Those Who Buy Now, Will be Waving Bye to Their Capital

Dear Reader,

‘Should I buy this?’

‘Do you think it’s a good time to buy that?’

The ‘this and thats’ are various blue chip shares I’m being asked about by friends and relatives.

The fact they’re calling me is a good indicator to…not buy.

If only it was as simple as…‘market goes down suddenly, then buy, market goes up’.

How easy life would be if long-term wealth creation came in such a nice, neat package.

Unfortunately, it doesn’t work that way. Markets play with your head…on the way up and on the way down.

I know. Because they played with mine on the way up…how was this lunacy possible? Surely it can’t go higher? Are people really that ignorant of history? When will this recklessness end?

Valuations — based on artificially inflated earnings times historic PE multiples — went well beyond the realms of pricing sanity.

Yet, somehow, people managed to rationalise away this irrationality.

Ah, the madness of crowds.

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And now that we’ve begun the journey to lower lows, the market — aided and abetted by central bank ‘stimulus’ plans — will tease, tempt and toy with investors.

Brutal downside slides will be followed by ‘there there, everything is OK’ rallies and then whack.

Just when you thought the worst was over, here comes another ‘stomach in your mouth’ vertical descent…to God knows how low.

Regrets will creep in over not selling when the price was higher. Doubts over what to do next start to dominate waking (and in some cases, sleeping) hours. Retirement dreams start bordering on becoming nightmares.

Is that an overly pessimistic outlook? Perhaps.

But then again, the US sharemarket is almost halfway to losing the two thirds (or more) in value that I expected to happen.

With what’s unfolding, was my forecast a pessimistic or realistic assessment of what the market had in store for investors?

Are we seeing a repeat with markets past?

People repeatedly ignore history at their own peril. Today, I would like to share with you a little history.

Then we’ll see if present day markets are repeating (or at least, rhyming) with markets past.

This extract is from an article I wrote in September 2019. It’s part of the ‘Survival Guide’ I’m currently writing for readers of The Gowdie Letter

‘Should a recession (one that cannot be arrested by central banks) morph into depression, then the history books provide an insight into what might await investors who relied on the blue chip dividends to remain constant.

The following chart tracks the S&P 500 index (blue line) and the index EPS (earnings per share) (orange line) from 1929 to 1949.

The Rum Rebellion

Source: Macro Trends

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Earnings collapsed in sync with the index.

At its lowest point in late 1932, EPS were only one-quarter of the October 1929 level.

‘That’s a rather sobering 75% fall in earnings…caused by the ending of the long-term debt cycle.

It took nearly 20-years before earnings recovered to the 1929 level.

When a share market suffers a fall of 80%, you can be assured there will be economic consequences. People have less money to spend. Less money going through the cash registers means less corporate profits.

If businesses are earning less, guess what happens to dividends?

They are reduced or even, cancelled.

In Barrie A Wigmore’s rather lengthy book, The Crash and Its Aftermath: A History of Securities Markets in the United States, 1929–1933, there’s a treasure trove of data on what happened to shares during the Great Depression.

The following table of US blue chip companies shows the falls they suffered from 1929 to 1933 and the dividends that were paid in 1933.

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Three of the seven “blue chip” companies stopped paying dividends.  

The remaining four appeared to be paying a high level of dividends in 1933…but all is not what it seems.

In the case of Gillette, that 13.77% dividend was calculated on a share price that was 95% lower than it was four years earlier.

What do I mean by that?

To keep this exercise simple, we’ll work in whole numbers and assume the company was paying a 4% dividend in 1929.

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In dollar terms, the dividend shrank by more than 80%…from $4 per share in 1929 to $0.70 per share in 1933. 

This contraction in income is in addition to the share price falling 95% in value.

Talk about rubbing salt into an open wound.

In the case of Gillette, cashed up investors could, in 1933, buy 20 shares for the price of one 1929 share…AND receive a 13.77% dividend on those 20 shares.

This example makes a nonsense out of the widely held belief that money in the bank loses its buying power.

That cash in the bank bought significantly more in 1933 than it did in 1929.

