Welcome to Fantasy Land — Part II

Your world becomes your reality.

It’s a fair bet that those who paid their hard earned to attend ‘crooked’ Hilary’s talk-fests are probably of the same political stripe. Hilary was preaching to the converted.

If you believe Clinton’s narrative, those 50 million Americans who did not vote for her were misogynists or ‘deplorable’ or buckled to the whim of their male partner.

It’s beyond her comprehension that any dissenting female voter could have possibly been influenced by the stench from the Clinton Foundation, or Hilary’s sneakiness and untruths, or her husband’s philandering ways.

Looking from the outside in, Hilary’s get togethers are nothing more than a gathering of back slappers held hostage to group think.

And the same is true of those held hostage to Canberra’s ‘go along to get along’ culture.

Independent thinking borders on treason.

Don’t believe me?

Ask John Murray.

‘When top accounting firm BDO warned [Treasurer] Wayne Swan in 2011 that his mining tax could fail to collect much revenue, the Treasurer reacted by accusing it of “substantial errors” and “distorting the public debate.

‘More than a year later, John Murray, the BDO partner who crunched the numbers and issued what now appears to be a prophetic warning about the design flaws of the tax, describes the impact of Mr Swan’s public attacks on him as “horrific”.’

The Australian, February 2013

Tell the truth and you risk the wrath of Canberra.

Draft a Budget, chock full of fanciful projections, and your ascendency in the public service ranks (with all those taxpayer-funded perks) is all but assured.

That’s how the ‘go along to get along’ game is played.

The Budget is a fairy story…kiss the economic frog and it becomes a surplus producing Prince.

And boy do we need to pucker up big time to bring this Prince to life.

These are the projections on which our wafer thin surplus is going to materialise…

Government 2018 Budget 14-05-2018


Source: Government 2018 Budget Papers
[Click to enlarge]

We discussed the fantasy behind these numbers last Friday, and how they bear a striking resemblance to the Treasury’s hopelessly inaccurate forecasts from 2008.

The following chart provides a dashboard on various US economic indicators dating back to 1955.

The table of interest is the one in the middle at the top — Real GDP.

When total US debt (Public, Corporate and Household) exceeds 318% of GDP, Real GDP growth averages 1.66%.

Australia’s total debt exceeds 400% of GDP.

High debt is a growth retardant. Yet our Treasury officials are dismissing this economic reality and predicting we’ll achieve Real GDP of 3%…tell ‘em they’re dreamin’.

Total Credit Market Debts 14-05-2018


Source: CMG Wealth
[Click to enlarge]

The prospect of a recession — here or overseas — is not even considered in the Treasury’s forecasts.

Remember, the further we move away from the last recession, the closer we are to the next one. Our continued economic prosperity rests solely on one pillar…continued debt accumulation. And that pillar is starting to show signs of cracking under the weight.

But let’s assume Aussie households can somehow (despite sluggish wage growth) manage to add even more debt to their balance sheets, what about overseas? 

The most reliable recession predictor

Is it the inverted yield curve?

A business confidence survey?

No.

Here it is…

The US share market.

S&P 500 Index 14-05-2018


Source: Yardeni Research
[Click to enlarge]

Dating back to 1921 — with one exception in 1945 — the US share market has predicted every recession.

The blue line is the S&P 500 (to a logarithm scale). The shaded areas (light blue bars) are US recessions.

Look closely at the chart and you’ll see that before each recession (blue bar), the US share market (blue line) has turned down.

The popular thinking is ‘recessions cause market downturns’. That, like most of the other industry claptrap you read, is not true.

Market downturns cause recessions.

And all it takes is a few moments of considered thought to realise this.

Did the Great Depression happen before or after the market collapsed in 1929? After.

Did the ‘worst economic crisis since The Great Depression’ happen before or after the US share market turned negative in late 2007? After.

Why? Because when people lose a serious amount of money, two things happen.

They are poorer and more nervous. Spending contracts. Recession follows.

It ain’t rocket science.

The US share market has been on the up and up since 2009.

Recently, it’s developed a case of the wobbles. But as usual, mainstream — who never saw 2008 coming — expect the upward trend to resume any time now.

John Hussman is an investor with an established track record in identifying the toppy US market conditions in 2000 and 2007.

This is from Hussman’s May 2018 newsletter (emphasis is mine) …

‘Presently, we observe a particularly dangerous pairing of extreme valuations and deteriorating [US share] market internals. Coming off of one of the most extreme periods of overvalued, overbought, overbullish enthusiasm in market history, and coupled with hostile yield pressures and widening credit spreads in the debt markets, the current set of market conditions is easily among the most hostile in history.’

Let’s just recap that last bit…current market conditions are the most hostile in history!!!!

When you consider the history of the US market includes the 1929 crash, the Dotcom bust and the Subprime meltdown, we are looking at something very, very serious.

The next market led recession promises to be one for the ages

But never fear; our Budget will be completely immune from Wall Street’s fireworks. At least that’s the fantasy you have to believe if you subscribe to Canberra’s group think.

Here’s my budget outlook for the next few years.

  • Windfall tax receipts are going to be blown away by an economic storm the likes of which we haven’t experienced in our lifetimes.
  • Initially, expenditure is going to increase as more people access welfare payments.
  • Deficits are going to increase substantially.
  • Financing those deficits will increase public debt levels and, with a downgrade in our credit rating (resulting in higher interest rates), our debt servicing costs are going to rise significantly.
  • Deficits will get so big we can no longer avoid the inevitable. Long overdue expenditure cuts will be announced.
  • What was once promised will be taken away…and that includes tax cuts.
  • The sacred cow of superannuation is going to be milked to within an inch of its tax effective life…to hell with the future, we need money now.

If I was delivering this budget outlook, I’d preface my address with…

We’ve had a dream run for 26 years, time to face up to reality.

As a nation, did we really think we could borrow our way to prosperity and expect there would be no repercussions?

I know the Reserve Bank lowered rates to encourage you to increase your debt levels. That was a mistake. In recognition of the RBA’s woeful economic management, we’ve disbanded our nation’s central bank. This will result in a substantial saving to tax payers and, more importantly, prevent future generations from being led into a life of debt servitude.

Folks, it’s time to batten down the hatches before this expected storm hits. Pay down debt. Stock pile savings. Reduce market exposure to a level that’s prudent. Start living within your means.

For many this will be too hard or a case of too little too late. Sorry, but this is the future you need to embrace either voluntarily or involuntarily.

The bearer of such news is invariably shot.

That’s why I expect this to be the first and last Budget address I’ll ever give.

The reason you need to take this warning seriously is that it does NOT come from group think. It’s an outlook that runs counter to everything we’re told by those who have a vested interest in keeping us in the dark.

It’s only when the predictable happens, and the proverbial hits the fan, that we are told that ‘we were hit by the perfect storm’…exactly the defence Clinton used to explain away her loss to Trump.

The fact her and Bill helped seed the clouds that created the storm, was conveniently ignored.

We are going to be hit by a storm…but it’s one of our own making.

Regards,

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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