‘natural level’.

That assumed natural level was established during a period when labour was needed during the age of industrialisation — bank tellers, telephonists, typing pools, door to door encyclopaedia salesman, and so on.

The modern world offers a vastly different employment landscape. For the reasons outlined above, we may very well end up with a decidedly unnatural rate of unemployment.

The high cost of our past is about to collide with the low cost of our future.

Something will give.

What gives?

As James Galbraith stated in his book The End of Normal: ‘The unpleasant conclusion is that it is possible for a society to choose economic collapse.

The technology genie is well and truly out of the bottle. At a rough guess, there are probably a hundred million or so ‘tech heads’ in the world looking to develop a multi-billion-dollar disruptor for all sorts of industries…you can bet that a few of them will succeed. The future pace of technological advancement is going to make the past decade look like a snail race.

However, modern society is not about to give ground on wages and welfare easily. Governments that even hint at realigning their budgets and labour laws to reflect the new world are destined to suffer at the ballot box. Minus the hard decisions, the unpleasant conclusion is that we’ll hit the wall…in a 2011 Greek-type scenario — only more severe.

In addition to the lack of political willpower to change course, the financial sector’s complete lack of morality and ethics means they would exert their very powerful influence to ensure the gravy train continues for as long as possible, irrespective of the social cost.

Two powerful forces destined to meet.

The reality is simple: Our future cannot afford our past.

What gives? My guess is that the system of industrial relations, welfare and healthcare as we know it today will be vastly different to the one that exists in a decade’s time.

Minimum wage rates, free healthcare and the plethora of social security payments will all be talked about by future generations in terms of ‘Can you believe this once existed?’

I have no doubt the world will enjoy another age of prosperity.

However, the excesses of the current era must first be expunged. And secondly, the next wave of prosperity will not be for the West to enjoy in isolation.

The inevitable rebuild and recalibration of the economic motor is going to create enormous disruption to peoples’ lives.

What we are heading towards is going to make the subprime meltdown look like a Sunday school picnic. The signs are there for you to read…or ignore.

Decades of conditioning — thinking an economy could grow on responsible debt accumulation indefinitely — left Greenspan shaking his head in disbelief in October 2008.

The economic model that produces the stellar returns you are basing your future retirement plans on is broken. It no longer exists. The signs are there.

When everyone around you is turning left because the government, the

Federal Reserve, the RBA and the investment industry told them to, you should be looking to go ‘right’.


Vern Gowdie,
For Markets and Money

Editor’s Note: Newman Show Hijacked! James Woodburn and Kris Sayce hijacked The Newman Show to discuss recent market news across Money Morning and Markets and Money.

Join Woody and Sayce for an informal discussion on…Trump infrastructure spending… where the money’s going…resource investment opportunities…how far the Aussie housing market has left to run…the war on cash… You can watch all that, and more, right here.

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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