DO NOT Ignore the Lessons of Crises Past

Dear Reader,

Royal commissions. Parliamentary inquiries. Congressional hearings.

These are all convened — for public theatre — to identify why something went horribly wrong.

When distilled down, the culprits are invariably…greed and hubris.

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Later today, you’ll receive a new research report from me that I expect, in due course, will be presented to a future royal commission…one that looks into how and why the ‘Great Credit Crisis’ happened and what needs to be done to prevent it from ever happening again.

But, prior to that royal commission, it’s likely we’ll have one into the recent bushfire crisis.

Not all classrooms have four walls


Mother nature teaches us so many lessons…some we remember, others we forget.

People are searching for answers to explain the recent devastating bushfires.

Climate change. Arson. Population growth in rural areas. Lack of suitable fire-fighting equipment.

The apportioning of blame for the start, duration, extent and intensity of the fires will be a matter of individual perspective.

However, the indisputable truth — a lesson well-learned from past bushfires — is…fires cannot exist without fuel.

The following is an extract from the 2010 Parliamentary Inquiry into bushfires (emphasis added):

Since 1939, there have been at least 18 major bushfire inquiries in Australia, including state and federal parliamentary committee inquiries, COAG reports, coronial inquiries and Royal Commissions.

…the common themes to have emerged from the inquiries into Australian bushfires. They include:

  • the importance of prevention and mitigation activities before fires occur: including protective burning/fuel reduction (both in the landscape and around assets), improving community education and awareness, and improving track access for fire fighters…’

Can you believe that, prior to 2010 there had been 18 major bushfire inquiries? 18 times we’ve been told to reduce fuel loads.

The one in 2010 made it 19 and the royal commission that’s coming will take the tally to 20.

This is an extract from the CSIRO evidence provided to the 2010 Inquiry:

Of the three components that combine to determine fire behaviour (fuel, topography and weather), fuel is the only one that can be modified by people to moderate the behaviour of bushfiresReducing the fuel hazard will reduce the overall danger posed by bushfires and increase the potential that a fire may be stopped through natural or artificial means…’

Finally, I can now use that overused quote ‘the science is settled’. 19 inquiries, same finding. Are we really that dumb?

Mother nature provides the lessons. Human nature ignores the lessons.

And I ask (no, make that, implore) why?

Is it our complacency/stupidity/ignorance/arrogance that compels us to (repeatedly) learn the hard way?

We seemed condemned to repeat our mistakes over and over again.

Please learn from history

Sadly, that same mindset applies to financial markets.

Investors down through the decades are regularly provided with lessons from the markets.

Then with the passing of time…we forget.

And we forget for the same reasons…complacency/stupidity/ignorance/ arrogance.

In April 2008, Professors Rogoff and Reinhart wrote a detailed academic paper titled ‘This Time is Different: A Panoramic View of Eight Centuries of Financial Crises’.

The title was a tilt at the common refrain of ‘it’s different this time’, which, as the paper revealed…IT. NEVER. IS.

This extract from the Introduction outlines just how wide-ranging their research was (emphasis added):

This paper introduces a comprehensive new historical database for studying debt and banking crises, inflation, currency crashes and debasements. The data covers sixty-six countries in Africa, Asia, Europe, Latin America, North America, and Oceania. The range of variables encompasses external and domestic debt, trade, GNP, inflation, exchange rates, interest rates, and commodity prices. The coverage spans eight centuries, going back to the date of independence or well into the colonial period for some countries.

Analysing eight centuries of data on debt crises is certain to extract patterns of behaviour.

One of those was…

Looking forward, one cannot fail to note that whereas one and two decade lulls in defaults are not at all uncommon, each lull has invariably been followed by a new wave of default.’

The lull in defaults, is when the fuel load in debt markets builds up. People ignore the lessons of the past.

The longer the period between market ‘fires’, the greater the conviction in it ‘being different this time’.


Sorry for the repetition, but this is a lesson you need to learn BEFORE markets are set on fire.

Debt, we’ve learned, is the match that lights the fire of every crisis. Every crisis has its own set of villains — pick your favorite: bankers, regulators, central bankers, politicians, overzealous consumers, credit rating agencies — but all require one similar ingredient to create a true crisis: too much leverage.

Andrew Ross Sorkin, financial columnist for
The New York Times; co-anchor of CNBC’s Squawk Box
and co-creator of the Showtime series Billions.

The underlying similarities between devastating bushfires and capital destroying debt crises cannot be ignored…too much fuel.

And in the history of debt, there has been no greater fuel load than that which exists NOW…especially in Australia.

After a decade-long lull since the last wave of defaults, the global debt pile has risen from around US$140 trillion to over US$250 trillion.

