What Awaits in Our Post-COVID-19 Future…

Dear Reader,

Talk about perfect timing. No, not the markets, the release of the latest season of Ozark.

Netflix has been the refuge for many self-isolators.

For those not familiar with the Ozark series, it’s the usual plotting, scheming and betrayal that goes with money laundering and a Mexican drug cartel.

In the latest series, one of the main money-laundering characters gives refuge to her brother.

All appears to be normal…but in this series nothing is ever normal. Least of all family life. The brother is bipolar. What could possibly go wrong when he stops taking his medication?

Predictably he becomes…unpredictable, unstable, uncontrollable. Not the best person to have entrusted your darkest of secrets to. Who knows what he may say or do.

Without medication the extent of his mood swings are unknown. One minute, high next minute, low. Wild, rage-filled outbursts followed by tear-soaked apologies. Ozark viewers are taken on this character’s emotional rollercoaster. You know you’re watching a train wreck. But you watch it anyway.

His unpredictability is entirely predictable. His actions give rise to reactions. If Ozark was a romantic comedy, there would be a ‘feel-good’ ending.

But, it’s a drama…so naturally, it has a dramatic ending. When watching the love, hate, laughing, crying, rage and regret, it reminded me so much of the emotions that can move share markets.

While medicated on the Fed’s prescribed stimulus drugs, the market behaves in an engaging manner. Charismatic. Charming. Those enthralled by the market’s enchanting personality are laughing. Those who remain wary, can feel pangs of regret.

People can be so beguiled by the market’s charm, they entrust their life savings to its care…some even borrow to participate in the market’s elevated mood.

Then, the market’s temperament changes. Without warning, we’re given a glimpse of a dark and unpredictable side. The central bank meds lose potency. In an attempt to stabilise the unsettled ‘patient’, more medication is prescribed. Restoring a sense of calm and balance is not easy.

The good doctors at the Fed wonder is it enough? What about trying something different? Do we offer words of soothing comfort?

The lows are followed by highs…but is that end of it? Or, like all good dramas, are there more exciting twists in the plot?

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Here’s the market’s story line so far

For almost 11 years, the Fed’s meds kept the market’s mood swings within an acceptable range.

More highs and less lows.

Since its last depressive episode ended in early 2009, the Dow Jones appreciated around 330%…until February 2020.

Then came an abrupt mood change. The Dow Jones plunged 37% in value (from 29,550 points to 18,600 points) in a matter of weeks.

Rum Rebellion

Source: Macro Trends

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People were in shock. Where did this come from? Where’s our charming market gone to? This was so out of character. So unpredictable.

Then came the Fed with all manner of drugs…more money, more patches to credit markets, more promises.

The sedated market has — predictably — settled down.

Since touching 18,600 points, the Dow has recovered around 21%, rising to 22,600 points. Phew. That’s better. You had us worried there for a moment.

There’s the market of old…the one we’ve put our faith (and money) in. The drama is hopefully over.

Sorry to disappoint you. What we’re now seeing on our screens is looking very much like a remake of a 1929 drama series.

The screenplay from that movie is almost identical to what’s happening today. Even the background story sounds familiar.

As recorded in the ‘Federal Reserve History — The Stock Market Crash of 1929’:

The [1920’s] financial boom occurred during an era of optimism. Families prospered. Automobiles, telephones, and other new technologies proliferated. Ordinary men and women invested growing sums in stocks and bonds. A new industry of brokerage houses, investment trusts, and margin accounts enabled ordinary people to purchase corporate equities with borrowed funds.

Era of optimism. New technology. More people investing, some with borrowed funds.

Hmmm, there’s a definite ring to this story. See if you can spot these other similarities in the plot…

Since its last depressive episode ended in mid-1921, the Dow Jones appreciated around 440%…until August 1929.

Then came an abrupt change of mood.

The Dow Jones plunged 37% in value (from 380 points to 240 points) in a matter of weeks.

