Stock Market Downturn Ahead — Savour the Moment on Easy Street

When life looks like Easy Street, there is danger at your door.

Grateful Dead

Life is a series of moments. Some last longer than others…but they all move on. Nothing stays the same forever.

But first, while on the topic of moments, my fellow editor and good friend Greg Canavan is hosting a moment you should not miss this Thursday. Greg is a 20-year investment veteran. His new service, Greg Canavan’s Investment Advisory, is tailored for investors who are seeking better than zero on their cash. To learn more about Greg’s unique insight into the opportunities that exist in a life at zero rates, please register here for your free place.

Back to today’s Rum Rebellion moment.

When we’re in the moment, we have to accept and appreciate it for what it is…another piece in the tapestry of our life.

Right here and now we’re in a moment that I believe is destined for the history books.

Please take the time to appreciate and marvel at it…as this moment will not last.

For many, it looks like easy street…which means danger is lurking close by.

Signs of euphoria abound on Wall Street.

Oversubscribed IPOs. SPACs (special purchase acquisition companies) racking in tens of billions of dollars (from the greedy and the gullible) to invest in as yet unknown and unidentified ‘special purchases’.

Record amounts of margin lending…you may recall this was the great wealth destroyer of the 2008/09 crash. Dogecoins. Sports trading cards. Copious amounts of CCC rated debt being issued and (just as worryingly) being invested in.

Millennial ‘stonk’ investing. And this unprecedented surge in buying activity for penny stocks (small companies) typifies the euphoric moment we are in…


Surge in Buying Activity for Penny Stocks

Source: Grant Williams

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Making money is easy. No matter how many fleas the dog or dogecoin has, the mood is one of ‘you’ll clean up’.

Enjoy it folks.

HOODWINKED! Why Australia’s ‘miracle’ economy is a farce

This once-in-a-century moment is definitely something to behold. Personally, I’m in awe of it.

The collective madness of men (and to a lesser degree, women) is truly spectacular. Living long enough to give my (yet to be born) grandchildren a firsthand account of this moment in history is something I hope I’m blessed to do.

It’ll be a story laced with humour and sadness.

The State of the Market – Crash Ahead

‘Did you know people actually thought Tesla was worth more than every other car maker in the world?’ or ‘Somehow, people convinced themselves a very clever algorithm called bitcoin would be an alternative store of wealth to gold.’

I know? Crazy right?

But we shouldn’t laugh.

In time, there will be many farcical tales that’ll define this moment of unhinged thinking.

Unfortunately, each one will have come with a personal and financial cost to those who failed to recognise this moment for what it is…an epic level of collective mania.

The really sad part of our tale will be it could all have been avoided.

While history may not repeat itself, it does do a very good job of rhyming (emphasis added):

In reality, the nation’s most prosperous decade [the 1920’s] had been built on a house of cards. Low wages, high rates of seasonal unemployment, chronic stagnation in the agricultural sector, and a hopelessly unequal distribution of wealth were the darker story that lurked behind 1920s-era prosperity.

There was a price to pay for so lopsided a concentration of the nation’s riches. Good times relied on good sales, after all. The same farmers and workers who fueled economic growth early in the decade by purchasing shiny new cars and electric washing machines had reached their limit. By the late twenties, when advertisers told them that their cars and washing machines were outdated and needed to be replaced, the working class simply couldn’t afford to buy new ones. Unpurchased consumer items languished on the shelves. Factories cut their production. Workers were laid off by the millions. The good times were over.

History by Era

Low wages.

For the past 40 years, US wages (in inflation adjusted terms) have remained range bound. Until the pandemic hit…


Spike up in US Wages

Source: Federal Reserve Economic Data

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Unfortunately, this spike up in wages is a statistical anomaly. Get rid of lower paid workers and the average jumps up.

According to the Federal Reserve Bank of San Francisco (emphasis added):

Despite a sharp spike in unemployment since March 2020, aggregate wage growth has accelerated. This acceleration has been almost entirely attributable to job losses among low-wage workers. Wage growth for those who remain employed has been flat. This pattern is not unique to COVID-19 but is more profound now than in previous recessions.

High rates of unemployment.

According to ShadowStats (using a definition of un-and underemployment that passes the pub test), US unemployment (blue line) is running at 25.7%…a far cry from the official (heavily massaged) numbers.


US Unemployment Rate vs ShadowStats Alternate

Source: ShadowStats

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Hopelessly unequal distribution of wealth.

Well, we’re back to those late 1920s levels…


Port Phillip Publishing

Source: US Center on Budget and Policy Priorities

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The first instalment for the price to pay for so lopsided a concentration of the nation’s riches was made in October 1929.

Over the next 32 months, the market extracted its full price…an 87% fall on the Dow Jones Index.

Can we expect the same toll to be paid this time?

Maybe. Maybe not.

Some assets — like junk bonds, cryptos, overhyped growth stocks, SPACs, loss-making IPOs, penny stocks et al — could lose up to 100% of their price (I deliberately did not us the word ‘value’, because there’s precious little to no value in some of this rubbish).

Other assets — good quality companies with solid earnings priced on fair value PEs — should fare much better. But they’ll still be bounced around.

Why?

Because a market in panic mode has a tendency to act first and think later.

Watching this moment in asset-price inflation unfold has, for me, been a mixture of frustration and admiration.

I thought I’d seen it all before in 1987, 2000 and 2008…but this is all of those combined and some more.

The prospect of witnessing an event that comes along once in a century fills me with anticipation and a fair degree anxiety.

Surviving a serious stock market downturn with your capital reasonably intact is cause for relief.

However, knowing when to deploy that cash — to take advantage of the opportunities on offer — is another challenge.

Has the selling pressure finished or close to finishing or a long way off finishing?

After the initial falls in October 1929, it took a further 32 months before the Dow Jones finally hit bottom.

Once this market takes an abrupt turn off Easy Street and onto far more challenging terrain, that’s when having an investment veteran as your navigator will prove invaluable.

In the interim, I intend to sit back and savour this one…when people thought the pathway to wealth was called easy street.

Regards,

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.


The Rum Rebellion