Can you guess who offered this refreshing dose of common sense?
‘First, any boom built on rising asset prices financed by increased borrowing has to end.
‘The further asset prices rise above their intrinsic value, the more likely it is that a reassessment will be made and they will stop rising. At this point, there is a “rush for the exits”, as everyone wants to sell before prices fall.
‘The situation is usually made worse by banks wishing to call in loans, or refusing to roll them over, as they react to falling collateral values.’
Would you believe it was a central banker?
Yep. In fact, it came from one of our very own.
Ian Macfarlane was the RBA governor from 1996 until his retirement in September 2006.
The extract was from the Boyer lecture he delivered in December 2006.
How the world of central banking has changed in the space of 15 years.
Today’s crop of central bankers is a disgrace. They insult our intelligence with their patently ridiculous policies.
Lower rates + higher debt levels + more immigrants = economic growth.
What has this policy actually delivered?
Meme investing. Crypto craziness. Housing bubble.
And as Michael Burry tweeted recently, the legacy from this bunch of incompetents is the ‘Greatest Speculative Bubble of All Time in All Things. By two orders of magnitude.’
The combination of arrogance and stupidity is what makes central bankers so dangerous. Their appalling track record on blowing bubbles should have made them the laughing stock of the economic profession. But it hasn’t.
Which tells you all you need to know about the profession in general.
My thoughts and actions are influenced by the Macfarlane-era of thinking. Debt-financed booms always end badly.
And in the history of booms, this one is the mother of all bubbles.
When this massive bubble meets its pin (and it will), the divide between winners and losers will be chasm-like.
The losses will be life changing…much like how the Storm Financial blow up altered the future course for many retirees.
The potential gains — from being cashed up to take advantage of the carnage — will also change the fortunes of those who didn’t drink the central banker Kool-Aid.
The prospect of family wealth being enhanced or extinguished is why I’ve erred on the side of caution with our portfolio.
To date, the only thing my caution has earned me is ridicule. That’s fine.
I learned a long time ago that wealth can take decades to create and moments to lose.
The last laugh always belongs to those who survived and thrived from a full cycle rotation.
What do I mean by that?
Here’s the rotation of the Dow’s cycle from 1925–33…
Making money in the boom is easy. Everyone is happy.
Retaining it when market conditions change from friendly to hostile is much harder.
In my opinion, central bankers have set us up for a massive fail.
Learn from the lessons of others
Studying generational wealth has been a passion of mine for more than a decade. Better to learn from the mistakes of others than to make them yourself.
The causes of failed generational wealth transfers were identified in the Brown Brothers Harriman & Co research paper titled ‘Crossed Wires: Why Most Generational Wealth Transfers Fail’.
‘Ninety-seven percent of the failures were attributable to the family itself: due to a lack of a family mission (12%), the inadequate preparation of heirs (25%) or a breakdown of family communication and trust (60%). The common thread in each of these causes of failure is a lack of communication. Therefore, better communication is the common cure.’
Source: Brown Brothers Harriman
This data is based on research of the second- and third-generation experiences.
But what about first-generation wealth?
There’s a lot of wealth lost in the first generation — money that’s never given to the second generation for an opportunity to ‘make or break’ the family fortune.
While poor investment advice might account for 3% of failures in the second and third generations, it’s a much higher percentage in first-generation wealth creators.
Boris Becker. Nicholas Cage. MC Hammer. Mike Tyson.
These are just some of the high-profile first-generation wealth creators who’ve lost their wealth due to poor investments and/or lavish lifestyles.
Falling victim to a scam or investing your entire net worth in Nigerian mines are imaginative ways to be destructive.
Irrespective of whether you lose your family money ‘creatively’, or through a bad business venture or in a share market crash, the facts remain the same…the wealth has gone.
Identifying shonky investments is fairly straightforward.
If it sounds too good to be true, then it usually is. Promises of high returns. Once-in-a-lifetime opportunity. These are all characteristics of investments that should be avoided like the plague.
It’s the investments that are supposedly ‘blue chip’, the ones you can’t go wrong buying. They’re the ‘wealth destroyers’ that are hiding in plain sight.
Therefore, as a first-generation wealth creator, my focus is on both family and wealth. We are doing our utmost to ensure our family is built on the right foundations…foundations that hopefully will last for generations to come.
However, first and foremost, we need to ensure our wealth remains intact to turn that vision into a reality.
While it may sound hyperbolic to compare the current investment climate to that which preceded the Great Depression, I genuinely feel we’ve reached a major inflection point in markets. One that has the potential to unleash forces capable of destroying or creating generational wealth.
The narrative is simple — the global economy, thanks to the misguided policies of central banks, has become addicted to debt.
The base of debt must expand by at least $4 to generate $1 of ‘growth’. This — like it or not — is a pyramid scheme.
Like Russian dolls, this grand pyramid scheme includes other pyramid schemes.
Entitlement (welfare) payments. Share markets. Property markets. Cryptocurrencies. China’s miracle economy.
To prevent these individual pyramids from collapsing requires more and more people to take on more and more debt and to continue believing in the unbelievable.
Throughout history there have been credit booms and busts — the last global credit bust was in the 1930s.
We can see how attitudes toward prudent economic management have changed over the past 15 years…so, an event that happened 90 years ago has no chance of being remembered or considered relevant to today’s society.
In 1959, writer and philosopher Aldous Huxley said:
‘That men do not learn very much from the lessons of history is the most important of all the lessons that history has to teach.’
Sadly, this is so true.
With the passing of enough time, we seemed perpetually destined to repeat the errors of our forefathers.
Here we go again…make sure you’ve taken precautions to protect your family wealth from a collapse that has the potential to rival that of the 1930s.
The decisions you make or don’t make, could be life changing.
Editor, The Rum Rebellion
PS: Vern is also the Editor of The Gowdie Letter and The Gowdie Advisory — investment services designed to help everyday Australians avoid the financial pitfalls of a volatile economy and make informed decisions to grow their wealth for generations to come.