Economic Trends Change: If Something Can’t Go on Forever, It Won’t

Expectations have been created.

The problem is those expectations cannot be met.

We’re rapidly approaching the point when 20th century legacies collide with 21st century realities.

WARNING: Here’s two reasons why the AUD could collapse in 2020

It’s got all the makings of a ‘Big Bang’ type moment.

This morning we were greeted with the news of more riots in France.

The reason this time?

President Macron wants to reform the pension system.

The French are not happy at the prospect of working longer.

As reported by BBC News…

Train driver Cyril Romero from Toulouse told France Info he would reconsider his job if the reforms went through.

I started in 2001 with a contract that allowed me to leave at 50. But like everyone else, I got the reforms which pushed back my early retirement age to 52-and-a-half and then, in reality, 57-and-a-half for full pension. Now they want to make us work even longer.’

This is the problem with socialist systems, they build unrealistic expectations with other people’s money.

The 19 November 2019 edition of the Australian Financial Review provided us with a glimpse of what the future holds for retirees the world over (emphasis is mine):

Jan-Pieter Jansen, a 77-year-old retiree from the Netherlands, had high hopes for a worry-free retirement after having saved diligently into a pension during his working life.

But Mr Jansen…has been forced to reappraise his plans after receiving notice from his retirement scheme, one of the Netherland’s biggest industry-sector funds, of plans to cut his pension by up to 10 per cent.

This is causing me a lot of stress,” says Mr Jansen, who retired 17 years ago … “The cuts to my pension will mean thousands of euros less that I can spend on the family, and the holidays we like. I’m very angry that this is happening after I saved for so long.”

Mr Jansen is not alone in experiencing pension pain. Tens of millions more pensioners and savers around the world are facing the same retirement insecurity as Mr Jansen, as plunging interest rates since the financial crisis wreak havoc on the funding of schemes.

Mr Jansen retired at age 60 and expected the world to remain unchanged.

However, his pension fund most likely never expected to have to pay him for maybe 30 years or more AND try to do so while earning nothing on the fund’s money.

The world changes and so must our expectations.

Note the choice of words in the article…

High hopes. Forced to reappraise. Lot of stress. Retirement insecurity.

This emotive language has been used for a pension cut of…only 10%.

When I say ‘only’, it’s because the Dutch pension schemes are ranked among the best in the world.

What’s going to happen to schemes of lesser quality?

And these pension cutbacks are happening BEFORE the funds have been shaken to the core by the next market crash.

How many high hopes are going to be replaced by stress and insecurity?

Millions of people will have their retirement expectations dashed.

Pension schemes are a construct of the 20th century. A period of time that was (and is likely to be) without peer.

Prosperity was borne from population growth, productivity gains, workforce participation (females entering the workforce in greater numbers) and debt…mountains of debt.

This unique combination of economic positives expanded our horizons. We have come to expect more. And when what’s been expected is not delivered, people are naturally upset.

But it wasn’t always this way.

Civilisation of a thousand years ago was vastly different to what we’re accustomed to today.

Transportation. Food production. Dietary options. Trade. Armed conflicts. Fabrics. Manufacturing of clothes. Literacy. Numeracy. Currency. Health treatments. Telecommunications. Financial systems.

These components of our society (and more) have all evolved over the centuries. They creep up on us and eventually become part of our lives. We wonder how we ever survived without them.

It’s only when we experience bouts of nostalgia, watch a black and white movie or flick through an old photo album, that we’re reminded of how much change we’ve witnessed over the decades.

Our thinking and expectations are conditioned by our environment and experiences.

Workers in medieval times never expected to receive state sponsored welfare or a company pension plan.

Never expected to live to 60. Never expected every child to see their 10th birthday. Never expected life to change very much from generation to generation. Never saw themselves as being upwardly mobile.

What was once beyond comprehension is now regarded as the norm.

The transition in our thinking and expectations — in the context of history — is a relatively recent occurrence.

Thousands of years of human development provided the momentum to deliver a century of progress and prosperity that changed the world…the 20th century.

But has the incredible success of the 20th century given rise to false expectations? Have we been set up for failure?

These questions haunt me. Maybe I’m jumping at shadows.

Economic trends are constantly subject to change

But what if all we believe to be true, is only that way because a unique set of circumstances made it so. What if those circumstances change? Will that alter the way we think and act?

Share markets, for example, have really only been in fully fledged operational mode during the 20th century. All the data we use to evaluate markets has been garnered from a century of extraordinary advancement. Demographics and debt have been key drivers behind the accepted wisdom of ‘the share market always goes up’.

But what if these past drivers are not — to the same extent — in our future? If that’s the case, then can we rely on past valuation data to be a reliable guide?

We are told that ‘past performance is no guarantee of future performance’, yet we (as in politicians, business people and households) conduct our lives on the basis that what has happened will continue to happen. Extrapolating our recent experiences into the future.

Government budgets are a perfect example of this…forecasting current trends well into the future. The Treasury projections are mostly fantasy delivered as absolute fact.

At a deeper level we know that nothing last forever, yet, we (as in society) act as if nothing will change. That’s dangerous thinking…as Jan-Pieter Jansen has discovered.

Our economic prosperity is based on continually borrowing from tomorrow for consumption today. The model has been a simple one…lower interest rates = higher debt levels.

Is this a sustainable model?

History, mathematics and logic all say, ‘no’.

If it’s unlikely that we can ‘grow our debt tree to the sky and beyond’, then that brings into question everything we think we know about economic progress and the functioning of investment markets.

Will property values continue to rise?

Is there a point where growth becomes a zero sum game…for one company to grow another must fail?

Do we scale back welfare spending?

Is retirement a fanciful notion that can no longer be entertained?

Do we abandon our obsession with growth and shift our focus to ‘wellbeing and happiness’ indices?

Could we return to a medieval style of thinking — where future generations don’t expect as much, if anything, from the future?

That question is being partially answered in the affirmative by today’s younger generations.

Many have given up on ever owning a home.

Who would have thought that possible a couple of decades ago?

If we’re in the final phase of a grand experiment in excess and false expectations, the implications for the global economy and financial markets are going to be significant…and that’s an understatement.

Dismissing the very real potential for a reversal in the ‘growth’ trend, in my opinion, is a folly.

If history has taught us anything, it’s that economic trends are constantly subject to change.

Excesses in one direction are invariably corrected. Some sooner and others later.

But in due course, balance is restored.

Which is why US economist and Presidential adviser, Herb Stein, famously said ‘if something can’t go on forever, then it won’t’.

That’s the reality I think we’re facing in the not too distant future. The 21st century cannot afford what was promised in the 20th century. Something has to give.

What’s happening in Holland is a taste of what’s to come.

If I’m wrong, then everything continues as is.

However, if I’m even somewhat right, then you best start preparing now rather than be forced to reappraise like the Dutch and the French.


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.

The Rum Rebellion