You Never Go Full Australia

You never go full Australia. That’s when your public health officials and power-mad politicians decide to place the whole country under de facto house arrest permanently, or at least until they tell you it’s safe to come out again. When you go full Australia, you turn an entire continent into a prison. Yet, that’s what some insiders in the Biden Administration are encouraging the US president to do.

But first, in the midst of all the COVID-19 lockdown madness, it’s easy to forget there’s a mania in the stock market going on. It makes sense if you think about. It’s largely the well-to-do who can comfortably work from home, have food delivered, and make derogatory posts about the ‘unvaccinated’ on social media. When they’re not doing that, they have plenty of time to trade stocks online.

They’re certainly not hoarding cash or gold (neither is a bad idea). Just the opposite. Investors have their fifth-lowest allocation to cash going back to 1990, according to data from American Association of Individual Investors (AAII). As a sentiment indicator, that usually means investors are ‘all in’ on stocks as an asset class. What happens next?

Well, in three of the previous four times when cash allocations were this low in individual portfolios, the return over the next 12 months was negative. In 1999, the cash allocation was just 12%. Returns over the next 12 months were negative 10.14% on the S&P 500. In December of 2017, cash allocations were 13% with a negative of 6.24% over the next 12 months. And in January of 2018, the cash allocation at the end of January was 13.3% with a negative return of 4.24% over the next 12 months.

The exception was in late March of 1998. Cash allocations were just 11% of the average individual portfolio. But the S&P 500 went up another 16.76% over the next 12 months. The tech melt-up hadn’t even really begun. The Nasdaq Composite went up 85.59% in 1999.

That’s what you call a melt-up. But it was also the last hurrah. The index fell by 39% in 2000, by another 21% in 2001, and by another 31% in 2002. The peak-to-trough decline was 76%. That’s what you call ‘the big loss’.

Avoiding that loss is the number one mission right now at The Bonner-Denning Letter. Whereas baby boomers had 20 years until retirement in 2000 — meaning they could afford to ride out a drawdown without taking an actual loss — today, they’re retiring in their droves.

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.

The situation varies from person to person. But ask yourself this: could you afford a 75% drawdown in your portfolio and still retire comfortably and on time? For most investors over the age of 60, I suspect the answer is no.

Yet, the financial powers that be are not making things easy. As I’ve written to you in the last few weeks, when the ‘risk-free rate’ of return (as defined by government bonds is negative in real terms when adjusted for inflation) makes it nearly impossible to rationally price other assets, the result is that investors are paying nearly record prices for any kind of future growth promise.

But you have to do something with your money, right? And psychologically speaking, it’s hard to sit on the sidelines while other people appear to be getting effortlessly and obscenely rich trading meme stocks, tech stocks, and cryptos. Isn’t it time to quit complaining about how central banks have rigged the game and just get as rich as possible as quickly as possible?

Maybe if you’re younger that seems like a good idea. Especially if you have a ‘non-essential’ job, can’t work, or have no other prospects to improve your lot in life through hard work and effort. That’s one of the saddest and most unfair consequences of the lockdowns — robbing young people of their prime years, years they’ll never get back.

But if you’re at or near retirement age and already have a large portfolio, I’d suggest avoiding ‘the big loss’ is a more urgent goal than making the next 15% as stock indices make new highs. And let’s be fair, maybe it’s not the next 15%.

Maybe it’s the next 30%. Or even 50%. Or you get a massive melt-up if and when COVID lockdowns end and stocks have another melt-up like the Nasdaq did in 1999. That’s the best-case scenario.

Worst case? The worst case is ‘the big loss’. And it doesn’t really matter what causes it. It won’t be valuations by themselves. They are good indicators that stocks are overbought. But they don’t tell you when to sell. What does?

Nothing, precisely. That’s because when risk is mispriced, it usually takes a ‘credit event’ or bankruptcy to trigger a chain reaction. Like a nuclear chain reaction, it tends to get everyone’s attention. And THEN what changes is the psychology and perception of risk. And then all bets are off and risk is on.

For now, there’s plenty of mispriced risk. For example, 85% of US high-yield debt now trades with a yield below the rate of (official) inflation, according to Deutsche Bank. That’s ugly, lending money to corporations with a non-investment grade level of credit. It’s asking for trouble.

You’d think that a rational individual wouldn’t do it. Maybe a speculator would. But if you’re managing someone else’s money? Maybe it’s a risk you’re happy to take. You get all the performance- and bonus-related upside. And it’s not your money!

Watch this space for more on ‘credit events’ that could trigger a mean-reverting crash in stock markets. In the meantime, US President Joe Biden has mandated that anyone who works for a company with more than 100 employees to get vaccinated for COVID. Biden used a federal agency — the Occupational Health and Safety Administration — as the vehicle with which to exercise what is likely an unconstitutional mandate.

What you may have not heard is that Biden’s wife, Jill, wanted to go ‘full Australia’. That is, she didn’t think the mandate went far enough. Australia and New Zealand have, tragically, become role models for how to implement a society-wide attack on personal liberty, freedom of movement (and speech), and the right to work and run your business.

There are some places in the US where local and state governments may go ‘full Australia’. But the US is a big place. And there are more guns than people in the US. Crucially, local law enforcement (especially sheriffs, who are elected by the people they live with) are already declining to enforce laws that are repugnant to the Constitution.

A little pushback goes a long way. Wire services are reporting that UK Prime Minister Boris Johnson has backed off the country’s proposed vaccinate mandate. So how about Australia? Is it time to push back?

Until next week,

Dan Denning Signature

Dan Denning,
Editor, The Rum Rebellion

PS: Even though I ceased living in Australia as a full-time resident in December of 2014, I’m still a citizen. I gained that citizenship after living there for 10 years (I’m still a paid-up and slightly frustrated member of the North Melbourne Kangaroos). And as you may know, I was in Australia for several months in early 2020, before Daniel Andrews went ‘full Victoria’ and turned Melbourne into a prison city.

I have friends and family who are still in Australia. I care deeply about what’s happening. It’s sad and unnerving to watch. But it’s a complicated issue.

Last week, I joined up with Joel Bowman, my colleague at Bonner Private Research, to discuss the matter. Joel is from Queensland originally. He’s a bit of an international man now. But you might enjoy the discussion and his perspective. You can listen to our conversation here.


Dan Denning is the co-author of The Bonner-Denning Letter.

Dan was a founder of Port Phillip Publishing back in 2005, which quickly became the leading publisher of its kind for independent financial research and insights. In 2014 he left to head up Southbank Investment Research in the UK. Dan is also the author of the 2005 book, The Bull Hunter. Today, he’s based in his home state of Colorado. Each Monday in The Rum Rebellion you’ll get Dan’s unique contrarian thinking to provide insights you won’t find anywhere else.

Dan Denning’s belief in free markets, sound money, personal liberty, and small government have underpinned everything he’s done during his 23 years in the financial publishing industry.


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