1920s or 1930s? — Central Banks and The Impact of ‘Free’ Money

Hello…over here…it’s me…waving my arms…trying to get your attention.

You can’t hear my voice anymore. It’s been drowned out by those blaring BULL horns.

2021 is going to be HUGE…

Reuters, 10 November 2020:

JPMorgan said on Monday it expected the S&P 500 index .SPX to hit 4,000 points by early 2021 and called Pfizer Inc’s PFE.N COVID-19 vaccine update “one of the best backdrops for sustained gains in years.”

The appointment of former Fed Chair Janet Yellen to US Treasury Secretary all but assures money will be flowing freely.

Which is why Janet features so prominently on the 4 December 2020 issue of MoneyWeek:

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Source: MoneyWeek

ECB President (and convicted criminal) Christine Lagarde — another person who plays fast and loose with other people’s money — also appears in the background.

According to the article:

Prepare your portfolio for a return of the Roaring ’20s

Don’t believe the pessimists. What with the end of lockdown and central bankers taking charge of government spending, party time is just around the corner…’

With all this partying going on for what the year and decade ahead has in store for us, it’s little wonder my voice has been reduced to pipsqueak status.

Central Banks and ‘Free’ Money

So if people are to believe the drunken revellers, all it takes to take markets on a linear journey (for ever and a day) is…central bankers taking charge of government spending.


I have a question.

How’d that work out for Japan from 1990–2010 or China’s Shanghai Composite Index that’s almost half its October 2007 peak, or even the Euro Stoxx 50 Index that peaked in March 2000?

Not so well as I recall.

But who wants to hear that?

Don’t you know…this time is different.

On that we agree. But — and you knew there’d be a but — not for the reason you think.

This time is different because 2020 is more like 1929…not 1920.

The 13 September 2020 issue of The Gowdie Advisory addressed the question of will the 2020s really be a repeat of the 1920s?

Here’s a few edited extracts…

The starting positions

The time-honoured secular (long term) market cycle has been…

Secular Bull markets START with a LOW PE10 and FINISH with a HIGH PE10.

Secular Bear markets START with a HIGH PE10 and FINISH with a LOW PE10.

If we look at the PE10 valuation multiples for 1920 and 2020 they are poles apart.

Port Phillip Publishing

Source: Multpl

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The 1920 PE10 multiple is less than five times.

The 2020 PE10 multiple is over 32 times…the current multiple is at the same level as 1929 NOT 1920.

Then there’s the belief in…

Technology-enhanced productivity

What about the driver of the coming boom will be technology-enhanced productivity, as it was during the 1920s?

Since the productivity peaks in America’s golden age of manufacturing, the trend in productivity — even with the increased uptake in technology — has been down.

Port Phillip Publishing

Source: CEIC data

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The reason for this is simple.

It’s called “The Law of Diminishing Marginal Returns”.

When the farmer replaces the horse-drawn plough with a tractor, his productivity goes through the roof. But after that initial burst in productive output, the returns become marginal. He could buy a new tractor that’s a little faster and more efficient. However, these are gains made at the margin.

If you buy the latest computer and access lightning-fast internet service, your productivity will jump immediately. But after that, any gains in your output will be marginal…

And, even if there is a sustained spike in productivity, that’s only part of the growth equation.

The three Ps

According to the Australian Government Productivity Commission…

“Economic growth, as measured by GDP, is jointly determined by the three Ps — changes in population, its rate of participation of the working aged in economic activities (also referred to as ‘labour utilisation’), and labour productivity.”

You can have the fastest and most efficient system in the world, but for an economy to grow, it needs an increased population of working age AND an active engagement (participation) of that available labour force in the workplace.

If we go back to the early 1900s, the age distribution formed the perfect society pyramid.

A large base of youth supporting a narrowing apex.

Over the course of the 20th century, some middle-age spread started to set in…

Port Phillip Publishing

Source: US Census Bureau

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And now the shape has completely changed.

People [are] living longer.

The bulkiness in the middle has moved up into the over-60 age group.

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Source: Indexmundi

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The composition of US society today is vastly different to that of 1920.

Demographics play a huge role in economic growth…just look at the impact Japan’s ageing society has had on its once glorious economic prowess.

Labour force participation

In addition to below trend labour force growth, the participation rate has been in a two-decade decline.

Is this because people have disconnected from the employment market due to lack of reskilling and/or technology making jobs obsolete?

Port Phillip Publishing

Source: Federal Reserve Economic Data

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Even if there is a boom in technology-enhanced productivity, it’s likely to be offset by weak labour force growth and a lacklustre participation rate.

Without two of the three ingredients for economic growth, how can there be an economic boom?

And finally, there’s…

Household finances

In 1920, total US debt to GDP was around 170%.

Today, it’s nudging 400% (US$80 trillion debt to US$20 trillion GDP).

Port Phillip Publishing

Source: Hoisington

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Household balance sheets are in vastly different shape to that of a century ago.

The private sector debt (blue line) rose strongly during the Roaring Twenties. Is it likely we’ll see a repeat of this in the 2020s?

In an environment of employment uncertainty, I have doubts that households will be too eager to put themselves under additional financial pressure.

When you strip away the emotion and look at the data, the conditions in 2020 are nothing like they were in 1920.

The only similarities I can see between the two periods are they both have a ‘20’ and a pandemic.

All those good time Charlies who believed the champagne can continue flowing from the Fed are in for a rude shock.

That ‘roaring’ in the 2020s, it’ll be coming from one very angry bear.


Vern Gowdie Signature

Vern Gowdie,
Editor, The Rum Rebellion

PS: In a brand new report, market expert Vern Gowdie warns of the dangers waiting in a post-COVID-19 world. Plus, he outlines the steps you should take now to protect your wealth. Learn more.

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.

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