The debt tinder is piled high all over the world…the US, Europe, China, Japan, UK, Canada and Australia.

Remind me, what was that lesson from 800 years of data on debt crises?

Oh, that’s right…

…each lull has invariably been followed by a new wave of default.

In Australia, the lull between recessions is approaching three decades.

Every day that passes brings us one day closer to our next recession…and with our nation’s historically high debt load, we have never been more vulnerable.

Unless of course you think ‘it’s different this time’.

The driest of dry global tinder can be found in Corporate Debt issuance.

On 19 December 2019, the Financial Stability Board (a G20 initiative) published a report titled ‘Vulnerabilities associated with leveraged loans and collateralised loan obligations (CLOs)’.

Here’s an extract:

The report concludes that:

Vulnerabilities in the leveraged loan and CLO markets have grown since the global financial crisis. Borrowers’ leverage has increased; changes in loan documentation have weakened creditor protection; and shifts in the composition of creditors of non-banks may have increased the complexity of these markets.’

Vulnerability increased since GFC. Leverage is up. Credit standards down.

What could possibly go wrong?

Plenty…and even politicians know it.

This is from a UK Telegraph article published on 20 January 2020:

“You can hear the ghosts of subprime mortgages clanking their chains,” an alarmed MP told Mark Carney [Governor of the Bank of England]’

The title of the article ‘Fears grow over resurgence of toxic borrowing’.

And as reminder of exactly how toxic that borrowing is…

Leveraged loans are junk-rated loans and issued by debt-soaked corporates at enticing rates, offering investors relief by tracking central bank interest rates higher. They’re packaged up in collateralised loan obligations (CLOs), given a top credit rating and sold on to yield-hungry investors starved in the ultra-low interest rate environment.’

The IMF published this chart on the increasing fuel load in the most toxic debt:

The Rum Rebellion

Source: IMF

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As the debt load increases, the quality decreases.

The sudden increase in ‘weakest links’ — corporate debt issuers rated ‘B–’ or lower by S&P Global Ratings with negative outlooks, or credit ratings on credit watch with negative implications — should be sounding alarm bells, but instead the US market continues to surge higher.

According to S&P Global Ratings Research (emphasis added):

‘The default rate of weakest links is nearly eight times greater than that of the broader speculative-grade segment, and the rise in the weakest links tally may signify higher default rates ahead.’

The Rum Rebellion

Source: S&P Global Ratings Research

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NOTE…the previous high in the ‘weakest link’ chart was in 2009…AFTER the GFC hit.

This time around, it’s happening BEFORE anything has hit the fan.

Ironically, the only reason the whole thing hasn’t ignited yet, is the weakest links have been able to issue even more debt offerings to keep the illusion of solvency alive.

The credit quality of those debt offering is deteriorating rapidly.

According to S&P, for every one credit upgrade there are five downgrades…a ratio that hasn’t existed since the midst of the GFC in 2009.

As I said earlier…this worsening in credit quality is happening BEFORE defaults start.

The Rum Rebellion

Source: S&P

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Claudio Borio, head of the Bank for International Settlements (BIS) monetary and economics department, sums up the situation perfectly with this recent observation:

A growing number of investors are paying for the privilege of parting with their money. Even at the height of the Great Financial Crisis, this would have been unthinkable. There is something vaguely troubling when the unthinkable becomes routine.

There are only three sentences in Claude Borio’s quote…but each one should put investors on notice.

Parting with money. Unthinkable. Troubling.

And in case people need any more warnings on the severity of the situation we are facing in markets, this is from last Thursday’s (23 January 2020) Rum Rebellion

This is the most recent version of Warren Buffett’s ‘best single measure of where valuations stand’

The Rum Rebellion

Source: Advisor Perspectives

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If we go back to the 2001 [Fortune magazine] 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.

The Buffett Indicator is definitely in the ‘you are playing with fire’ zone.

As you’ll see later today (check your inbox this afternoon), the reason for updating The End of Australia is to issue investors with a warning of the dangerous fuel levels that currently exists in markets.

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Record high share markets. Record high levels of (toxic) debt. High levels of complacency — central banks will save the day.

The fuel load has never been greater and Australia has never been more defenceless to ward off the effects of a global credit crisis.

All it’s going to take is one spark — a corporate or sovereign default — and an unfavourable change in social mood, and the effects will be devastating.

The time to take preventative action is BEFORE, not AFTER the event.

If you ignore the warning signs, then all the inquiries in the world will not bring your money back.

We all have a choice…learn the lessons from past crises or be prepared to learn them the hard way.


Vern Gowdie,
Editor, The Rum Rebellion

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