If you want to boil a frog, you must do it slowly.
Place the frog in a saucepan of cold water.
Allow the frog to get comfortable and settle in.
After the frog is feeling snug, ever so slowly, turn up the heat.
The poor old frog remains oblivious to the danger it’s in.
The end result on the incremental increase in heat…Kermit gets cooked.
Subtle change creeps up on us. We become accustomed to the new order. It’s only when we take a nostalgic look back do we realise how much things have changed.
Decades of conditioning have made us oblivious to the dangers we are facing. What we now accept as normal, was once considered extravagant, excessive, indulgent, irresponsible, and reckless.
To quote Warren Buffett:
‘The rear-view mirror is always clearer than the windshield.’
For some clarity on how we’ve arrived at this point, we need to look back at the 20th century.
When put into perspective, it’s easy to see how the 20th century took us from cold to barely warm to boiling hot.
The exponential economic growth — in inflation adjusted terms — was simply staggering. It was without precedent.
Source: Our World in Data
Prior to 1900, the economic frog had been in cold water for thousands of years.
The temperature was dialed up a notch with the Industrial Revolution.
Mechanisation. Sanitisation. Medication. Financialisation. Population. These all combined to contribute to a truly transformational century.
Population growth (resulting from a reduction in infant mortality rates and increased life expectancies) combined with productivity growth turbocharged the global economy.
Over the past century, the economic temperature has been steadily increasing. We have come to accept this as normal. But in the context of history, it isn’t.
The world we were born into has been one of growth, growth, and more growth. This is the mantra of every business and political leader. Job growth. Wages growth. Earnings growth. Population growth. However, the low-hanging fruit of real growth was picked a long time ago.
Do we stop, take a breather, and reassess whether this obsession with growth is healthy or not?
Hell no. Too much has been promised to too many for that to happen.
So if we can’t make it, we fake it.
If growth can no longer happen organically, we’ll manufacture it artificially…with increased (and increasing) credit expansion.
US debt (blue line) to GDP (red line) is now around 400%…and growing.
Decades of artificial growth has conditioned us to expect a continuation of the trend…without interruption.
That’s not possible.
Way too much debt is now being used for unproductive purposes…financing unfunded social security promises, burgeoning healthcare services, and interest payments.
If something cannot continue, then it won’t. What’s going to give?
Retirement expectations must change
The concept of retirement evolved from 20th century prosperity.
Prior to 1900, most men aged over 65 remained in the workforce.
Source: Our World in Data
By the end of the 20th century, only one in five remained in the workforce. Note how the trend has started to reverse in recent years. Hmmm.
Longevity and economic growth (generating higher tax revenues which enabled politicians to promise taxpayer funded pensions) were the drivers behind the declining over-65 workforce participation trend.
Younger generations might be surprised to learn that once upon a time, retirement was unthinkable. You worked until you could work no more.
Now, retirement is considered a basic human right. Publicly-funded pensions (another construct that gained traction in the 20th century) are considered an entitlement. The ‘I’ve paid taxes all my life’ mentality.
This reasoning is emotive, not logical. Past tax payments were used by past governments to fund the services of that time. No taxes were ever set aside to pay for future retirements.
The harsh reality is today’s age pensioners receive a fortnightly payment courtesy of today’s taxpayers and government borrowings (a public debt to be repaid by the children of today and the as-yet unborn…is that fair?).
Any challenge to the notion of retirement — raising the age pension eligibility age, tightening up of means test, suggesting people work into their 70s — is met with enough backlash to indicate society is not yet ready to accept a change in the trend.
But it will come.
Market forces — demographics, debt deflation, depression — are going to be the catalyst for a change in our collective thinking on retirement.
Within the next decade or two, the idea of leaving the workforce at age 67 and spending 20, 30, or more years in receipt of a publicly-funded retirement will be seriously challenged…and so it should be. I do not want my children and grandchildren being placed into indentured servitude to the ATO.
The future is unlikely to be a repeat of the past. That ever so slight trend change in the US labour force participation rate is a sign of things to come.
In the 21st century the pendulum of over-65 workforce participation will swing back to a much higher percentage.
And for private pension funds relying on an overweight share allocation to meet retirement income obligations, they may want to think again.
The two-part performance of the Dow
In 1915, the Dow Jones Index was 50 points. The following (logarithmic) chart shows the Dow did not permanently breach the 1,000-point level until the early 1980s.
It took the Dow 65 years to increase 20-fold in value (a compound return of 4.8% per annum).
Over the past 40 years — since debt has become the primary driver of economic growth — the Dow has increased 35-fold (a compound return of 9.3% per annum).
Does that seem a little out of whack to you?
Was the 1915–1980 period too low or the 1980–2021 performance too high?
How’s this for a fun fact…
Had the Dow maintained the pre-1980 compound growth rate of 4.8% per annum, then today the Dow would only be at 6,500 points…about 80% lower than where it currently sits.
Perhaps, a 60–70% correction is not so far-fetched after all?
But in the minds of many, the prospect of this happening is simply not possible. Collective thinking has it that the Fed won’t let it happen.
Well, the Fed is yet to face a truly hostile, unforgiving, and fearful market. Investors should not be so sure any fight between the Fed and the market will be a one-sided affair.
An angry bear can be seriously intimidating…especially for retirees, pension funds, and those with margin debt. SELL orders can gain momentum very quickly.
In looking back to look forward, it’s apparent the drivers of 20th century growth are waning.
Yet, due to our conditioning, we believe the future is going to be a continuation of the past.
That’s not how cycles work.
We are in hot water and with each dollar of new and unproductive debt and record share market high, the temperature gets increased a little more.
We are getting ever so close to boiling point.
Editor, The Rum Rebellion
PS: The Rum Rebellion is a fantastic place to start your investment journey. We talk about the big trends driving the Australian Economy. Learn all about it here.