‘Do not fear to be eccentric in opinion, for every opinion now accepted was once eccentric.’
British philosopher & mathematician Bertrand Russell.
Questioning convention can be both challenging and lonely.
Group think is much easier.
Popular thinking doesn’t require you to think at all.
You just nod and agree with the opinion of the day.
The ability to shape popular thinking is why the investment industry spends so much time and money on its raison d’être (reason for being) — telling stories and myth to attract more funds to manage from which more fees can be extracted.
How the investment industry shapes popular opinion
The basic marketing strategy revolves around having enough experts repeat the same message (albeit with a slight difference to avoid absolute repetition) until it becomes popular thinking — accepted as Gospel.
A couple of examples of the industry brainwashing are…
- In the long term shares always go up (unless of course you are a Japanese share investor circa 1990)
- Cash is trash (unless of course you were cashed up prior to the GFC)
Both marketing messages (one positive and one negative) are designed to promote engagement in the industry’s products — managed funds.
The All Ords recent ‘fresh decade high’ adds weight to the industry’s message – share markets always go up.
However, what’s not been mentioned is the Aussie share market is still nearly 10 per cent below its October 2007 high of 6873 points.
The industry message can come in a variety of forms.
For example, USA Today published an article titled ‘A chart shows why cash is trash’.
The chart, compiled by — surprise, surprise – J P Morgan Funds, shows the paltry level of interest being generated on a $100,000 cash investment.
According to the (hardly unbiased) report:
‘Cash is really a trashy investment when you compare last year’s CD [certificate of deposit] return with that of the Standard & Poor’s 500 stock index, which rallied 29.6%, its best annual return since 1997. A $100,000 investment in the broad stock market would have made you some real cash: $29,600.’
Just to rub it in a bit more:
‘That’s big money. Enough to pay for the average in-state tuition at a public college, enough for a sizable down payment on the home of your dreams and even enough to drive that snazzy new car you’ve been eyeing off the dealer’s lot.’
Talk about appealing to the greed gene — down payment for a house, a snazzy new car.
Why stop there with trying to press investor hot buttons?
What about caviar and champagne, or impress the girl or boy of your dreams with an all-expense paid first class holiday?
What the article failed to say is that ‘year of good returns ship’ has sailed.
That was last year’s returns. What about next year?
The article did finish with one teeny weeny caveat (emphasis is mine):
‘The takeaway: Cash is not always as safe as it appears. Indeed, though cash is golden in a financial crisis, cash is trash in a stock bull market.’
The problem is, no-one, least of all the Fed, is prepared for a financial crisis.
The whole reason cash is on the nose is because the Fed ground rates into the dust and actively manipulated asset prices higher…with the clear and deliberate intent of driving cash out of the banks.
PS: 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.
Knowing the Fed has their backs, Wall Street analysts feed journalists at USA Today and other news outlets a few meaningless cherry-picked graphs to support the whole ‘shares for longer and stronger’ story. Talk about blatant self-promotion.
Fortunately, the interest rate picture in Australia is not as bleak as in the Northern Hemisphere. At least we can earn (if you shop around) close to $3000 interest on a $100,000 deposit.
I accept money in the bank is slowly having its buying power eroded from taxes and inflation. But on the scale of bleakness, what is worst?
- Slow erosion (maybe 1% per annum) of buying power as you wait for an opportunity to buy assets at significantly discounted prices;
- Rapid erosion of your buying power due to the very real possibility of a market correction wiping 50, 60, 70% or more off your capital.
The fact these possibilities are not canvassed in industry-sourced articles is the heart of the problem for the investing public.
The industry and its media mouthpieces promote this message of the share market being everyone’s best friend albeit with the occasional bad mood.
Group think takes over, belief systems are formed…without ever really challenging the premise on which that belief is built.
One-year figures can distort the bigger picture
The point I am trying to make is the use of one-year figures can distort the bigger picture and create confusion in the minds of the average investor searching for direction.
I could equally quote the one-year cash rate of 2008/09 (GFC year) to trumpet the merits of cash against other asset classes. This too would be an unfair comparison.
The reason for me recommending investors be overweight in cash and term deposits is all about capital security.
Waiting for assets to be priced at much lower levels is a genuine investment strategy.
Low interest rates are the price you pay for the peace of mind.
The investment industry may believe the asset price levitation act being performed by central bankers, but I’m not buying it.
Markets always have and always will prevail…and the longer market forces are kept at bay, the more ferocious the retribution.
Knowing this means a different strategy needs to be employed. One that’s at odds with group think.
The following is an extract from Bill Bonner’s book Hormegeddon:
‘Success, as it turns out, leads to failure. With no fear of negative consequences, people take more and more risks, reaching for higher and higher returns. The stability of the system reassures and misleads them. They think the lack of corrections in the near past means there will be none in the proximate future. They begin to think they can’t lose. Their actions become more reckless, and then the whole system becomes, to use Nassim Taleb’s word, “fragilized.” It becomes unstable… and eventually blows up.’
The pricing of today’s markets is a function of the Fed cultivating an attitude of ‘no fear of negative consequences’.
People have come to believe — due to the record post-GFC recovery — no real harm can come to them while the Fed stands guard.
Be brave, the risk is low and the rewards are high…this is the subliminal message.
And this leads to another ‘truism’ that’s generally accepted by the public.
The concept of risk = reward.
The popular thinking is that if you accept a higher risk this equates to a higher return.
What utter rubbish.
One of the highest risks you can take is to buy into an over-priced market — ask anyone who invested in the NASDAQ in early 2000 (the height of the tech boom).
The ‘reward’ for that risk was a loss of over 80 percent.
The best risk/reward equation is one of low risk/high reward.
This risk/reward mix only comes along AFTER a market collapse…and, can only be accessed by cashed up investors.
Money in the bank, at present, is a no risk/low reward proposition.
Whereas, share markets are presently at a high risk/high loss proposition.
However, in the short-term, markets may well push higher.
It’ll only be with hindsight we’ll see the height markets can reach when propelled by unbridled belief in the deranged policies of central bankers.
When (not if, but or maybe) global share markets collapse, I can tell you in advance what the investment industry’s response will be to the carnage…
‘We were hit by the perfect storm. No one could have seen this coming. Stay invested. Don’t sell. Shares always rebound and go higher.’
Don’t say you haven’t been warned.
Think for yourself.
Look at the following chart of the US share market (S&P 500 index).
Can this parabolic trend continue indefinitely, or will the current market follow the corrective pattern of the two previous peaks?
Source: Macro Trends
Your answer will determine your future.
Editor, The Gowdie Letter