The lesson from 1929 is that when the share market goes through a significant correction, and the economy struggles to respond to stimulus efforts, dividends will be cut…and cut hard.

If you think it’s difficult now to live off a 2% return on 100 percent of your capital, then what’s life going to be like if both your capital and dividend income is slashed by 50%, 60% or more?

Being in the right asset class at the right time has not been this important since 1929. Choose wisely. Your future depends upon it.

Knowing your market history can pay huge dividends in emotional and financial well-being.

Understanding and appreciating history is why, in good conscience, I could not recommend that friends and relatives buy CBA or NAB or other blue chips…at present.

As the effects of this health crisis work through the economy — not just today or next month, but in the years to come — there will be an impact on corporate profits.

If people re-evaluate their attitude to money and credit — whether voluntarily or involuntarily — then the end result is less money flowing through the cash registers.

Full stop.

As shown in the real-life examples of the 1930s, that takes time to show up in the half-yearly profit results and dividend announcements.

And by the time the numbers are made public…it’s too late.

Are the days of banks reporting multi billion-dollar profits over for the foreseeable future?

Could we see tens of billions of dollars provisioned for bad and doubtful debts AND margins squeezed by interest rate compression?


Are we seeing a repeat (or at least, rhyming) with markets past?

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The Dow Jones Index is comprised of 30 of the bluest of blue chip US companies. These are all household names…

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Source: Investopedia

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These extracts are from Forbes on 17 March 2020 (emphasis added):

ExxonMobil, the nation’s biggest oil and gas company, and its fortress balance sheet, were downgraded on Monday. With commodities prices plunging, Standard & Poor’s Global Ratings downgraded ExxonMobil to AA from AA+. The rating agency said ExxonMobil’s cash flow and leverage measures fell well below its expectations and kept a negative outlook on ExxonMobil, warning the oil behemoth had not taken adequate steps to improve cash flow.


Boeing, which has been mired in problems associated with the grounding of its 737 Max aircraft, moved last week to tap a $13.8 billion credit line. On Monday, S&P downgraded Boeing’s debt by two notches to BBB from A-, one step away from junk territory.

‘“Boeing’s cash flows for the next two years are going to be much weaker than we had expected, due to the 737 Max grounding, resulting in worse credit ratios than we had forecast,” S&P said.

ExxonMobil currently pays a dividend of 9.82% and Boeing pays 8.65%. Can these dividends be maintained if normal trading conditions do not return anytime soon?

And, this is from Almost Daily Grants on 25 March 2020:

Triple-B-plus-rated McDonald’s, which earlier today warned of a “material” impact on results from the COVID-19 pandemic, saw its outlook cut to “negative” from “stable” by S&P Global, with the rating agency warning that deteriorating operating performance “could result in an expectation for prolonged credit measure deterioration and a downgrade.’

Who would have thought that a ‘staple’ like McDonald’s could be affected? McDonald’s is currently paying a 3.1% dividend.

When you look through the list of companies on the Dow, it’s hard to see how most (if not, all) can avoid being adversely affected by…

The firm [Goldman Sachs] on Friday dramatically cut its US economic forecast and is expecting gross domestic product will decline by 24% in the second quarter of 2020 due to the coronavirus pandemic. A drop of that size would be a record, nearly two-and-a-half times the largest drop of 10% seen in 1958.

Business Insider, 21 March 2020

Also, what’s happening in the global economy:

BERLIN (Reuters) — Germany’s economy could contract by as much as 20% this year due to the impact of the coronavirus, an Ifo economist said on Wednesday, as German business morale tumbled to its lowest level since the global financial crisis in 2009.’

Reuters, 26 March 2020

These outlooks are just the beginning

And these sobering outlooks are likely to be just the start…not the finish.

How much further is there to go? The latest PE 10 chart provides us with a glimpse.

This long-term valuation measure is still some distance away from its 2008/09 low and a long way off the historic (single digit) lows of the early 1920s, 1930s and 1980s.

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Those who think the current conditions are a signal to ‘buy, buy’, are probably going to be waving ‘bye-bye’ to their capital in the months and years to come.


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