Rum Rebellion

Source: Macro Trends

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People were in shock.

Where’s our charming market gone to?

This was so out of character…so unpredictable.

Sounds like a clear case of plagiarism to me.

Anyway, where were we?

Oh yes…

Then came the Fed with all manner of drugs…more money, more patches to credit markets, more promises.

Boy, you’d think these copywriters could come up with something original.

From ‘The Federal Reserve History — The Stock Market Crash of 1929’:

To relieve the strain [from the market crash], the New York Fed sprang into action. It purchased government securities on the open market, expedited lending through its discount window, and lowered the discount rate. It assured commercial banks that it would supply the reserves they needed.

The (virtually identical) plot continues…

The sedated market has — predictably — settled down.

Since touching 240 points, the Dow has recovered around 20%…rising to 290 points.

Phew. That’s better. You had us worried there for a moment.

There’s the market of old…the one we’ve put our faith (and hard-earned) in.

The drama is hopefully over. 

There’s an uncanny resemblance between the two plots. The screenplay for the modern-day movie is still being written.

But here’s how the 1929 drama played out. To quote from ‘The Federal Reserve History — The Stock Market Crash of 1929’:

While the crash of 1929 curtailed economic activity, its impact faded within a few months, and by the fall of 1930 economic recovery appeared imminent.

Curtailed economic activity. Faded within a few months. Economic recovery appeared imminent.

This narrative sounds very familiar to the modern-day drama. That imminent economic recovery was the momentum behind the Dow’s (sucker) rally in late 1929/early 1930.

People thought everything was going to return to normal. No real harm done. Business as usual.

But beneath the surface…a great deal of harm was done. The credit bubble had burst.

The euphoric mindset had shifted to apprehension…then to depression.

As described in ‘The Great Depression’ by History.com:

As consumer confidence vanished in the wake of the stock market crash, the downturn in spending and investment led factories and other businesses to slow down production and begin firing their workers.

Is this what awaits in our post-COVID-19 future?

At present, JobKeeper (and similar programmes in other countries) keeps employees tethered to their employer…hoping, that when life returns to normal, people get back to work.

When the time comes for employers to pay the wages out of their own pockets, will there be sufficient cash flow?

Or, due to a lack of consumer confidence, will businesses slow down and begin firing those previously tethered workers?

This is highly probable. Why?

Not all of those destroyed jobs are coming back. Unemployment will remain stubbornly high. Secondly, to retain or get a job could mean accepting a reduction in wages.

Society’s collective loss of earning (and borrowing) power will play havoc with the debt-funded economic growth model.

And, contraction begets contraction…dominoes fall from one industry to another. The ending of the 1929 drama series has already been written.

Here it is, as told by ‘The Federal Reserve History — The Stock Market Crash of 1929’ (emphasis added):

The slide continued through the summer of 1932, when the Dow closed at 41.22, its lowest value of the twentieth century, 89 percent below its peak. The Dow did not return to its pre-crash heights until November 1954.

Will the remake have an equally dramatic conclusion?

History does tend to rhyme. Prior to the beginning of the 1929 drama, the Hussman Margin Adjusted PE (MAPE) (a model with a 90% accuracy in predicting future returns) was around the same level as its modern day sequel.

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Source: Hussman Strategic Advisors

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While markets, on a day-to-day basis can be unpredictable, in the longer run they are very predictable. You know euphoric highs are going to be followed by depressive lows. You just don’t know when and what’ll trigger the mood change.

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In 1929, the Hussman MAPE predicted the US share market would — over the next 12 years — return MINUS 1% per annum.

The market’s actual 12-year performance was far more dramatic…MINUS 2.5% per annum.

Prior to US market’s recent mood change, Hussman’s MAPE predicted a return of…MINUS 2.5% per annum for the next 12 years.

The 1929 prequel shows us the unpredictable actually does have a very high degree of predictability.


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