2023…the Year of the Big Loss? |
Tuesday, 10 January 2023 — Gold Coast, Australia | By Vern Gowdie | Editor, The Daily Reckoning Australia |
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[8 min read] In today’s Daily Reckoning Australia, Vern discusses how now is the time to prepare for a world that’s going to be vastly different to the central bank nirvana of recent years. Vern thinks what’s coming to our shores in the next months and years is going to be vastly different to the decade we’ve just experienced…just like the 1930s were nothing like the 1920s. |
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Dear Reader, ‘Success breeds complacency. Complacency breeds failure. Only the paranoid survive.’ Andy Grove For more than a decade (from early 2009–21), central bankers successfully employed stimulus strategies to reinflate global asset prices. The mere utterance of ‘whatever it takes’ was enough to send share market hearts a flutter. The reversal of any downtrend only required Bernanke, Yellen, and now, Powell to promise more printed dollars and give a little forward guidance on interest rates, which turned out to be years’ worth of ‘wink, wink, nudge, nudge’ on how much they intended to punish the savers of this world. Wall Street loved this rigged game. Safe and secure in the knowledge the all powerful Fed had its back, the boys and girls running the biggest casino in the world knew they couldn’t lose. The ‘house’ was on a sure thing. All those trillions in newly minted currencies — dollars, euros, pounds, yen, yuan — flooded into markets. Any time the markets stumbled — say, a pesky crisis in Greece or a pandemic-inspired crash — an even greater stimulus package was announced. It mattered little that this money was being used to finance all sorts of marginal activities that, in the real world of properly assessed credit risk, had a snowball in Hell’s chance of being entertained as a genuine investment offering. Are loss-making tech, SPACs, cryptos, and NFTs ringing any bells? But this was the not the real world. This was market nirvana. Markets were told if things get a little tough out there, don’t worry, ‘there’s more where that came from’. From 2010 to late 2021, the elasticity of Price/Earnings (P/E) ratios was stretched to levels last seen during the heights of the Roaring Twenties and dotcom boom. These infamous historical precedents mattered for little. The central bankers were determined to make sure…‘this time was different’. Spoiler alert…it never is. During the euphoric phase of a boom, wide-eyed participants all mistakenly think…‘what has been will continue to be so’. WRONG! We’ve seen this Boom Bust movie before The leader of the pack — the NASDAQ — continued to post new high after new high…until late 2021. Worthless loss-making tech stocks were perceived as priceless. If success is measured by market indices, then central bankers succeeded well beyond their wildest dreams. What could possibly go wrong from these giddy heights? History’s response to that question is: ‘plenty and none of it good’. Printing money, punishing savers, and going deeper into debt were never a long-term fix for the debt and demographic problems ailing the world. The meltdown in 2008 (now long forgotten) was a result of serious overcommitment — at that time, total global debt was around US$140 trillion. Today, global debt exceeds US$300 trillion…and counting. Curing a debt crisis with even more debt makes about as much sense as an ashtray on a motorbike. Yet, this was the official cure. God help us. Rather than taking the hard decisions to curb the excesses, the incompetents charged with running the global economy opted for the instant gratification of investment banker adulation. Investor complacency — borne from the absolute belief in the Fed having the market’s back — sowed the seeds for what promises to be…a spectacular failure. 2022 was a dress rehearsal for what’s to come. We’ve seen this ‘boom to bust’ movie many times before. The plot is as old as 17th century Tulip Mania. First comes ‘The Peak’. Followed by a fall. Next, there’s a period of consolidation (an attempt to revive the Glory Days). Then…down she goes…in what feels like an uncontrollable freefall. Dow Jones circa 1929–32: 2022 was the year of The Peak, followed by The Fall, and then the attempt at reviving boom-time momentum. If the pattern repeats, 2023 (and, most likely, 2024) are the years of freefalling markets…with the occasional pause for the diehard ‘buy the dippers’ to throw good money after bad. The one thing history teaches us is that — in the fullness of time — market forces are far more powerful than a handful of academics and their optimal computer programs. Blind faith in the capacity of the printing press and suppression of interest rates to defy market gravity indefinitely was always severely misplaced. However, while the good times were ‘a rockin’ and a rollin’’, anyone who dared question the sustainability of living in this fool’s paradise forever was deemed to be a merchant of ‘doom and gloom’. Some would even say ‘a little paranoid’. Questioning the sustainability of the unsustainable is