Dear Reader, The humble beginnings of the ‘building society’ can be traced back to a tavern in Birmingham. In 1775, Richard Ketley, the landlord of the Golden Cross Inn, established ‘Ketley’s Building Society’. Ketley’s newly formed entity was true to label. The monthly membership fees were pooled and used for the purpose of building homes for the society’s members. The original building societies were created as fully terminating cooperatives. When all society members had their own home, it was mission accomplished…the society was terminated. Ketley’s Building Society model was soon adopted by other communities. In the 1830s, the building society structure changed from being ‘fully terminated’ to ‘permanent’…hence they became known as the Permanent Building Society. As older members completed their home purchases, newer members were welcomed into the society’s fold…perpetuating the life of the building society. Our English ancestors introduced the permanent building society into Australia. In 1867, the good folk of Geelong began the (appropriately named) Geelong Building Society. By all accounts, the Geelong Building Society operated on a prudent basis. In 1959, another building society opened its doors for business in Geelong…it too (as fate would have it) was appropriately named…the Pyramid Building Society. ..............................Advertisement.............................. An Australian Publishing Exclusive Zero Hour: Turn the Greatest Political and Financial Upheaval in Modern History to Your Advantage By renowned economic futurist Harry S Dent There are plenty of people — a growing chorus actually, who are now convinced the nine- year bull market in stocks is ending. And a bear market is coming. But virtually NO ONE sees what’s REALLY coming… According to a shocking new book by Harry Dent, there WILL be blood in the streets...in America AND Australia… That sounds like hyperbole. But it quite possibly isn’t… Which is why you need to click here and read this book as soon as possible. | .......................................................................... The founders of Pyramid Building Society were Vautin Andrews (a solicitor and mayor of Geelong) and Bob Farrow (an accountant). When Pyramid started its operations, building societies were not permitted to receive deposits from the public. Capital was raised by borrowing from banks and/or insurance companies. That all changed in the mid-1960s. Legislation was passed that enabled building societies to accept deposits from the public. The fledgling Pyramid Building Society recognised the commercial value in broadening its depositor base. Unlike its more conservative, long established Geelong competitor, Pyramid capitalised on the legislative change. In 1971, Pyramid, the new kid on the block, took over the longstanding Geelong Building Society. This was the first in a series of mergers/takeovers undertaken by the acquisitive Pyramid Building Society. In the late 1970s, Bob Farrow retired due to ill health. The reins of Pyramid’s operation were handed to his son, Bill Farrow (aged in his late twenties). The timing could not have been better for an ambitious young man…the regulatory shackles that bound the financial sector were soon to be removed. According to the Treasury Department’s review into the operations of Pyramid Building Society… ‘The problems of the Pyramid Group stem from the freedom afforded by the deregulation of the 1980s. The Group went into commercial lending soon after deregulation and grew rapidly from that point. Between 1981 and 1989 assets grew from $260 million to $2,900 million.’ Financial deregulation was also a boon for banks. The banks aggressively competed for customer deposits. During the 1980s, the fight for funds resulted in more than 100 building societies ceasing operations. In this highly competitive environment, how did Pyramid succeed where others failed? This is from the Treasury Department’s report (emphasis is mine)… ‘Particular actions by the [Pyramid] Group further contributed to its problems. These actions included: borrowing at higher rates than the major banks (between 2 to 4 per cent higher)…’ Wooing depositors with higher rates is how you increase your asset base 10-fold in less than a decade. The perceived strength of Pyramid — an institution with $2,900 million in assets — lulled investors into the complacency trap. They ignored the golden rule…higher returns tend to come with higher risks. Did any of the depositors ponder this basic question? For me to receive the higher deposit rate, who’s borrowing at even higher rates? Probably not. In the good times, people tend to smell the sizzle and ignore the flame. But, as they say in the classics, all good things come to an end. In 1990, Australia was on the cusp of entering the ‘recession we had to have’. Again from the Treasury report (emphasis is mine)… ‘The [Pyramid] Group began experiencing liquidity problems in late 1989 and early 1990 with a run on deposits throughout February/March 1990 with more than $200 million being withdrawn. A second run in May/June 1990 led to its ultimate close on 22 June 1990.’ Lack of liquidity is never a problem when no one perceives there’s a problem. People don’t want their money back while they’re earning an above average return and there’s no real hint of risk to capital. All it takes is a minority (only $200 million from an asset base of $2,900 million) to obtain first mover advantage and it’s all over for the majority. Doors are closed and receivers appointed. The Pyramid depositors who panicked in February/March 1990 must surely have thanked their luck stars. According to Wikipedia: ‘The [Pyramid] group collapsed in 1990 with debts in excess of $2 billion.’ The building society model was originally designed to build member wealth, not destroy it. Richard Ketley would have been turning in his grave at the collapse of Pyramid Building Society. The cartoon published in The Age 4 June 1990, illustrated the plight of depositors who (literally) gambled on Pyramid’s higher returns growth strategy… The lessons in the collapse of Pyramid Building Society are as relevant today as they were 30 years ago. The solid foundations of a business, industry, asset class or nation can take centuries to build (stability) and only a short space of time to be exploited and destroyed (instability). Bernanke fell into the ‘stability leads to instability’ trap when he said in July 2005, ‘We've never had a decline in [US] house prices on a nationwide basis.’ The US share market’s artificially enhanced performance is another classic case of an asset class with a serious case of stability leading to instability. The lure of higher returns – especially in a low interest rate environment — is too tempting to ignore. The more stable the market appears to be, the more unstable it becomes. Higher rates invariably come with a risk to capital. The promised extra return is never a free lunch. There’s always a reason why the rate is higher. With the RBA dropping rates to 1%, the investment industry is falling over itself to bring ‘higher yielding’ products to market. The industry — like Pyramid Building Society — knows the easiest way to woo investors is with the promise of higher returns. Based on my experience, the absolute WORST time to invest in any industry product is when everyone is thinking the same. In the late 1980s/early 1990s unlisted property funds boomed precisely when the commercial property market was about to tank. In 1999, the industry rolled out an abundance of ‘dotcom’ products…12 months later we had the tech wreck. In 2007, margin lending (borrowing to invest in shares) was all the rage…right before the GFC hit. In each case it was the promise of participating in higher returns (from the latest hot sector) that attracted dollars into products. Investors lured by the promise of ‘higher yields’ are destined to meet the same fate. That extra few per cent of income return will come with a serious level of risk to capital…far more than you ever thought possible in the good times. Liquidity doesn’t matter until it does. The investment industry tells you that cash is idle money...it needs to be employed to earn higher returns. And that’s true while things are going well. But when the cycle rotates from up to down, then cash is crowned the king. The time to cash up is before the mob panics not after…the Pyramid depositors who headed for the exit in February/March 1990 were the smart ones. All periods of extended and exceptional growth come to an end. History is replete with examples of empires, dynasties, markets, industries, businesses, political parties that have gone through periods of ascendancy and decline. Everything is cyclical. The US share market has enjoyed a spectacular run (thanks to the unqualified support of the Fed) since the dark days of 2008/09. This too will end and when it does, the dramatic collapse is likely to send shockwaves around the world. The time to exit with your capital intact is well before this happens. Over the past few decades, central banks have also been building a society. One that’s become totally dependent upon an increasing base of debt to achieve growth. The lessons of crises past have been knowingly and wilfully ignored. Investors all over the world have been forced to chase promises of higher returns from sources with dubious credit ratings. History tells us how this will end. Whether we want to be or not, we’re all members of the central bank building society. The charter of the central bank building society is slightly different to the one started by Richard Ketley. Instead of a scheme to build homes for its members, the central bank building society primary objective is to build one giant pyramid scheme. Judging by the parlous state of the world economy, it’s a case of mission accomplished for the central bank building society . My sincere hope is the central bank building society was established on a fully terminating basis and not a permanent one. But I somehow I don’t think so. Regards, | Vern Gowdie, Editor, The Rum Rebellion |
| ..............................Advertisement.............................. ..........................................................................
