HIS STORY has Been Told, but We Don’t Listen

Dear Reader,

History, it has been said, is short for…his story.

And the truth in ‘his story’ often depends on the author.

On Tuesday (US time) President Donald Trump delivered his story with the State of the Union address.

The Donald’s story began with…

Three years ago, we launched the great American comeback. Tonight, I stand before you to share the incredible results. Jobs are booming, incomes are soaring, poverty is plummeting, crime is falling, confidence is surging, and our country is thriving and highly respected again. America’s enemies are on the run, America’s fortunes are on the rise, and America’s future is blazing bright.

The years of economic decay are over. The days of our country being used, taken advantage of, and even scorned by other nations are long behind us. Gone, too, are the broken promises, jobless recoveries, tired platitudes and constant excuses for the depletion of American wealth, power and prestige.’

New York Times

Depending on which side of the political divide you’re on, Trump’s Story was either an accurate portrayal of events OR a manifesto of mistruths.

Yes…US unemployment is at its lowest level since 1953.

Yes…US wages are (finally) on the increase.

Yes…the US economy (as measured by GDP) is almost 50% greater than it was a decade ago.

Yes…the US share market has surged over 60% since Trump was elected.

Are jobless recoveries gone? Maybe.

But what if the next US recession coincides with employers increasing their investment in (lower cost) AI and robotics?

The wait in the unemployment queue could be much, much longer than anyone thought possible.

Are the years of economic decay in the US really over or is the data simply masking the rot in the system?

The official data absolutely and categorically supports the claim of ‘a strong US economy’.

In 2010, US GDP was US$14.7 trillion. Today it’s US$21.7 trillion.

That’s seven trillion reasons to validate the claim.

The Rum Rebellion

Source: Federal Reserve Economic Data (FRED)

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But where did that extra US$7 trillion of economic activity come from? Productivity gains?

According to ABC News November 2019 (emphasis added):

… [US] productivity has increased just 1.4% in the past year, about two-thirds of its long-run average. Weak productivity growth has been a hallmark of the current economic expansion, now in its 11th year. It is a key reason the overall economy has expanded more slowly than in previous expansions.’


So what’s been the main driver?

Over the past decade, total US debt has increased by US$20 trillion…nearly US$3 of debt for US$1 of economic output.

The Rum Rebellion

Source: Federal Reserve Economic Data (FRED)

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Tuesday’s State of the Union address was the President’s story…thus far.

On face value, his story appears to be a good one.

But his story is one that has been told before.

On 17 September, 1928, the Republican Presidential nominee, Herbert Hoover, told this story in his (ultimately successful) campaign address…

When we [the Republican Party] assumed direction of the Government in 1921 there were five to six million unemployed men upon our streets. Wages and salaries were falling and hours of labor increasing. . . The Republican Administration at once undertook to find relief to this situation. At once a nationwide employment conference was called. . . Within a year we restored these five million workers to employment. But we did more; we produced a fundamental program which made this restored employment secure on foundation of prosperity; as a result wages and standards of living have during the past six and a half years risen to steadily higher levels.

This recovery and this stability are no accident. It has not been achieved by luck. Were it not for sound governmental policies and wise leadership, employment condition in American today would be similar to those existing in many other parts of the world.’

Again, his story was based on a degree of truth.

The unemployment numbers skyrocketed in 1921 due to the Forgotten Depression of 1920–1921.

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Within the space of 12 months, Civilian Unemployment went from a low of 4% (in 1920) to a high of almost 12% (in 1921).

That should be a lesson to anyone who touts low unemployment as a reason for continued prosperity. There is a well-established pattern of low to high to low unemployment throughout the 20th and 21st century.

The Rum Rebellion

Source: TES

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History did not support his story

Herbert Hoover — a full 13 months before the 1929 crash — may have genuinely believed this…

…we produced a fundamental program which made this restored employment secure on foundation of prosperity; as a result wages and standards of living have during the past six and a half years risen to steadily higher levels.

But history did not support his story.

As told by Edward Chancellor in his book Devil Take the Hindmost: A History of Financial Speculation

During the 1920s, America was experiencing a growing economy. The economy overall was growing tremendously. The vast majority of the growth was experienced by the wealthiest tenth of America. People who had wealth acquired much more wealth in the 1920s. Most Americans did not get richer during the 1920s.’

It would appear the same story is being told today…the percentages for the concentration of income are almost identical to those of the 1920s.

The Rum Rebellion

Source: CBPP

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The economy was growing tremendously, but how (emphasis added)?

What they [most Americans] did get was access to cheap credit. People bought cars, radios, and many other new technologies and consumables. They acquired debt to pay for luxuries. Because everyone was spending money, there were plenty of jobs. So the economy grew, and people acquired more luxuries and more debt.

It was a simple case of people buying things with money they didn’t have to impress people they didn’t know.

Going deeper into debt for consumption is an absolute GUARANTEED way to boost GDP numbers…but as history shows us, this IS NOT a ‘foundation of prosperity’.

All this borrowing and buying does produce plenty of jobs.

Over the course of the 1920s, the unemployment rate fell to a low of 3% in 1929.

Here’s a quick recap of the story so far…

The severe economic downturn of 1920/21 saw unemployment rise from 4% to around 12%.

Over the next eight years, credit-fuelled growth…

–  Pushed the unemployment rate down to 3%

–  Drove the share market up fivefold (from 76 points to 380 points)

–  Created a wealth divide between the haves and have nots

I know you know where this is going, but we’ll go there anyway.

His story or history?

In mid-2007 — a few months before the US share market peaked and the US economy went into the most severe downturn since the Great Depression — US employment was a low of…4.4%.

Then came the recession (grey shaded area) and lo and behold, unemployment shot up to 10%.

Is that history rhyming?

The Rum Rebellion

Source: Federal Reserve Economic Data (FRED)

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Then came a decade of credit fuelled growth, that’s…

–  Pushed the unemployment rate down to 3.5%

–  Driven the share market up four-fold (from 7000 points to over 28000 points)

–  Created a wealth divide between the haves and have nots

Eerily similar isn’t it?

None of us know what the future holds.

Perhaps, this period of prosperity has been built on more solid foundations…ones that can support the heaviest of debt loads and greatest amount of (unfunded) promised pension payments in history.

Then again, they might just not be.

If that should be the case, then history gives us a glimpse into what the future may hold…

A peak to trough fall on the Dow of nearly 90%…

The Rum Rebellion

Source: Macro Trends

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Will the Dow fall this far? Unlikely.

But it could fall much further than most expect.

What about unemployment?

From the 1929 low of 4%, unemployment shot up over 20%.

The reason it dropped so dramatically in the late 1930s?

The Second World War.

The Rum Rebellion

Source: Wikipedia

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The moral of this story is that record high markets or record low unemployment numbers are NEVER permanent…especially if they’ve been achieved on record levels of debt.

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If history should even somewhat rhyme, then this statement from President Hoover in October 1931, gives us an insight into how a future US President is likely to write his (or her) story…

The depression has been deepened by events from abroad which are beyond the control either of our citizens or our government.’

As they say in the classics…success has many fathers, but failure is an orphan.

When it comes to busts, it’s the same old story…every man or woman for themselves.

We are in a moment in time that has the look and feel of Depressions’s past…so, who do you bet your hard earned capital on?

His story or history?


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