Tuesday, 17 May 2022 — London, UK

By Vern Gowdie Editor, The Daily Reckoning Australia

[7 min read]

• 21^st century cannot afford the 20^th century
• The land of the ageing population
• 80/20 rule…lose 80% over 20 years
• USA today
• The comparisons continue

Dear Reader,

I have no interest in trading shares.

Spending countless hours studying balance sheets to identify undervalued companies is not my thing.

Cryptos…well, say no more. I don’t understand them and can’t comprehend how you can put any sort of meaningful value on them…pricing is only determined by belief in the unbelievable.

The backyard I’m most comfortable playing in is long-term trends.

In a world of instant-everything, waiting patiently for trends to play out is definitely not most people’s cup of tea.

And that’s completely understandable.

There’s so much content vying for our attention these days.

Taking time out to ponder the shifting patterns of society is a luxury few can afford.

However, those trends are what influence the economy and financial markets.

At the risk of repeating myself one too many times, the 20^th century was like no other century in history.

From 1900–99 so much changed…and most of it in the second half of the 20^th century:

• Population growth on an unprecedented scale (due to lower infant mortality rates, baby booms, and longer life expectancies).
• Industrial Revolution leading to the technology revolution.
• Quantum leaps in medical science.
• The sophistication of financial markets.
• Fractional banking.
• Women entering and remaining in the workforce.
• Expansive welfare systems.
• Pension funds.

This list could go on and on. But I’m sure you get the gist.

What we take for granted as ‘normal’, is, in the context of history, far from normal.

The society we know today has largely been a construct of the past 70 years.

The problem is the 21^st century now has to deal with the legacies from the 20^th century:

• An ageing population.
• Unfunded welfare commitments.
• Society’s increased expectations to a certain standard of living (irrespective of whether we can afford it or not).
• Declining birth rates.
• An economy caught in a massive debt trap.

The land of the ageing population

The demographic and debt trends responsible for creating these less-than-favourable legacies are on the cusp of changing.

Japan has been the Western world’s ‘canary in the demographic and debt mine’.

We know from Japan’s experience; the metamorphosis process can be long and (financially) painful.

The following chart compares the demographic trend in the ‘Land of the Ageing Population’ with the US.

Japan’s demographic sweet spot (when the ratio of non-working-age citizens was lower than the working-age cohort of over 15s and under 65s) was the key driver behind Japan’s economic glory, especially in the 1980s:

Courtesy of the demographic sweet spot — with a greater percentage of society in the peak earning age bracket — households borrowed and borrowed some more.

People became conditioned by the onwards and upwards trend (and narrative) in the economy and asset markets.

Past success was destined to continue, uninterrupted, into the future.

Failure to understand the role demographics and debt played in Japan’s financial ‘success’ meant people fell for ‘Investing Mistakes 101’…overconfidence in an overhyped market.

80/20 rule…lose 80% over 20 years

From 1984–89, the Nikkei 225 Index soared fourfold…rising from 10,000 to almost 40,000 points:

From its late 1989 peak to the 2009/10 trough, the Nikkei would lose 80% of its value…wiping out 30 years of gains.

When Japan’s ratio of non-working-age population to working-age population began to increase, sustainable economic growth became a distant memory…a forlorn ideal from glory days past.

The US is now where Japan was 25–30 years ago.

Is this slowing economic growth trend going to impact the US in the same way?

USA today

A key driver behind the surging Japanese share market was identified in a research paper from the Institute for International Economics (emphasis added):

‘The Japanese financial market in the second half of the 1980’s was most evidently characterized by a rapid increase in capital market fund-raising by corporations…Figure 4.3 shows the movement of fund-raising in the Japanese capital market and its growth rate relative to the same month of the previous year.’

Looks and sounds awfully familiar, doesn’t it?

From S&P Global in July 2021:

Issuance of corporate debt ramps up as the boom closes in on its peak:

Trends produce repeatable patterns of behaviour.

