Group Stink in the RBA: Lower Rates Over-used and Abused

Before we get into today’s article on RBA group think, here’s a quick quiz for those interested in markets.

Which month did the Dow Jones Index fall in 1929?


Which month did the Dow Jones fall in 1987?


It has become part of market folklore that October is the bogey month for markets.

Greg Canavan’s Top Two ASX Gold Stocks for 2019

But what’s less well known is the month in which both the 1929 and 1987 markets peaked.

The Dow Jones in 1929…

The Rum Rebellion - 16-08-19

Source: Macro Trends

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The Dow Jones in 1987…

The Rum Rebellion - 16-08-19

Source: Macro Trends

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Between August and October, the smart money was moving towards the exit. Then, group think took over…and the herd stampeded.

The moral of the story is if you’re going to exit…exit early. Leave some on the table for the next guy to lose.

The pressures in the global system are building.

The recent jitters on Wall Street are an indication of the flashpoint we’re heading to a time when daily falls will be in excess of 1000 points.

The fat lady is warming up the vocal chords. When she goes into full chorus…it’s too late.

In 1929 and 1987 the time to act was in August…a couple of months before the mob woke up to the headlines proclaiming the good times were over.

Interest rates are now at their lowest level in 5000 years according to the Bank of England

ABC News

The global economy is in a difficult spot right now. It has been weakening for more than a year and now it seems like it might even fall into recession.

FX Leaders 13 August 2019

Clearly, the lowest interest rates in 5000 years are not producing the economic outcome central bankers so desperately seek.

It’s becoming very apparent that this ‘over-used and abused’ blunt policy instrument no longer works.

What’s the RBA Governor’s response to the prospect of an economic slowdown?

As reported in the Australian Financial Review (AFR) on 9 August 2019

Dr Lowe’s three-hour appearance at the House of Economics committee in Canberra has ended. A few key points he made [included]:

It is “possible” the RBA is forced to cut rates to near zero if other central banks do and the world economy has a serious downturn.

Phil Lowe(r) is simply going to play follow the leader…a classic example of group think.

Dr Lowe — as we pointed out yesterday — is a PhD graduate of MIT…an institution that has produced the likes of Ben Bernanke…who said in March 2007:

At this juncture, however, the impact on the broader economy and financial markets of the problems in the subprime market seems likely to be contained.

Bernanke couldn’t spot a crisis if it was painted in fluro colours and parked on his front lawn.

Another MIT graduate is ECB President Mario (whatever it takes) Draghi…a serial money printer and advocate of negative interest rates.

How’s that working out in Europe’s largest economy?

The Times on 8 August 2019…

The Rum Rebellion - 16-08-19

Source: The Times

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And these are the proven failures the RBA Governor is committed to following.

Can someone please send Phil Lowe this quote.

Insanity is doing the same thing over and over again and expecting different results

Albert Einstein

Phil, zero-bound rates are NOT going to be any more successful than rates at 1%. Please stop this insanity.

The RBA Neverland

The RBA Peter Panners have followed the same flawed ‘low rates, high debt’ growth strategy of their US, European, Japanese counterparts…but, with even more ‘success’.

Australian households are the second most indebted in the world AND we have a record-breaking recession free run.

Do any of those who live in RBA Neverland see the link between these two (dubious) global achievements?

As demonstrated in yesterday’s Rum Rebellion, the US data from the past four decades shows that more debt feeds into higher GDP numbers.

Our record debt has been the primary driver behind our record economic performance. That debt load is now our Achilles heel. Pure and simple.

And now that the RBA has encouraged people into a lifetime of debt servitude (where more of their income goes to paying off the debt), the Peter Panners moan and groan about slower growth.

What’s the answer? Lower rates.

That’s right Phil, go ahead and starve retirees (those with savings) of even more income…money they need for living expenses…retarding their capacity to spend money in economy.

These Peter Panners are really clever (my tongue is now being removed from cheek).

But wait…it gets even better.

RBA Governor Phil Lowe has come up with an ingenious plan to boost wage growth.

As reported in The Canberra Times on 9 August 2019 (emphasis is mine):

Reserve Bank governor Philip Lowe has substantially upped pressure on governments to increase pay packets for public servants, blaming caps on public sector wage growth for suppressing wages across the board.

