Close to a new and devastating market crash that could erase up to 65% of the stock gains enjoyed by Australians over the last 11 years.
This is according to my Rum Rebellion colleague, Vern Gowdie.
Now, you’ll be no stranger to the idea that Vern is bearish. In fact, his essay today will leave you in no doubt. But as the last decade gives way to the new one, Vern’s more insistent than ever. This is it, he says. The end of this year, according to the big man, could look quite different to its beginning.
But…you look at the market…and the market’s up.
We’ve had a storming start to the year. What’s the problem?
‘Phantom growth’, says Vern.
This is just one of the reasons why he says Australian savers, investors and retirees need to get ready to grab their cash out of the stock market and put it in the bank. Yep, even with record low interest rates.
In Vern’s words: ‘The way I see it, 100% of my capital earning something — however small — is better than losing up to 65% of it in a crash.’
Over the next week, in a special Rum Rebellion video series, Vern will set out his case for you in detail.
He’ll show you why what you’ve come to believe as ‘normal’ economic behaviour is, in his words, ‘bogus’ and ‘unsustainable’.
He’ll explain why he believes a crash has to happen soon…what could trigger it…and why we could be looking at a potential 65% fall by the time the market bottoms out.
He’ll go over his reasoning for changing tack with your investment plan, especially if you hope to retire at any time in the next 10 years.
And he’ll put his case to you for urgent action.
Early next week, I plan to get Vern in the hotseat and interview him myself over Skype.
We share similar views about stretched markets and overpriced stocks…
But a 65% crash?
Well, you can hear it from the horse’s mouth with the first of Vern’s short videos today, titled ‘Calling out the Lie of Phantom Growth’.
In this first clip, Vern reveals how growth statistics are based on a complete misnomer. Borrowing to create more debt might demonstrate that Australia is growing on paper. But in reality, it’s a hoax. It’s ‘phantom growth’.
And, says Vern, it’s hoodwinking Australian investors into thinking that the good times are here to stay.
Vern will show you why the opposite is true…
Click the thumbnail now to watch…
Now, for more from Vern, read on below…
Blow Offs and Blow Ups
When it comes to blow offs and blow ups, there’s been nothing in recent history more spectacular than the crypto craze of late 2017.
Wow, what a show that was!
In the space of three months (from September to December), BitCOIN, sorry, bitcoin went parabolic.
In the midst of the blow off, some idiots/punters/analysts predicted bitcoin to go even higher…to US$1 million.
Source: Trading View
That’s what happens when ICE (Irrationally Charged Exuberance) runs through the veins of ‘investors’ (and, I use that term very loosely) because my definition of investing is ‘putting out money today to receive more money tomorrow’.
ICE makes people go hard in their belief and soft in their head.
People have been injecting/snorting/smoking this hallucinogenic drug since Tulip Mania in the 1630s…
Source: Elliot Wave International
Blow offs all follow the same pattern…a late surge based on a belief in the upward trend continuing.
On 4 December 2019, CNBC reported (emphasis added):
‘Between mid-August and late November, the Dow Jones Industrial Average was up 10.5% in a 74-day sprint that seemed to be immune from negative headlines.
‘According to Ned Davis Research, the Dow has posted a median gain of 13.4% during blow-off tops dating to 1901. The median rally length was 61 days.
‘“Given the high valuations I see, plus these divergences between many different indices, I am aware that many bull markets have ended with a rally similar to what we have seen since August,” firm founder Ned Davis said in a note.’
The report included the following chart:
The Dow obviously didn’t get CNBC’s memo. The US market continues its advance…extending beyond the median levels.
The current blow-off phase has now chalked up a 15% gain over a period of 128 days.
This period of irrational exuberance — in percentage gained terms — is now ranked in the US market’s top five.
Three of the other four historic blow offs were recorded just prior to the crashes in…1929, 1987 and 2000.
Given the importance of these capital destroying dates in market history, it’s apparent that a side effect of ICE is amnesia.
People simply forget the lessons of markets past.
Or, somehow manage to convince themselves that it’s different this time…it really is…you’ll see.
The firmness of their conviction is in direct proportion to the softening of their cranial content.
Please let me be absolutely crystal clear…IT. IS. NEVER. DIFFERENT.
Whatever the prevailing ‘it’ is, it may last longer and/or go higher than other ‘its’…but ‘it’ will not end any differently.