not paranoia It’s not even rocket science. It is just plain common sense. If something cannot continue, then it won’t. It is such a simple concept. But too few seem to grasp the rationale AND, more importantly, the lessons from history…ALL booms do bust. Anyone who dare asks ‘why is that so’ or ‘this can’t possibly last’ in the midst of the hedonistic period is dismissed as ‘the boy who cried wolf’. Confession time, having been around investment markets for almost four decades, has made me slightly paranoid. In 1987, 2000, and 2008, I witnessed firsthand how swiftly and viciously markets can turn on investors…the ones who believed past returns could be confidently projected into the future. On each occasion, the result were losses in excess of 50%. Delivered in a brutal fashion to those who never saw it coming or refused to acknowledge historical precedent. The cycle repeats over and over and over again. Expensive markets become cheaper…without exception. In recent years, my so-called paranoia reached a whole new level. In all my time in the investment industry, I have never witnessed such an open display of market price manipulation…with cryptos being the poster child of ‘the worthless being considered priceless’ brigade. During the boom, markets bestowed central bankers with an almost God-like reverence. With a determination to belatedly fight inflation, the central banker halo is starting to slip. If push comes to shove and markets do go into freefall, the question on everyone’s lips will be: what are the central bankers going to do to arrest the market slide? More QE, lower interest rates, money from helicopters, ban short selling, perhaps even ban selling altogether (that’s a new one they haven’t tried), OR let market forces do their job? Who knows what measures they may or may not resort to. But I suspect the game is no longer in their hands. The market cat is playing with the central banker mouse. Using history as a guide, 2022 was the year when we saw ‘a flick here, and a claw swipe there’. Is 2023 the year of ‘the kill’? Questions you need to ask before the Freefall phase If you think the recent slump is a ‘buy the dip’ opportunity, perhaps you’ll be right in the short term. However, in the longer term, this market is headed much, much lower. If history repeats, you might want to consider the questions I posed in my book The End of Australia: ‘No amount of wishing it could be different will change the facts…imbalances, unfortunately, must be corrected. ‘An attitude of “she’ll be right” may assist in providing us with a coping mechanism…putting on a brave face amidst a world of turmoil. ‘But behind closed doors, the brave face will give way to the inner demons of: ‘- Is my job safe? ‘- How will we cope on one wage? ‘- Will I ever find employment again? ‘- Will we be able to keep our house? ‘- Why did we borrow to buy that second property? ‘- How much more will my superannuation lose? ‘- Are we going to be able to keep the business open? ‘- Can we afford to keep the children in private education? ‘- Will there be a job for me after uni? ‘- Will we be able to retire? ‘- What if the government cuts back on the age pension? ‘These are questions framed by fear…the fear of losing lifestyle, assets, employment, business, and entitlements. ‘The coming collapse of the global debt super cycle…means everything we’ve assumed as being normal is going to be challenged.’ Please take the time to exercise a little paranoia — ask yourself the relevant ‘what if’ questions. What if the market falls 50%, 60%, or more, will my retirement be OK? What if I lose my job, do I have sufficient cash reserves in place? What if property values fall more than expected, do I have enough equity to avoid bank foreclosure? What if the government cuts back on entitlements, how will I make ends meet? Don’t be complacent. Take the time to prepare now for a world that’s going to be vastly different to the central bank nirvana of recent years. What I think is coming to our shores in the next months and years going to be vastly different to the decade we’ve just experienced…just like the 1930s were nothing like the 1920s. Perhaps this is just my paranoia, or it could be our reality. In my opinion, it would be prudent to take the precautionary steps to protect your financial position before the fight to revive the Glory Days is lost. Regards, Vern Gowdie, Editor, The Daily Reckoning Australia Advertisement: Is Bitcoin ‘100-Times Better Than Gold’? 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| By Bill Bonner | Editor, The Daily Reckoning Australia |
