Wednesday, 21 July 2021 — Gold Coast, Australia

By Vern Gowdie Editor, The Rum Rebellion

[4 min read]

• A biblical theme for a biblical crash
• Jeremiah 5:21
• Talmud Investment Strategy

Dear Reader,

In an attempt to make sense of the world’s woes, today’s Rum Rebellion takes on a biblical theme.

Which is somewhat appropriate given the size of the everything bubble and its inevitable bursting will be of biblical proportions. 

Don’t worry, this is not a sermon. More of an exercise in drawing on the wisdom of the ages to help regain our bearings.

Religious teachings are replete with examples of excesses being corrected by God or if you prefer, nature.

The burning of Sodom and Gomorrah. Noah’s Ark — 40 days and 40 nights of flooding to cleanse the Earth of violence.

Balance is the natural order in life. Soft and hard. Hot and cold. Dark and light. We need contrasts to provide balance. We need opposing pressures to provide strength.

Natural order can be disrupted, but eventually, the pendulum does swing back.

At present, this earthly world we inhabit is very much out of balance.

Oh…where do we start?

Will the meek inherit the Earth? Not if the Fed has anything to do with it.

As reported by MarketWatch (emphasis added):

‘Over the tenures of four Fed chairs — Alan Greenspan, Ben Bernanke, Janet Yellen and Powell — rates have fallen precipitately and the central bank has engaged in several rounds of massive securities purchases, or quantitative easing (QE), which clearly have helped wealth explode for the top 1% and even the top 10% of Americans, while stagnating for half of the country.’

Will your prudence and sacrifice be rewarded?

Are you kidding?

Bank of America Global Research went back 3,000 years before Mary and Joseph went into the stables with the three wise men and found…

‘Global interest rates remain around the lowest levels they have been in 5,000 years.’

ABC News

Using Warren Buffett’s ‘best single measure of where valuations stand at any given moment’, we can see the US share market is ascending into the heavens.

Buffett said, ‘If the ratio approaches 200% — as it did in 1999 and a part of 2000 — you are playing with fire.’

Are markets getting ready for a descent into Hades’ inferno?

We can add Aussie home prices, cryptos, meme stocks, and others to this list of out-of-whack wackiness, but I’m sure you get the picture.

The danger with this longer-than-usual period of imbalance is it starts making it seem like we’re in a ‘new normal’.

Wrong. This is not normal.

As renowned economist Hyman Minsky famously said, ‘stability breeds instability’. When nothing goes pear-shaped, risk taking keeps pushing boundaries…until it collapses.

Without resistance, the system grows weak and vulnerable.

Human nature gravitates towards the line of least resistance…which only serves to increase the weaknesses.

Preferring cheap loans over savings, gambling over investing, printed money over productivity.

People either forget the ‘old normal’ or dismiss it as a relic of the past. The accepted view becomes one of ‘the world’s changed, so get with the programme’.

Perhaps.

However, history is littered with tales that started with ‘this time is different’ and ended with ‘told you so’.

Jeremiah 5:21

John Heywood’s proverb ‘There are none so blind as those who will not see,’ dates back to 1564.

It’s believed Heywood’s inspiration came from the Bible (Jeremiah 5:21):

‘Hear now this, O foolish people, and without understanding; which have eyes, and see not; which have ears, and hear not.’

The accepted view is one of central bankers having a divine power over markets and the economy.

Central bankers holding sway over markets has been around since Greenspan was anointed the Fed’s high priest in 1987. 30-odd years of central banker-induced imbalances have created an almost unquestioned belief in the wisdom and power of these false prophets.

If you believe the Wall Street parables, central bankers can raise markets from the dead (albeit with some help from a few squillion newly-minted dollars and zero interest rates).

Wall Street and the investment industry are obviously blind to the mounting pressures that are building to correct the massive imbalances in the system — a direct result of policies that have overtly encouraged and enabled an overdependence on excessive credit (ab)use.

In due course, the gamblers who inhabit Wall Street’s casino will watch with eyes and mouths wide open the sea of red (or should that be Red Sea?) on their Bloomberg screens.

The excesses from this period of extraordinary intervention are all around us…but we (as a society) are blinded by the bling and easy dollars on offer.

Whether it be your God, the universe, or the law of reversion to the mean, there will be a force that corrects these imbalances. Wrongs will be righted.

Talmud investment strategy

To appreciate the natural balance in the investing world, we refer back a couple of thousand years to the Talmud investment strategy.

What is the Talmud?

‘The Talmud contains the teachings and opinions of thousands of rabbis on a variety of subjects, including Halakha (law), Jewish ethics, philosophy, customs, history, lore and many other topics.’

Wikipedia

The teachings contain this timeless advice…

‘Let every man divide his money into three parts, and invest a third in land, a third in business and a third let him keep by him in reserve.’

The Talmud (1,200BC–500AD)

The rabbis’ opinion on prudent money management has stood the test of time.

In Roger Gibson’s excellent book, Asset Allocation: Balancing Financial Risk, he noted ‘that whoever wrote the Talmud knew something about risk. He also knew something about return.’

The wisdom of one-third shares, one-third property, and one-third cash is considered a relic of the past.

These days your garden variety ‘balanced’ fund is more likely to be two-third shares and the remaining one-third allocated between a mix of infrastructure, property, fixed interest, and cash.

The Talmud investment philosophy is a timely reminder of how it’s possible (over a period of time) to drift away from the wisdom of the ages.

The looming problem for a lot of Australians is their superannuation money is invested in the default ‘balanced’ option.

These decidedly unbalanced funds — with an overexposure to shares — are likely to suffer serious losses when the market begins its descent into the fires of the market hell.

The serious imbalances in the global financial system are staring us in the face. Some choose to see the signs, but most remain blind to them. 

All indications point to a crash of biblical proportions in our future.

Only foolish people and those without understanding of how markets function would close their eyes and ears to the messages being sent.

Ironically, the best defence against the second coming of the Great Depression is to create an equal and opposite imbalance in your portfolio.

An overweight position in cash is likely to be your saviour.

Regards,

Vern Gowdie,
Editor, The Rum Rebellion

Vern is also the Editor of The Gowdie Letter and The Gowdie Advisory — investment services designed to help everyday Australians avoid the financial pitfalls of a volatile economy and make informed decisions to grow their wealth for generations to come.