Vern Gowdie – Markets and Money (Australia) –
A friend called earlier this week and said ‘You must be happy with what’s happening on Wall Street?’
‘Not really’ was my reply.
This wasn’t the response he was expecting.
My reasoning was twofold.
First, one swallow does not make a summer.
Best to reserve judgement on whether this is ‘the beginning of the end’ until a little more time and market action has elapsed.
Second, if this is the start of something far more severe, then life as we know it is going to change for the worse. The vast majority of people are simply not prepared for a Great Depression-like scenario.
It’s hard to get too overjoyed when you know that a lot of people are going to face serious hardship.
On Tuesday — the day after Wall Street fell 1,000 points — I was looking around the coffee shop and everyone was going about their daily life as usual.
Familiar and not-so-familiar faces showed no outward signs of concern over the volatility engulfing global share markets.
The collective thinking is probably one of ‘this too shall pass’.
Maybe. Maybe not.
But my thoughts were running a lot deeper than the overnight ‘bump and grind’ on Wall Street.
I sat there and wondered if anyone really understood how we’ve arrived at (or are very close to) what I call ‘peak risk’.
Being dumbed down by central banks, financial institutions, the IMF et al. has created a complacent society.
History teaches us that there’s an inverse relationship between complacency and risk.
Lower complacency equals higher risk.
From where I sit, we’ve reached an inflection point. One where the threat of wholesale capital destruction and widespread loss of livelihoods has never been greater.
But how can you say this out loud without sounding like a banner waving ‘end is nigh’ nutter?
You can’t. The level of overall bullishness drowns out mutterings of the worrier.
Therefore, you withdraw to a place of isolation…far away from the crowd.
Allow me to share with you some thoughts on what’s troubling me of late.
The other day our esteemed Treasurer Scott Morrison said with a straight face:
‘The government is committed to providing jobs and wages growth.’
The reality is that the current and previous governments are and have proven to be economically impotent.
How can our tiny nation possibly fight against the deflationary trend of increasing global competition (even more so if highly leveraged businesses in China start dumping product on the market to generate cash flow) and artificial intelligence?
For nearly a decade, central banks have — with vast amounts of cheap money— tried and failed to move the needle on GDP, inflation and wages growth.
What hope does either Morrison or the Shadow Treasurer Chris Bowen have of succeeding where trillions in newly minted dollars and another US$90 trillion in debt has failed?
All that the government, the opposition, the Greens and unions will collectively do is make a bad situation even worse.
These clueless meddlers are problem creators, not solution providers.
If the Treasurer truly wanted to earn the title ‘The Right Honourable’, he should be honest with the Australian public. Warning them that the RBA-endorsed debt binge has placed the Australian economy in a hazardous position. Therefore, get your finances in order to protect yourself as best as you can.
But we know that politicians only ever do the honourable thing once all the dishonourable options have been exhausted.
People are blindingly walking into a lethal trap and all we get from the elites is reassurance that ‘around the next corner is the land of milk and honey, so keep walking.’
Turning a blind eye to reality
Decade after decade of growth has conditioned us as a society to be more optimistic. Therefore, we want to believe in the Promised Land.
In surveying the cafe, I pondered: Do my fellow coffee lovers ever think about the primary driver behind our recession-free record breaking run?
The little voice inside says ‘Don’t be silly. They have better things to do with their time.’
Debt has been such a constant in our lives…we know no different.
With each passing year, more debt — public and private — is added to the system. No one seems to care.
Society has become accustomed to living beyond its means…it’s what keeps the whole thing turning.
Without the annual addition of debt, the system would grind to a halt…as we briefly glimpsed in 2008/09.
But the events (and lessons) of 2008 are all but forgotten.
Central banks saved the day. The world did not end.
And the more distance we put between 2008 and now, the more complacent we become.
That is until recently.
This week’s Lazarus-like return of volatility has roused people from their complacency slumber.
All the ‘right’ (that is, predictable) words were said by all the wrong people.
Calls for calm. Reasons why were given. Assurances were made.
Not one — and I mean not a single solitary comment I have read or heard — identified the real reason behind this week’s rumblings.
We were told is was because of inflation in the US…higher interest rates…a flash crash…and algorithms working in reverse.
But these are not the true culprits.
This is an extract from the 2 February 2018 edition of The Gowdie Letter:
‘There is no easy way down from this artificially created peak.
‘In 2002, Didier Sornette (professor of entrepreneurial risks at the Swiss Federal Institute of Technology in Zurich, professor of finance at the Swiss Finance Institute in Geneva, and the director of the Financial Crisis Observatory at ETH Zurich) published a book titled “Why Markets Crash”.
‘In a nutshell, this is why…
‘“The collapse is fundamentally due to the unstable position; the instantaneous cause of the crash is secondary.”
‘Everyone is looking for the “snowflake” that’ll cause the avalanche. Will it be China’s debt woes? Does Trump press his “mine’s bigger than yours” button? Is it going to be a sovereign or corporate debt default?
‘You can stop your looking and second guessing. The cause is secondary.’
The reason this and every other market has collapsed is simple: they become too expensive.
Overvalued markets are fundamentally unstable. Teetering. Waiting for a puff of wind to blow them over.
Whether that wind blows from the east, west, north or south is irrelevant.
They are fragile and vulnerable.
Yet the public perception is ‘the higher they go, the stronger they become’.
Nothing could be further from the truth. But truth is not what people want to hear when all is going exceedingly well.
There is a time-honoured cycle. Overvalued to undervalued to overvalued.
If the market only ever went from overvalued to over-overvalued, it wouldn’t be called a ‘cycle’…it would be a straight line to infinity.
This is what really troubles me: The fact that people are blissfully unaware of what lies in wait.
Unfortunately, it’ll all become painfully obvious when the seriously overvalued US market rotates into the downward phase of the cycle.
The Dow Jones (graph below) has recovered from previous market cycles — 1987, 2000 and 2008 — courtesy of the ever-expanding efforts of the Fed.
[Click to enlarge]
It’s no coincidence; the Dow has scaled to historical highs on the back of the greatest level of central banking intervention in history.
But what happens next time?
Does the Fed have anything left to paper over the next debt crisis? Unlikely.
Are people planning for the US market to fall back to levels first reached in the mid-to-late 1990s? I think not.
Are they prepared for a long, slow recovery…one that could take decades to again reach 26,000 points? I think not.
Am I happy about the recent volatility?
Not really. Because if I am close to being right, we’re in for a world of hurt.
If you share my concerns about complacency preceding a collapse, please go here.
Editor, The Gowdie Letter