We Are on the Cusp of a Deflationary Depression

Dear Reader,

‘I knew it. I should have sold when I had the chance. I could kick myself for being so stupid.’

Regrets, you may have had a few, but please don’t mention this one…ever again.

The memory will be too painful.

Asking the ‘whys’ and ‘what ifs’ and ‘if onlys’ is destructive.

It’s a torment you need to learn to live without.

Put it behind you. Accept that life has changed.

Expectations dimmed. Adjustments to be made. Difficult conversations with loved ones to be had.

In those quiet times, when you’re alone with your thoughts, you’ll be drawn to reflecting on what might have been.

The market did show you the door.

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Offering you an exit with a dignified and manageable loss.

But you stayed. Wanting more. Hoping things would return to normal.

Until recently your portfolio/member statement was a source of comfort.

Now you avoid looking at it.

The reality of your altered financial situation is too painful. Too raw.

You don’t want to, but out of some perverse need for further mental torture, you tune in to the overnight action on Wall Street.

The good days are few and far between.

Losses continue to take the Dow down…deeper down.

Every day the market notches a lower low, you do the mental arithmetic…tallying up the losses.

Privately, your lament continues.

‘Why didn’t I bail when it staged that (oh so predictable) bear market bounce in early April?’

Everyone told me it was a sucker’s rally.

And I’m the sucker who fell for it.

You’ll seek comfort in the misery of others.

Hopefully, their losses and stories of woe are (far) worse than yours.

Somehow this makes you feel a little better.

But that’s just a distraction. It doesn’t make you any less poor.

If only you could shut out these thoughts.

Why didn’t I sell earlier?

If only I’d sold when the market was down 20 or 30%.

How different things could have been.

Regrets, you’ve had a few, but none like this one.

These hypothetical mind games could become an investor’s reality in the not too distant future.

Regretting the day they did not take action to secure their (remaining) capital.

Regrets over listening to the investment industry’s doctrine of  ‘shares in the long run’.

Why didn’t anyone warn you about the mental anguish you endure in the short and medium run?

Who cares about the market in 20 years’ time.

You want this torment to end now.

You want to go back to how it was.

How do I know?

After almost 34 years in this business, I’ve seen versions of this movie before.

Conversations with those who lost their life savings in the Storm Financial debacle often had the same theme.

Why didn’t I listen?

How do we rebuild from here?

I feel physically ill.

Questions asked after the event is of no consolation.

Trying to make sense of it all is a coping mechanism.

Those who can’t are locked in a destructive spiral.

Regrets are a constant for any investor.

Regretting buying too much or not enough.

Regretting selling too early.

Regretting being in cash when markets are surging ahead.

However, the biggest regret is that of losing a life-altering amount of capital.

That money had so much emotion invested with it.

Decades of work. Years of sacrifice. Peace of mind. A future with prospects.

A lifetime of savings savaged in the space of days and months.

This is what’s coming at us.

We’ve all seen stories like this one in The Washington Post on 9 April 2020…

More than 17 million Americans have filed for unemployment benefits in the past four weeks, a rapid and unprecedented deterioration in the U.S. economy that the nation has decided is necessary to combat the deadly coronavirus by keeping as many people as possible at home.

Federal Reserve Chair Jerome H. Powell said Thursday that the U.S. economy is in an emergency and is deteriorating “with alarming speed.”

The nation has not experienced this magnitude of layoffs and economic contraction since the Great Depression, many experts say, and recovery is unlikely to be swift.

For now, Wall Street is ignoring the real economy.

The belief in the Fed saving the day remains resolute

In my opinion, this is a serious error of judgement.

The Fed is powerful.

But it cannot possibly backstop every defaulting corporate and private sector borrower.

This moment of temporary disconnect is the market providing investors an ‘exit with a dignified and manageable loss.

Those who stay out of hope or ignorance or misplaced trust are likely to regret that decision for a very long time.

Experience has taught me to listen to those ‘who have been there and done that’.

Most mainstream economists are nothing more than puppets for their institutional ventriloquist.

When I’m in need of intellectual rigour and well-reasoned insight, there are certain opinions I gravitate to.