People rarely question whether the conditions that created past economic and/or financial success are still in play or not. They just run with the crowd.

Towards the end of a long-term trend, confidence in the continuation of the good times is reflected in over-asset prices and an escalation in greed by individuals and corporates.

The Nikkei 225 rose fourfold over a six-year period.

The S&P 500 Index’s fourfold increase has been over an 11-year period:

Not quite identical to the Nikkei’s final hurrah, but still an impressive display of collective herding around the trend.

For your consideration, another impressive fourfold increase in a relatively short time frame occurred during the 1920s…just saying:

Like Japan, the 1920s burst of asset price inflation was followed by an 80%-plus market fall.

Forward-looking investors should take serious notice of these two precedents.

The comparisons continue

The souring of Japan’s economic sweet spot was instrumental in its economic stagnation and asset (shares and property) price declines.

The US is on the same pathway:

The demographic trend is no longer the economy’s or financial market’s friend.

To make matters worse, the participation rate of the (declining) working age (labour force) cohort is also declining from its sweet spot highs:

These two negatives don’t make a positive…there are fewer people working to pay for the (very expensive and unfunded) legacies of the 20^th century.

Based on Japan’s debt and demographic experience, the US economy (and financial markets) is facing tough times ahead.

Naturally, very few people think this is what the future holds.

The majority see a continuation of the trend…albeit with the occasional bump.

Until late 2021, the US share market was behaving similarly to the Nikkei 225 Index in 1989…new high after new high…until the bell rang.

Is the US market destined to follow 1929 Wall Street and 1989 Tokyo?

Stay tuned for Part Two next week.

Regards,

Vern Gowdie,
Editor, The Daily Reckoning Australia

By Bill Bonner Editor, The Daily Reckoning Australia

Dear Reader,

Gizmodo reports: ‘Tether Sinks Below $1 in Nightmare Scenario for Bitcoin’s Future’.

‘The cryptocurrency market continued to hemorrhage money Thursday, with the most popular coins down double-digit percentages over the past 24 hours. And absolutely no one knows when things will bottom out, with many people worried the entire market of fake digital money could go to zero as the stablecoin Tether officially traded below $1 for the first time ever early Thursday. 

‘Bitcoin, the most popular cryptocurrency in the world, is down 11.2% over the past day, currently sitting at $27,959 — roughly 58% lower than its all-time high of $69,000 in mid-November. Ethereum has struggled even worse in the past 24 hours, down 19.9% to a price of $1,930.’

Cryptos may or may not be the future of money. But we saw yesterday that when the money goes, everything goes. As the feds diddled the dollar…it was hard to know what anything was really worth. 

But now, like soldiers leaving a ruined city, the Fed is in retreat. And Mr Market discovers atrocities.  

One of the leading meme stocks, for example, was AMC…a well-known chain of movie theatres. It was trading at US$10 a year ago. Now, after blasting up to nearly US$60 in June of last year, it’s back to US$10.

GameStop, another meme favourite, went above US$300 back in January 2021. It’s now in the US$80s. And if symmetry rules as we think it does, the company will be back at less than US$5 soon.

They that did ride most high do lie most low…

Bankman…fried?

Crypto billionaire Sam Bankman-Fried has seen his wealth cut in half…so far. 

Also riding high in the saddle was Cathie Wood’s Ark fund. It’s down about 75% from its high. And poor Ms Wood; a press photo shows her hair has gone grey.

Atrocities are punished in the private sector. That’s what bear markets are for.

In the public sector, they’re more often rewarded.  

Yes, today we continue our tour of the Incompetents Hall of Fame. There’s Ben Bernanke and Janet Yellen. And generals David Petraeus, Stanley McChrystal, and Mark Milley. And, of course, Bush, Obama, Trump, and Biden.  

Any one of these men might be fine in private life. Bush owned a baseball team. Obama might have made a perfectly good high school history teacher. Trump…a fast-and-loose real estate developer. And Biden? The man is an able hack and could fit into any organisation that needs one.   