Pure genius Phil…pay the non-productive public sector more for doing less.

Just a few questions…

Do you think the billion or so people in China and India’s aspiring middle class — the ones who will work (on contract) for far less than Aussie workers — are contributing to wage suppression in the Western world?

Or, could there be downward pressure on wages from the increased adoption of robotics and artificial intelligence?

Or, the fact that people owe so much (thanks to the encouragement of central banks) or are being denied an opportunity to earn a decent return on their capital (again thanks to central banks), they cannot afford to pay more in state government taxes/fees/levies/duties to fund the higher public sector wages?

Or, that the global debt pile of US$250 trillion has brought forward years of future consumption into the here and now…people (in sufficient numbers) do not have the appetite for the same level of credit-fuelled consumption…perhaps, people need time to digest what they’ve already gorged on.

But let’s put all this rationality to one side.

The best determination on whether Phil’s grand wage boosting plan has merit or not, is to put it to the ‘fruit’ test.

First, we ask the watermelons (those who are green on the outside, but red on the inside) for their verdict.

And, the decision is…

No sooner than he [Dr Lowe] had spoken at a parliamentary hearing in Canberra on Friday than Greens public sector spokesman Adam Bandt called for a pay rise for public servants of more than 3 per cent — and 4 per cent for non-executive public servants for four years.

If the watermelons endorse the plan…it’s a guaranteed lemon.

If the watermelons despise and ridicule the plan…she’s apples mate.

The fruit test is very simple, but highly effective.

Dr Lowe, the finding on your plan is unequivocal…it’s a dud.

Everyday Aussies — the ones who go to work in the real world or trying to live off the fruits of their labour — are battling against academics who are wedded to an ideological position that’s proven to be an abject failure…but the Peter Panners show no signs of turning.

Such is their belief in this nonsense — nirvana will be delivered with even lower rates and even more money printing — that they are determined to take us on that paved road to hell.

If ever we needed a General Patton-type character to go into battle for us, we need one now.

But no one is forthcoming.

Sadly, the deck is stacked against us.

All the positions of power — at central banks and the IMF — are occupied by group thinkers who’ve never left the warm embrace of Neverland.

To paraphrase General Patton…‘these bastards are making us die — financially — for our country.’

The Peter Panners — on their guaranteed indexed incomes and generous pension schemes — don’t have to live in the world they’ve created.

They flit from one economic forum to another. Delivering useless speeches that only serve to highlight how clueless they really are about life outside academia.

If you think I’m seriously pi**ed off…you bet I am.

The misguided policies of these group thinkers — all in pursuit of growth, growth and more growth — is going to come with a very significant emotional and financial cost to many millions of people.

I wonder if the MIT PhD course happened to include a subject on ‘having a social conscience’?

Judging by the group thinkers’ actions, I guess not.

When this mess hits the fan, we’ll see these Peter Panners for what they really are…a bunch of group stinkers.


Vern Gowdie Signature

Vern Gowdie,
Editor, The Rum Rebellion

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Vern has been involved in financial planning since 1986.

In 1999, Personal Investor magazine ranked Vern as one of Australia’s Top 50 financial planners.

His previous firm, Gowdie Financial Planning, was recognised in 2004, 2005, 2006 & 2007, by Independent Financial Adviser magazine as one of the top five financial planning firms in Australia.

In 2005, Vern commenced his writing career with the ‘Big Picture’ column for regional newspapers and was a commentator on financial matters for Prime Radio talkback.

In 2008, he sold his financial planning firm due to concerns about an impending economic downturn and the impact this would have on the investment industry.

In 2013, he joined Fat Tail Investment Research as editor of Gowdie Family Wealth. In 2015, his book The End of Australia sold over 20,000 copies and launched his second premium newsletter, The Gowdie Letter.

Vern has since published two other books, A Parents Gift of Knowledge, all about the passing of investing intelligence from father to daughter, and How Much Bull can Investors Bear, an expose on the investment industry’s smoke and mirrors.

His contrarian views often place him at odds with the financial planning profession today, but Vern’s sole motivation is to help investors like you to protect their own and their family’s wealth.

Vern is Founder and Chairman of The Gowdie Advisory and The Gowdie Letter advisory service.

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