One of those is someone you’ve probably not heard of…Felix Zulauf.

Felix W. Zulauf is the owner and president of Zulauf Asset Management, a Zug, Switzerland-based hedge fund, which he founded in 1990 and now runs as his private family office. Zulauf Asset Management had US$1.7 billion assets under management…

Wikipedia

He has his own skin in the game.

During his long and storied career, Felix Zulauf has identified and exited from several asset bubbles…1987, Japan in 1990, dotcom in 2000.

On 6 April 2020, the German publication The Market NZZ interviewed Felix Zulauf.

The title of the article…

‘We Have Created the Biggest Excesses in Generations’

Please take the time to read these extracts carefully (emphasis added)…

I’ve been in business for almost fifty years, but I’ve never seen the global economy shut down so quickly. Many people still do not realize the enormous economic damage caused by the measures to contain the Covid-19 pandemic. The world will not be the same after this.

Let’s take pause here.

Enormous economic damage’.

The world will not be the same after this’.

This reality is not yet being reflected on Wall Street.

The article continues…

This time, all sectors are affected, especially services. Tourism, restaurants, hairdressers, countless small businesses: if they have to close for two months, their cash flow dries up and they cannot survive. That is probably unique in history. According to estimates by the Ifo Institute in Munich, such closure leads to a loss of economic output of 7 to 11% after two months and up to 20% after three months.

The estimated loss of economic output is after factoring in the multitude of global stimulus plans.

The Fed simply cannot rescue everyone. It’s just not possible.

The debt problem — the one central banks created — is simply too big.

Contraction creates further contraction.

And when that reality dawns on markets, the Dow at 23,000 points will become a distant (and forlorn) memory.

When Felix Zulauf was asked, ‘Don’t you expect a V-shaped recovery of the economy when the worst part of the pandemic is over?, his reply was an emphatic…

No, because the recession is starting a domino process. All the excesses from the expansion of the past ten years come to the surface now. Remember: The level of total debt in the world today, compared to economic output, is more than twice as high as in 2007. We have created the biggest excesses in generations. This debt is now increasing the downward pressure.

Debt played a major role in creating the illusion of growth over the past decade.

The biggest excesses in generations now have to be dealt with.

There is no getting away from this reality.

Ignoring this ‘herd of elephants in the room’ is one people will live to regret.

Do people really believe that suddenly and magically society is going to resume its old borrowing habits?

No. That’s not going to happen.

The system was structurally flawed before COVID-19

In the 31 January 2020 issue of The Rum Rebellion, I alerted readers to the weaknesses building within the Australian economy…

In 2010/11, Australia’s GDP was $1.32 trillion.

In 2018/19, our economic output has grown to $1.88 trillion.

Australia’s economy has expanded $560 billion over the past eight years.

On the surface, it looks like a cause for celebration. But keep the bubbly on ice for a moment…

In 2010, Australia’s national debt (public, corporate and private) totalled around $4.4 trillion. The latest national debt tally is slightly over $8 trillion.


Port Phillip Publishing

Source: Australian Debt Clock

[Click to open in a new window]

We’ve added $3.6 trillion to our national debt to create economic growth of $560 billion. It’s taken $6.40 of debt to generate $1 of economic activity.

The need for more and more debt to produce GDP is a trend that’s been ongoing since the early 1990s…our last recession.

This is an indication of the biggest generational excess that Felix Zulauf refers to.

What’s happened in Australia has played out across the globe.

Debt, debt and more debt to generate the illusion of growth.

The RBA is now considering negative interest rates.’ Click here to watch this interview with US economist and gold expert Jim Rickards.

All around the world jobs have been vapourised. Never to be returned.

If people can’t or won’t borrow to levels of previous excesses, the system falters…badly.

We are on the cusp of a deflationary depression.

The Fed knows what’s at stake.

Which is why they’ve gone ‘nuclear’ early.

Wall Street has bought it…for now.

But, as the new, more frugal reality begins to make its presence felt on corporate bottom lines, markets will respond harshly.

When that day comes, many of those who opted for hope over experience, could experience one of the biggest regrets of their lives.

Regards


Signature
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