The Stock Market Alarms Are Sounding, But Investors Are Not Listening

Years ago, when car alarms were first installed, everyone stopped when the shrill siren sounded.

What’s happening? Was someone trying to steal the car?

We all developed a sense of community watch

Then the alarms kept going off. Someone bumped the car. The system short-circuited.

These days we — as a community — pretty much consign the shrill sound to a false alarm.

Yet, some of the alarms are genuine.

According to the latest ABS data, ‘54,600 households experienced motor vehicle theft and 257,000 households experienced theft from a motor vehicle.’

The same goes for those security sensors in retail outlets.

Beep, beep, beep.

Hardly anyone bats an eyelid. Probably a tag left on by the cashier. The sensors are too sensitive.

But, according to the Australian Retailers Association (emphasis is mine)…

‘Theft is the most prevalent form of shrinkage experienced by retailers on average globally. In Australia, theft costs retailers billions each year, and for most retailers that number is on the rise.’

Some of those alarms are warning us there’s a thief in our midst.

The same principle applies to warnings about markets that are poised to steal your wealth.

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The asset bubble keeps inflating…moving away from long-term averages.

During the inflation stage, those who sound the alarm on the impending ‘theft of capital’ are dismissed as modern-day Cassandras.

Household Net Worth as a percent of nominal GDP

Source: Real Investment Advice

[Click to open in a new window]

When the bubble is near bursting point, the warning bells are drowned out by the cries of ‘it’s different this time’. People blithely ignore the daylight robbery that’s about to occur.

As the graph shows, grand larceny has been committed twice before in this millennium.

But, the grandest of larcenies is still in the making.

Sounding the alarm during this extended period of euphoria has largely fallen upon deaf ears. People shrug and look away. We’ve heard it before and nothing has happened.

However, history — like the ABS stats and Australian Retailers data — tells us that market theft does occur.

But it can take a long time for the planned robbery to occur.

Every year since the collapse of Lehman Brothers, the ‘everything bubble’ has continued to inflate. In total, ten years have now passed since Wall Street took us to the abyss.

A full-blown debt crisis was averted by flooding the system with…more debt.

It defies logic…but so far, it has worked…or at least convinced the majority that it’s worked.

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Over the past decade, I’ve sounded my fair share of alarms. Only to see the market go higher. It’s been a character building and patience testing decade.

Doubts creep in. What if the central bankers have figured out to keep this bubble from meeting the same fate as all previous bubbles? 

Recently, I shared my thoughts on this subject with readers of The Gowdie Letter…

What I’ve Learned from the Past Decade

The past decade has, for me, been an illuminating one.

The sale of our business in 2008 was, a ‘capital realisation’ event.

Properly managed, we have sufficient funds to live comfortably.

Therein lies the challenge. What constitutes ‘proper management’ in a world that’s been turned upside down by central bank meddling?

Markets have ceased to function on the basis of true price discovery.

Remember, price does not always reflect value.

Central bank manipulation is omnipresent…the level of officially-sanctioned interference is without precedent.

Failure to participate in the game of ‘chasing asset prices higher’ does come at a cost.

Our capital base has not grown to the extent it could have.

However, there are two sides to that coin…our irreplaceable capital has not been exposed to the very real risk of permanent loss.

One of the lessons learned from the past decade is the need for a large reserve of patience.

You can be right…but it may take much longer for that to be proven.

The other lessons are…

Central bankers cannot be trusted to do the right thing…it will always, always be ‘whatever it takes’…irrespective of the madness of these actions in the longer term.

They keep repeating — in ever increasing doses — the same flawed policies and expect different outcomes. That’s insanity.

Check and re-check your assumptions…continually ask questions. Is it different this time? Can you solve a debt crisis with more debt? What if I’m wrong?

Speculative behaviour can last longer and go much further than you ever thought possible.

You begin to question your ability to see things as clearly as you once did.

Previously, you could see trouble brewing in 1987, the dotcom boom and US housing bubble. You knew these were destined to end like all other booms. With each of these past booms, the cycle went full rotation within a matter of a few years.

But, this latest episode in irrationality, has gone on far longer than any of these prior periods.

Perhaps, I’m the irrational one?

Will it end like the others or have the central bankers found a way to keep markets on a permanent plateau?

The answer to that question is yet to be provided.

I think I know what awaits us.

However, the central bankers have taken the gloves off…no blow is too low for them to throw in the blind pursuit of their growth agenda.

These days, my confidence has been replaced by a greater degree of caution, concern and contemplation.

The past decade has made me very wary…nothing is what it seems.

For modern-day investors, there’s never been a more challenging time.

Do you place your faith in the Fed to maintain control over asset prices or do you believe market forces will eventually prevail…resulting in a Great Depression-like rout?

If it’s the former, then you are betting against history and the wager you’ve laid is your irreplaceable capital. That’s a pretty big bet.

If you opt for the latter, then the question is ‘how long do I need to wait?’

And that’s where the need for a larger reserve of patience applies.

While it appears that both the US share and Aussie property markets are off their peaks, a renewed level of speculation may give markets a second wind. Who knows?

I’m inclined to think this is the calm before the storm…but that’s only a guess.

However, if I’m wrong in my outlook, then I’ll be in good company.

Here’s a reminder of what legendary US investor, Stanley Druckenmiller, had to say at the Manhattan Institute in May 2018…

‘If I were trying to create a deflationary bust, I would do exactly what the world’s central bankers have been doing the past six years. I shudder to think of the malinvestment that has occurred. Corporate debt has soared, but most was used for financial engineering. Bankruptcies have been minimal, but who knows how many corporate zombies free money is keeping alive? Individuals have plowed ever-increasing sums into assets at ever-increasing prices.’

Manhattan Institute

If he’s correct, then the deflationary environment I envisaged after 2008, has been deferred…not defeated.

Druckenmiller shudders ‘to think of the malinvestment that has occurred’ in recent years…vast amounts of borrowed money has gone into investments living on borrowed time.

Remember, all it took last time was a mere one percent reduction in US debt levels to create a crisis.

The US debt pile is now nudging US$70,000 billion…an increase of US$15,000 billion since 2008.

What if that ‘malinvestment’ impairs just two percent of the debt pile…a reduction of US$1,400 billion?

The system is so brittle, that shattering the illusion of prosperity only requires a small amount of pressure…one crack in the corporate debt market or bad news from China or an emerging market sovereign default.

Should this scenario eventuate, the one doubt I do have is…I doubt that investors who have wagered their capital on ‘it being different this time’ will ever replace their irreplaceable capital.

Stanley Druckenmiller also offered one final piece of information worth considering (emphasis is mine) …

The three most pernicious deflationary periods of the past century did not start because inflation was too close to zero. They were preceded by asset bubbles.’

The latest asset bubble is the most historic ever blown.

The market is about to commit the greatest heist of all time…sending us into a deflationary bust.

The alarms are sounding, but people have stopped listening.

The perfect time for the market to swoop.


Vern Gowdie,
Editor, The Gowdie Letter

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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