How High Will You Be When the House of Cards Falls?

10.07.2017 • Australia

Vern Gowdie – Markets and Money (Australia) –

How good is your memory?

Can you recall what the big issue of the day was back in 2007?

Was it the Aussie share market marching towards a record high of 6800 points? By the way, a decade later, the All Ords is still 15% below this level…shares for the long term? But I digress.

No, the All Ords was not it.

The subprime lending crisis brewing away in the US?

No.

People were largely clueless to the unfolding catastrophe on the other side of the Pacific.

To be fair, the Fed was also guilty of blind ignorance to what was happening in its own backyard.

Had Aussies been aware of what was about to hit the fan in the US, they probably wouldn’t have poured borrowed money (margin loans) into a seriously overpriced market.

What was it?

Want a hint?

Kevin 07.

Well, it wasn’t actually KRudd — the self-proclaimed economic conservative — himself. It was the great moral platform upon which his campaign was based.

Climate change is not just an environmental challenge. It is so great we should be at the stage now in this country where climate change is beyond politics.

– Kevin Rudd at the National Climate Change Summit, 6 August, 2007

Kevin 07 tapped into the prevailing social mood.

People — especially the younger generation — wanted to do their bit for the environment.

Al Gore’s An Inconvenient Truth had struck a chord (as it turned out, Al’s work of fiction was more of ‘a convenient lie’). Proving once again that the master puppeteers know how to use the unquestioning gullibility of the masses to enrich themselves.

Priorities change in times of crisis

But I digress, again.

Fast forward a couple of years, and ‘the greatest moral, economic and social challenge of our time’ gave way to Rudd’s expletive-riddled tirade: ‘Those Chinese f**kers are trying to rat-f**k us.

It wasn’t just the Chinese who sabotaged the Copenhagen climate summit in 2009.

Social mood had also shifted.

Climate change was no longer a ‘front and centre’ consideration

The new ‘greatest moral, economic and social challenge’ was how to deal with the after-effects of the most severe financial crisis since the 1930s.

Superannuation statements were printed in red ink. Those who borrowed to invest lost heavily…even their homes. The public mood was so dire that the government was forced to guarantee bank deposits.

On the employment front, the RBA reported:

The decrease in average hours worked in the 2008–2009 episode reflected a fall for both full-time and part-time workers. The fall, however, was more pronounced for full-time workers…’

Politicians and bureaucrats (with secure jobs and taxpayer-funded retirements) carried on like nothing had happened. Hundreds of public servants jetted off to Copenhagen (flights, accommodation and entertainment courtesy of you and I) to meet the ‘great challenge’.

Meanwhile, outside of Canberra’s bubble, financial security and job security relegated the environmental concerns of 2007 to yesterday’s news.

The moral of the story? In the good times, society is prepared to lift its sights above self-interest, engaging in the social issue of the day.

However, when the tough times hit, forget that altruistic stuff. It’s all about our own personal, financial and employment security.

Public mood waxes and wanes with personal wellbeing.

A word of advice for those in favour of the current social issue of same-sex marriage. Act now while capital city property prices and the US share market are at record highs.

When these oversized bubbles hit a pin, public mood is bound to change. If same-sex marriage is not legislated before the next crisis hits, then it’s likely to go the way of climate change in 2009.

When it comes to losing the house and/or job, all else fades into the background. Which begs the question: When will the next crisis hit?

If our politicians are a guide, it’ll be sooner rather than later.

Politicians are the worst timers of a market.

They only act once a trend has been established…again, feeding off a social mood.

In the 2010–11 budget, then Treasurer Wayne Swan — in seeking to deliver his elusive budget surplus — announced a Resource Super Profits Tax.

After ‘negotiating’ with the mining sector, the Minerals Resource Rent Tax came into being on 1 July, 2012.

When did the mining boom peak? Let’s refer to the RBA for the answer…

In mid 2012, investment in the Australian resource sector had peaked at just under 8 per cent of GDP, compared with its average of around 2 per cent prior to the boom.

Well done, Swanny…you picked the very top of the market.

Imposing a tax after the big bucks had been made.

Treasurer Scott Morrison’s latest budget blindsided the major banks with a tax on their aggregate liabilities. This is his ham-fisted attempt to partially fill the budget’s black hole.

Courtesy of the RBA’s accommodative interest rate policy, the banks are stuffed full of liabilities.

