NO Fairy Tale Ending: The Dow Will Once Again Be Banished

Dear Reader,

It’s a story worthy of the Brothers Grimm. Delusions. Deceit. Wicked plotters. Gullibility.

Our story starts with the fall from grace of a once-favoured child.

During its early years, the Dow Jones Index had been both a source of great joy and heartache.

However, by the mid-1960s all was forgiven. The Dow had proved a worthy recipient of the praised heaped upon it.

Over a 50-year period, 1915–1965,  the Dow had risen almost 20-fold (50 points to 1000 points)…and there was the promise of more to come.

The Rum Rebellion

Source: Macro Trends

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Then, unexpectedly, it began to misbehave…badly.

Oil crises. Inflation. Rising interest rates. These all conspired to transform the Dow from hero to villain.

Panicked. Nasty. Violent. The market appeared to be possessed by an evil spirit.

The Dow’s erratic nature is evident in its down, up, down mood swings. Was it friend or foe?

The investing villagers could no longer tolerate this unpredictable behaviour.

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The Dow was all but exiled from their portfolios…cast out into the investing wilderness.

During the Dow’s period of petulance, the crowd gravitated to a new, shiny champion…gold.

Freed from the restraints of the gold standard, the ‘money of kings’ soared from US$35 to US$850.

The inflation ogre — punishing the Dow and rewarding gold — was thought to be invincible.

Nothing could tame the double-digit tyrant.

Then along came Paul Volker.

A central banker, who — at 6 foot 7 inches (2.01 metres) — literally and figuratively stood tall.

Volker looked the inflation monster straight in the eye…and didn’t blink.

Such was his determination to put a stake in the heart of inflation, he cranked interest rates to almost 20%.

In defiance of his political masters, Volker put the world’s largest economy into back to back recessions (grey shaded areas)

The beast was tamed. Interest rates began to descend from inflation’s mountainous peak.

The Rum Rebellion

Source: Federal Reserve Economic Data

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Then something truly bewitching happened on this journey to the valley of lower rates.

A new generation of bankers — unscarred from the Great Depression — relaxed lending standards.

Credit — in all its wonderous forms — was made more freely available.

Consumers were awoken from a deep slumber.

Suddenly, what used to take months or years to save for, was now available for immediate consumption.

The freedom to live beyond your means became a real-life fairy tale

And the lower rates went, the more enchanting the tale became.

Bigger home. Grander furnishings. A second house. Better car. More travel.

Anything was possible in this magical world of fractional banking.

While rates were descending, debt was ascending.

The Rum Rebellion

Source: Federal Reserve Economic Data

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During this period of debt escalation, gullible villagers remained blissfully ignorant to the stirrings of another ogre.

After decades in hibernation, the debt crisis monster was beginning to rouse.

There were some who swore they could hear the ogre chanting in the distance ‘fee-fi-fo-fum, I can’t believe people can be so dumb’.

But they were dismissed as naysayers. Making things up. Doomers and gloomers. This time would be different.

When the debt crisis struck in 2008, shocked villagers were reassured by central bankers that they could tame the ogre with more debt.

The crowd rose as one and shouted ‘brilliant’.

And for a time, the gifts of money printing and the lowest of low rates appeared to appease the debt ogre…or so the gullible villagers thought.

That all changed when the village was hit by a plague.

Forced into self-isolation they stopped buying things. Millions of jobs were lost. Economic activity shrank by more than 30%. Businesses closed…never to reopen.

With their wicked plot — indefinite credit-funded economic growth — at risk of being exposed, the evil scheming central bankers are doing everything possible to hide their grand deceit.

The villagers actually believe that printing money to buy the debt of zombie companies is going to appease the debt crisis ogre this time.

The once-exiled and reviled Dow is well and truly back in favour.

And for good reason.

From 1915–1982, almost 70 years, the Dow increased 16-fold.

Over the past 40 years (1982 to now), the Dow is up…30-fold.

Almost double the outcome in a little over half the time.

It’s easy to see why the villagers worship this idol of false returns.

The Rum Rebellion

Source: Macro Trends

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What the villagers failed to realise is the role that extra US$70 trillion of debt — since 1980 — has had on the Dow’s resurgence in popularity.

Credit growth and asset price growth are intertwined

What happens if the debt crisis ogre slashes credit growth?

Will the Dow once again be cast out into the investing wilderness?

These questions are not being seriously considered…yet.

There’s an almost unquestioned belief in the Dow’s ability to permanently scale to new heights…much like it was in the late 1920s and mid-1960s.

Which just goes to prove that fiction is stronger than the facts.

And it’s the facts that turn this fairy tale into a horror story.

The US housing bubble — that ended with the GFC — was caused by a rapid uptake in debt by the household sector.

The bubble that’s been blown since 2009 is, in part, due to the rise in US corporate debt.

Debt that’s been used for all sorts of (useless) things — share buybacks; boosting dividends; re-financing greater amounts at lower rates.

Anything that fires up the share prices.

The Rum Rebellion

Source: Federal Reserve Economic Data

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What about borrowing for productive purposes? That’s way down on the list of boardroom priorities.

It’s all been about lifting those share prices up and putting executive options in the money.

We’ve had two massive asset bubbles — the first blown by households and the second by the corporate sector.

Which sector is next for a debt binge?


But will the government’s debt splurge find its way into asset prices or simply be used to keep society from erupting in mass protests?

Look at the extent of the current job losses with those of all post-Second World War recessions in the US.

There is no comparison…even with the severe recessions caused by the 1970s oil crises and Volker’s determined efforts to slay the inflation ogre.

The Rum Rebellion

Source: CNBC

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The jobs lost in the last — most severe recession since the Great Depression — took more than six years to recover.

How long will it take this time?

Especially with AI and robotics becoming viable, low cost (and COVID-19-immune) alternatives.

Wage suppression. Stubbornly high unemployment. Ageing demographics. High debt levels.

These are not the same dynamics that created the 1980 to 2020 fairy tale of credit-funded growth.

Governments will go deeper and deeper into debt just to stop this unfolding horror story from becoming a blood-thirsty massacre.

As hard as it is to comprehend now, the plots of past grim tales, tells us the Dow will once again be banished from portfolios.


Vern Gowdie,
Editor, The Rum Rebellion

PS: Learn about the critical factors that affect the rise and fall of the Aussie Dollar. Download your free copy of this special report: ‘Will the Aussie Dollar Enjoy a Post-Pandemic Resurgence?’

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