The fatal plane crash that claimed the life of John F Kennedy Jr. was officially attributed to spatial disorientation.
Spatial disorientation as defined as:
‘The inability to correctly interpret aircraft attitude, altitude or airspeed, in relation to the Earth or point of reference. Spatial disorientation is a condition in which an aircraft pilot’s perception of direction does not agree with reality.’
Spatial disorientation is one of general aviation’s biggest killers. Losing your bearings in the air, sea or on land can have fatal consequences.
The same principle holds true for financial markets.
The stimulus activities of central bankers are creating spatial disorientation in investment markets. How?
Deliberately suppressing interest rates. Unprecedented levels of money printing. Financing government deficits through bond purchases. Currency debasement.
These (increasingly outrageous) interventions have created massive distortions in financial markets. Knowing what constitutes value is nearly an impossible task. The traditional valuation lines have been blurred by zero-bound interest rates and an unlimited supply of cheap money.
The recent increases in global share markets have been more a function of momentum than intrinsic value. Following the herd is not a sound investment strategy.
Have we entered a new reality where central bankers and their political masters can manipulate markets? Unlikely.
The global economic model we have all been conditioned to is in its death throes. Demographics and debt contributed enormously to the economic growth the developed world achieved over the past three decades.
Every borrower (individual, corporate and government) has a finite borrowing capacity. That capacity is determined by interest rates and income.
The borrowed funds are injected into the economy and GDP rises accordingly. Since 1980 the capacity to borrow increased as interest rates fell and incomes rose. Baby boomer debt-funded consumption created the illusion of economic prosperity.
So many costly commitments were entered into based on this unsustainable growth model — health funding, welfare entitlements, employment, business plans, retirements etc.
The global economy became a giant Ponzi scheme — sustainable only if the debt base kept expanding.
Private sector debt is now being repaid, restructured or defaulted on. Boomer conspicuous consumption is being replaced by modest retirement plans. The drivers of debt and demographics have turned inwards.
Absent these drivers, the only hope for the Ponzi scheme is for its operators to expand the base with counterfeit dollars (QE to infinity).
The actions being taken today by central bankers would have been ridiculed as voodoo economics a decade ago. History’s lessons on the fate of Ponzi schemes and money printing have been completely ignored. Too many promises have been made, so expect these acts of desperation to increase.
As central bankers intensify their efforts to defy the laws of economics, markets will become even more turbulent.
When a cyclone threatens, authorities close airports, boats remain in the marina and cars in the garage. You bunker down, reduce life-threatening risks and wait for the storm to pass. This isn’t rocket science.
Yet the mere mention of investing in cash is greeted with a questioning tone of ‘cash?!’
The marketing efforts of the investment industry have successfully denigrated cash as an asset class. You know the drill — cash doesn’t keep pace with inflation; the income is fully taxable; cash loses its buying power.
Where did the saying ‘cash is king’ come from? When faced with this question, the industry reluctantly acknowledges there are times in the investment cycle when it pays to be cashed up. Being in a position to acquire discounted assets is astute investing.
Cash and term deposits offer security of capital and a known rate of return.
The known rate of return is gradually diminishing as the forces of The Great Credit Contraction slowly but surely exert their influence on our economy. Falling interest rates and rising share markets will test the resilience of cashed up investors. Patience is crucial to successful investing.
It is important to remember cash is not a set and forget strategy. It is a capital protection approach while this central banker madness plays out. When the storm has passed, cashed up investors need to reallocate their capital.
Cash is after all just paper. It is not backed by anything but the good faith in government to honour its face value. All through history there are numerous examples of governments replacing commodity-backed currencies with paper.
In each and every case it is has resulted in varying degrees of economic catastrophe. It is a simple equation; politicians + printing presses = public poverty.
There have been no exceptions to this rule.
This is an extract from Wikipedia regarding the assignats (paper money) introduced during the French Revolution:
Assignats were paper money issued by the National Assembly in France from 1789 to 1796, during the French Revolution. The assignats were issued after the confiscation of church properties in 1790 because the government was bankrupt.
‘The government thought that the financial problems could be solved by printing certificates representing the value of church properties. These church lands became known as biens nationaux (“national goods”).
‘Assignats were used to successfully retire a significant portion of the national debt as they were accepted as legitimate payment by domestic and international creditors. Certain precautions not taken concerning their excessive reissue and co-mingling with general currency in circulation caused hyperinflation.’
Does this excerpt sound familiar to what Bernanke et al are doing today?
‘Assignats were used to successfully retire a significant portion of the national debt as they were accepted as legitimate payment by domestic and international creditors.’
The end result of the assignat experiment was hyperinflation. Does the same fate await us? If so cash will be the least secure investment to hold. The buying power of paper money will be decimated.
Before the end of this decade I suspect investors will need to have taken action and switched from cash to hard assets — precious metals, property and shares. When and how this transition should occur is as yet unknown. We are in unchartered waters and no one really knows what twists and turns markets will take prior to their collision with economic reality.
Navigating through these challenging times is not easy. The best and brightest economic and investment minds are somewhat divided over what the endgame will look like. However the one thing they seem to agree on is it will not end well.
The graph below gives you an indication of just how active the US Federal Reserve has been with its money creation activities since the GFC.
In the past four years the Feds balance sheet has exploded from US$1 trillion to US$3 trillion. In the next 12 months (assuming the Fed continues their $85 billion per month buy-back programme) this will increase by a further US$1 trillion.
Throw in the massive money creation efforts of the Bank of Japan, European Central Bank, the Bank of England and the People’s Bank of China and that is an awful lot of paper backed by nothing other than faith in the ability of central bankers to hold this whole thing together.
Centuries of disastrous money creating precedents provide the solid ground on which I stand to declare I have absolutely no faith in these academic elitists.
From the above chart we can see Ben Bernanke has not let a good financial crisis go to waste. He has been given a golden (or should that be, paper) opportunity to test out his ‘marvelous’ academic theories.
Anyone with a few decades of adult life experience knows there is a world of difference between theory and practice.
Sadly, Ben is going to take us all along on his learning journey.
What has US$2 trillion and four years of zero-bound interest rates produced? The weakest post-recession recovery in the past seventy years and a rocketing share market. This disconnect cannot be sustained.
The Great Credit Contraction is a function of demographics and debt. The forces of the contraction are far more powerful than the theories of a handful of bankers with computer models.
The markets will publicly humiliate central bankers. Until that day arrives, the investment conditions remain far too confusing to venture beyond the safety of cash.
Keep your portfolio firmly grounded in cash. Better flying conditions await us.
for Markets and Money
Note: Vern Gowdie has been involved in financial planning in Australia 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 5 financial planning firms in Australia. He is currently working with Port Phillip Publishing on the creation of a Family Wealth financial strategy for the challenging years ahead.
From the Archives…
How a Slowing Chinese Economy is About to Hand Australia a Pay-Cut
24-05-13 – Greg Canavan
Your Forefathers’ Pain Can Be Your Gain
23-05-13 – Vern Gowdie
The Fatal Flaw at the Heart of Modern Economics
22-05-13 – Bill Bonner
The Warning Signs for Australia’s Economy
21-05-13 – Greg Canavan
A Simple Interpretation on Gold for Times of Monetary Madness
20-05-13 – Greg Canavan