Australian households have been encouraged to borrow as much as they can in order to buy as many homes and/or trinkets as they can (or cannot) afford.

Record profits make the big banks an easy target.

In 2012, we witnessed the peak of the mining boom. If history repeats itself, 2017 should go down as the peak of the lending boom.

With imitation being the best form of flattery, Treasurer Morrison’s ego has been well and truly stroked by South Australia’s copycat levy. Apparently, Western Australia likes the idea as well. If this continues, the door to Morrison’s office will need to be widened to make room for his big .

When you have lazy and fiscally irresponsible treasurers lining up to leech off a fat host, you know the days of the host are numbered.

In the not-too-distant future, the federal and state budgets of 2017–18 may go down as the bellringers on these overpriced, overhyped and overindulged markets.

One final digression. Here’s a suggestion to Treasurer Morrison: Introduce a ‘robot and automation’ tax before the impact is felt on employment. At least this way, you’re generating revenue from a rising trend to offset the loss of income taxes. But true to form, this tax will come after we have a ‘jobs crisis’.

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The next financial crisis will be a bloodbath

Back to the topic at hand.

The next global financial crisis is going to make 2008–09 look like a Sunday school picnic. That’s a bold claim that isn’t made lightly.

The deliberate and targeted central banker policies, aimed at reflating global asset prices with the creation of an additional US$60 trillion of low-cost debt, have taken us to a peak of indebtedness from which there’s no easy descent.

This will not be a hard landing; it’ll be a bloodbath.

Thinking you can solve a debt crisis with more debt is as logical as curing obesity with a diet consisting entirely of Big Macs, fries and Coke.

Our clueless treasurers are introducing a tax on debt when waves of debt defaults are looming. Perfect timing, as usual.

My aforementioned bold claim is not without official backing.

The 25 June, 2017 edition of The Telegraph carried this line:

The Telegraph financial crisis article
Source: The Telegraph
[Click to enlarge]

The Bank for International Settlements (BIS) is often referred to as ‘the central bankers’ central bank’. This is an extract from the article…

The global economy is caught in a permanent trap of boom-bust financial cycles. This deformed structure is becoming ever more corrosive and dangerous as debt ratios rise to vertiginous levels, the world’s top monetary watchdog has warned.

The Bank for International Settlements said the rot in the global monetary system has not been cut out since the Lehman crisis in 2008.

The current ageing and unstable cycle could finish in much the same explosive way, contrary to the widespread belief that it was a once-in-a-century event caused by speculators.

“The end may come to resemble more closely a financial boom gone wrong, just as the latest recession showed, with a vengeance,” said Claudio Borio, the BIS’s chief economist.

Got that?

The global economy is caught in a permanent trap of boom-bust financial cycles.

Why?

Because we have built an economic model that’s entirely and utterly dependent on greater levels of debt-funded consumption to achieve ‘growth’.

The global economy is one gigantic Ponzi scheme…needing an ever-expanding debt base to keep it from collapsing.

The lesson from the 2008 debt crisis was: Take a breather, take some pain and build a better system…one that’s less reliant on debt.

The central bankers, their political masters and financial-sector benefactors — acting out of self-interest and hubris — deliberately and wilfully ignored the message.

The market’s retribution for this arrogance will be delivered with a vengeance.

The inconvenient truth, which the ruling class dares not to reveal, is that the master puppeteers have again used public mood (our growing sense of entitlement to a life we cannot afford) to enrich themselves.

When the next crisis hits and the convenient lie is exposed, the mood could turn very angry.

Without any rich veins to tap, what can treasurers (the world over) do to placate the masses?

The crowd’s sole focus is going to be their own wellbeing; to heck with anyone or anything else.

Where are the handouts going to come from?

Could it be that unlimited money printing is in our future?

Don’t discount that very real possibility.

The comedic duo of Rudd and Swan established the precedent in 2008, with cheques being sent to those above and below the ground.

All this adds up to the realisation that navigating our way through the next debt crisis is going to be extremely challenging.

The inconvenient truth for most people is that the life they’ve been led to believe they’re entitled to has been a lie.

Regards,

Vern Gowdie,
Editor, Markets & Money

Vern Gowdie

Vern Gowdie

Editor at Markets & Money

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 magazine as one of the top five financial planning firms in Australia. He is a feature editor to Markets and Money and is Founder and Chairman of the Gowdie Family Wealth and the Gowdie Letter advisory services.

Vern Gowdie

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