‘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:
|
|
| Source: Macrotrends |
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