21st Century America: Rotten but Gluten-Free By Bill Bonner ‘The mills of the gods grind slowly, but they grind small.’ Sextus Empiricus The year moves ahead. Here in France, leaves are already beginning to dry, curl, and fall to the ground. A gentle breeze shuffles them along, driving them into corners and under bushes. Last night was cold. We were out at a party in the Limousin region. Slightly higher and hillier than Poitou, we stood outside and felt the cool air falling on our heads. We shivered and reached for sweaters…and then retreated to our cars for the drive home. Our hypothesis is that the US peaked around the turn of the century. Since then, as measured in the most reliable money mankind ever discovered, gold, the flower of its industrial wealth, the Dow 30, has been cut in half. But the phenomenon goes far beyond the stock market or the business cycle. The American economy has been grotesquely distorted by fake-money financialisation. So has American society and government been perverted and corrupted by its fake-money-financed elite. And now, the fading light of late summer falls on an aging, degenerate empire…like a fallen apple, it sits on the ground dreaming of springtime. Whiff of decay Yes, we are living in another great Fin de Bubble period; there’s a whiff of decay in the air. The remaining fruit hangs heavy on the trees…late-summer flowers are at their finest…and as survivors of the Titanic reported, the band never sounded better than just before the ship sank. The futurists tell us that dying is just a technical problem, soon to be solved by science. But so far, nobody escapes death. And nobody escapes the justice of markets either…which grind exceedingly slowly, and exceedingly fine. The Federal Reserve, claptrap economists, the Trump team, and the geniuses on TV tell us that this stock market boom can go on indefinitely…as long as the Fed pushes down on the lever marked ‘Lower Interest Rates and More Growth: Push Here’. But no bubble has ever dodged its pin forever. No fake currency has ever survived for more than a few decades. And no jackass in high office has ever contributed one penny to the real output of any economy. Unhinged money man ‘Mr Trump has not done a bad job’, began a companion last night. ‘The US economy is doing pretty well, after all’. The common perception is that Mr Trump may be a bit unhinged, but he’s fundamentally a guy who knows money. Recall that he was elected to Make America Great Again. The ‘again’ part presumes that it isn’t so great now…and he was right. By almost every measure, the US has lost ground in the 21st Century, falling in almost every category. This decline was dismissed by Hillary Clinton, who countered that ‘America is still great’. But the decline was felt in the heartland, particularly by average men. ‘Breadwinner jobs’ in the factories of Gary, Indiana, and Donora, Pennsylvania, were disappearing. Women moved fairly readily into the offices and coffee shops in the big cities. But men were often left out. Today, there are said to be some 100 million adults without jobs. Many of them are comfortably retired. But others are simply marginalised, unable to find work in the financialised economy or status in the gluten-free, latte-loving, feminised, politically correct culture of 21st-Century America. These were the ills — real and imagined — that Mr Trump was elected to fix. But they are not technical problems. Mr Trump cannot simply push down on the lower-rate lever…or turn the tax-cut knob… …nor can he go to war with the Chinese, Mexicans, Democrats, the press, or the Fed and expect any significant improvements. No, America’s problems are self-inflicted. It turned against its own gods — balanced budgets, honest money, and small government. Now, the gods turn against it. Bipartisan treachery But let’s look at how Mr Trump has done so far. Generally, what we see is an economy that has more or less continued to fumble along as it did during the Obama years. Final sales numbers (a reliable measure of consumer health) have gone down from the last few months of the Obama era. The number of jobs added is also lower than it was in the later Obama years. GDP growth got a temporary boost from the tax cut, but has now fallen back to Obama levels, or lower. In other words, the economy as a whole has not changed. But the price paid to keep it from changing is higher than ever. Under Obama, federal spending rose at 2% per year. Now, it is rising at more than 4% per year. No president since Lyndon Johnson has dared to increase spending so recklessly. And in Johnson’s time, the economy was growing at 4%…or higher. Today, GDP growth is only half that level. The only way the feds can keep spending so much money now is by borrowing. Just three weeks ago, Nancy Pelosi and Donald Trump concluded an act of bipartisan treachery — agreeing to do away with the debt ceiling. Now, the sky’s the limit. And already, the feds are reaching for the stars. In the last three weeks, the federal government has been borrowing at the rate of $4.5 billion per day. But you ain’t seen nothin’ yet. Stay tuned. Regards, | Bill Bonner, For The Rum Rebellion |
| ..............................Advertisement.............................. How to Build a Wealth ‘Storm Shelter’ for a Crash If you sense that the markets are at some kind of tipping point, you need to read this vital book right now. According to Vern Gowdie, what we’ve seen in recent weeks is just the beginning. But the government and the financial sector are not sounding the alarm. Their advice is that this is a ‘healthy correction’…and to continue investing into stock, property and bond markets. But markets are threatening to unleash the financial equivalent of a Category 5 cyclone. Vern’s book shows you how to build a ‘stay indoors’ investment portfolio. It’s a certain asset allocation that is custom-designed to weather the coming downturn, which Vern labels the ‘Long Bust’, while it plays out. To download your copy of his book, click here. | ..........................................................................
|