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Dear Reader, ‘Permit me to issue and control the money of a nation, and I care not who makes its laws!’ Amschel Rothschild Everything depends on the Fed! It controls the money. Last week, when investors expected the Fed to continue raising rates, stocks fell. Then, on Friday, a report from the Bureau of Labor Statistics told us two seemingly contradictory things: that the labour market was better than expected…but that wages were rising less than expected. The first of these things implied a stern response from the Fed — higher rates. The second suggested it might go out for coffee. Investors, in their wisdom, focused on the second interpretation; the Dow shot up more than 700 points. What a remarkable state of affairs. Reporters study every word from the Fed. Analysts anticipate its every move. And now, businesses hold back on billion-dollar investments…wondering if the economy will take off after the Fed ‘pivots’. Employees wait for the Fed’s next move to decide whether to look for a new job. Investments postponed…careers cut short...vacations put off…marriages delayed… …and yes, the Fed has become the most powerful unarmed organisation in the world. By decree, it can wipe our trillions of dollars of wealth…destroy businesses…make the rich richer and the poor poorer. An implicit guarantee Last week, however, we saw that not even the Fed can make the sun stand still. Time waits for no man…certainly not for Jerome Powell. And eventually, the bubble pumped up by reckless printing press money implodes. Then, as the air whooshes out…those companies that benefited most…lose most. We have some direct insight into this phenomenon. Our company, Agora, has offered investment advice since 1979 — more than 40 years. The advice was sometimes shockingly good, sometimes not-so-good. After all, Mr Market does not give away his secrets readily. But the more the Fed favoured the stock market — with artificially low interest rates and an implicit guarantee — the more people wanted stock market advice. And the more our subscription sales went up. This was not altogether a good thing. The Fed gave investors the idea that making money was easy. All they had to do was to buy stocks and sit back. Then, in this century, the Fed went Full Fantasy, increasing the money supply (its own holdings) by 1,200%, with its key interest rate approaching zero…far below the inflation rate. Then, investors discovered they could make the most money in the least valuable investments, those least tethered to the real world of time and stuff. Cryptos, for example, had no value. They earned no profits. They had no employees to speak of. Nor did they have any assets worth mentioning — no factories, no patents, no distribution networks. Buying a crypto might get an investor a profit far higher and far faster than he could get from a real, old industry company. At first, our editors and analysts hesitated. This was not the kind of ‘investing’ that made sense to them. But they gradually adjusted…giving readers what they wanted. Sales soared; but both our own editors and the investors they served were learning the wrong lesson. The bubble epoch The peak in the Bubble Epoch came in August 2020. This was in the middle of the feds’ Covid Hysteria, in which they added US$5 trillion to the economy to offset the shutdowns they had caused. Early in the month, the 10-year treasury note hit a record low yield of barely more than one half of one percent. Then, on 24 August, the Dow replaced ‘old economy’ ExxonMobil with ‘new economy’ Salesforce. Salesforce grew by leaps and bounds — offering software from ‘the cloud’ to companies such as ours. Almost all investment-related companies were adding customers and making money. But after August 2020, the bond market took a new direction — down; the bubble was losing air. It wasn’t obvious at first. Salesforce did not peak until more than a year later. But investors were already backing off. Our sales were going down. Investors sensed that the Bubble Epoch was over. The Dow peaked at the end of 2021 at just over 36,000 points. This is good news. The spell is broken. Analysts can go back to doing what they should be doing — offering solid investment insights and advice. The Fed’s mettle But wait. Instead of carefully studying the ledgers of public companies, investors and analysts are still enthralled by the same monster that created the Bubble in the first place. And now the question is: Will it ‘pivot’ this year? The Fed says ‘no pivot’…uh-uh…no way, Jose…Fed minutes: ‘No participants anticipated that it would be appropriate to begin reducing the federal funds rate target in 2023. Participants generally observed that a restrictive policy stance would need to be maintained until the incoming data provided confidence that inflation was on a sustained downward path to 2 percent, which was likely to take some time.’ Do you believe that, dear reader? We do. But we also believe that the participants can change their minds. And if we get a real crisis — a major bankruptcy…a run on a bank…a crash in the stock market…a hotter war…a new virus… any excuse at all…then Fed governors’ foreheads will grow damp…their knees will tremble…their backs will bend — and they will fold like lawn chairs. We’ll see. Regards, Bill Bonner, For The Daily Reckoning Australia Advertisement: PAYMENT DECLINED Imagine a government bureaucrat had the power to track and ‘approve’ every purchase you made with your money. Thanks to a new currency designed by the Chinese Communist Party (and being trialled in Australia over the next 12 months)…it could soon be possible. Full story here. |
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