Instead, they were placed in charge of public policy…telling other people what to do…and each one made a disaster out of it. Why? 

We’re just connecting the dots here.

How come Americans are getting poorer? How come GDP is falling?

How come public policies seem designed to fail? How come public officials act like morons?  

What will the Fed do when the going really gets tough?

Today, let’s look at another arm of the ruling clique…the medical/pharmaceutical/health bureaucracy complex.

The COVID Games

In March 2020, it was obvious that a new plague was upon us. And there were two alternatives for how to deal with it.

The first was not to make a federal case of it, but just let ‘the people’ decide. This ‘bottom-up’ approach was taken by many poor countries…and by Sweden.

The Swedes were quickly labelled ‘anti-science’; Sweden was practically considered an outlaw state.

The other approach — top-down — was favoured by the ruling caste of almost all other developed countries. It involved lockdowns, masking, vaccines, and social distancing. ‘The science’, they said, required it. The idea was to stop the virus…to keep it from circulating so it couldn’t infect people.

Which approach worked better?  

On the available evidence, the Swedes were right…our health officials turned out to be as incompetent at stopping COVID-19 as our Fed was at preventing inflation. The Week reports:     

‘Sweden has one of Europe’s lowest Covid-19 death rates despite shunning most lockdown restrictions, new data released by the World Health Organization (WHO) suggests.  

‘Stockholm chose not to implement a full national lockdown during the pandemic, instead relying on “voluntary changes to behaviour”, said The Telegraph. The decision meant the nation was “deemed almost to be a rogue state” as other countries introduced wide-ranging restrictions to stem the spread of the virus. 

‘But according to the WHO figures, Sweden had an excess death rate of 56 per 100,000 — well below the global average of 96. By comparison, between 2020 and 2021, the UK’s excess death rate was 109, Spain’s was 111, and Germany’s was 116. 

‘At the beginning of the pandemic, Sweden’s public health officials argued that it would “take years” to see which approaches to combating Covid-19 would be most effective, The Telegraph reported, arguing it would be better to avoid “untested measures”. 

‘They also took into consideration the “collateral damage” of lockdown, such as “the missed cancer diagnoses, the cancelled hospital appointments, and the lost education”, the paper said. And the decision “appears to have been vindicated”.’

The Swedes’ approach was called the ‘light touch’. It meant leaving doctors and patients alone, letting them make their own decisions. But most of the world’s governments — advised by their health apparatchiks and pharmaceutical industries — chose the heavy touch.

Collateral damage

Dear readers will recognise the ‘heavy touch’; it was the path taken by the incompetents. The Bush administration, for example, after the Twin Towers attack of 9/11. Rather than allow the police and the judicial system to track down the perps and bring them to justice at minimal cost and little disruption, the Bush team invaded Iraq, which had nothing to do with the Twin Towers disaster.  

The ‘heavy touch’ was also the route chosen by the Fed. In the mortgage finance crisis of ‘08–09, it didn’t stand back and let people work out their financial problems. In an honest economy, speculators who had made bad bets would have lost money…CEOs would have given up their bonuses…corporations would have gone bust.

Instead, the Fed bashed in the door like a team of ATF agents on a midnight raid. They dictated interest rates (below zero, inflation-adjusted)…funded the federal government’s ghastly ‘rescue’ plans…and rewarded reckless risk-taking.

Learning nothing from this episode, they repeated it in 2020–21…but on an even greater scale, with US$4 trillion in money printing in just 18 months, a new record. 

And now, we are suffering the ‘collateral damage’.

Sweden tried to consider the ‘collateral damage’ done by COVID-fighting policies. But no one has yet attempted to plumb the depths of hurt caused by the combination of heavy-handed policies in both health and finance.  

Tomorrow, we will take a stab at it.

Regards,

Bill Bonner,
For The Daily Reckoning Australia