Never has. Never will.
With the US share market going deeper into over-overvalued territory, here’s a timely reminder from a previous period of irrational exuberance.
After the dotcom bubble had well and truly deflated, Fortune magazine interviewed Warren Buffett in December 2001.
Here’s some extracts from the interview (emphasis added):
‘…the last century proves that market irrationality of an extreme kind periodically erupts—and compellingly suggests that investors wanting to do well had better learn how to deal with the next outbreak. What’s needed is an antidote, and in my opinion that’s quantification. If you quantify, you won’t necessarily rise to brilliance, but neither will you sink into craziness.’
The antidote to irrationality is being able to keep your head while others lose theirs.
How do you stay grounded?
Simple. You quantify when markets have moved (well) beyond fair value.
How do you do that?
According to Buffett…
‘On a macro basis, quantification doesn’t have to be complicated at all. Below is a chart, starting almost 80 years ago and really quite fundamental in what it says. The chart shows the market value of all publicly traded securities as a percentage of the country’s business—that is, as a percentage of GNP.
‘The ratio has certain limitations in telling you what you need to know. Still, it is probably the best single measure of where valuations stand at any given moment.’
This is the most recent version of Warren Buffett’s ‘best single measure of where valuations stand’…
Source: Advisor Perspectives
If we go back to the 2001 interview, this was the sage advice the Oracle from Omaha offered:
‘For me, the message of that chart is this: If the percentage relationship falls to the 70% or 80% area, buying stocks is likely to work very well for you. If the ratio approaches 200%—as it did in 1999 and a part of 2000—you are playing with fire.’
‘And as you can see, nearly two years ago the ratio rose to an unprecedented level. That should have been a very strong warning signal.’
It was a warning signal that few heeded. Why?
‘It was different this time’. The dotcom era was a new paradigm. Those old fuddy-duddy valuation methods no longer applied.
The same reasons are being put forward to try and justify today’s irrationally high valuations.
And, to further harden investor conviction, they throw in for good measure…‘the Fed won’t let markets fall’.
You have to be several sandwiches short of a picnic if you believe that claptrap.
The tussle between man and market has been going on for centuries. The market ALWAYS wins by a knockout.
The Bank of Japan — with low rates and continuous QE — couldn’t get the Nikkei off the mat in the 1990s and 2000s.
The Peoples Bank of China — with the might of government behind it — hasn’t managed to revive the Shanghai Composite Index since its 2015 smack down.
It makes no sense to me that investors place their absolute faith (and life savings) in the hands of the very institution that’s proven (time and time again) it’s learnt nothing from history.
Why Buffett is building a cash pile…
Buffett explains why exponential growth — in his preferred valuation indicator — is simply not possible (emphasis added):
‘For investors to gain wealth at a rate that exceeds the growth of U.S. business, the percentage relationship line on the chart must keep going up and up. If GNP is going to grow 5% a year and you want market values to go up 10%, then you need to have the line go straight off the top of the chart. That won’t happen.’
It’s simply not possible for the US share market to continue growing at a rate that exceeds US economic growth.
It just…won’t happen.
However, during the market’s irrationally exuberant phase, people forget/lose sight of/ignore that simple piece of logic…and momentum driven by ICE takes the market (momentarily) higher.
With the ‘best single measure of valuations’ now well and truly in the ‘playing with fire’ zone, what’s Buffett doing with his money?
As reported by CNBC on 4 November 2019 (emphasis added):
‘Warren Buffett’s Berkshire Hathaway reported earnings on Saturday and Wall Street is caught up on one key thing: its cash pile.
‘In the third quarter , the holding company’s cash balance grew to a record $128.2 billion — up from $122.4 billion in the prior quarter and $23 billion a decade ago — leading analysts to wonder why the company isn’t spending.’
That last sentence is a classic…leading analysts to wonder why the company isn’t spending.
They obviously know nothing about history and quantification.
There is only one reason why Buffett is building a cash pile…he cannot find value in an over-overvalued market.
When will he deploy the cash?
‘If the percentage relationship falls to the 70% or 80% area, buying stocks is likely to work very well for you…’
To get back into the ‘buying’ zone, the Buffett indicator has to fall around 50% from its current level.
That requires a ‘blow-up’ phase…and it’s coming.
When it does, investors who bought in haste will be subjected to another form of ICE…introspection, contemplation, exasperation.