Where Do You Invest in an Everything Bubble?

Is your wealth real or just an illusion?

Those quarterly superannuation statements you receive tell you you’re worth $X…but is this a value you can reliably bank on?

The bottom line on that statement (if you’ve been invested in a balanced or growth fund) comes with a certain feel-good factor…an emotional lift to one’s spirits.

This elevated mood makes you inclined to share the good news with your better half or boast (just a little) to your friends.

There’s a certain contentment in knowing your retirement plans are on track.

But what if this time next year the quarterly statement that once gave you the warm and fuzzies makes you break out in a cold sweat?

Contentment turns to concern.

You decide it’s best not to worry your better half…things will turn…you hope.

The wealth you once thought was real turned out to be an illusion…30%, 40%, or 50% has magically disappeared.

Your once on track retirement plan has suffered a major derailment.

There are things you can do — now — to prevent this scenario for yourself.

They’re not palatable things in this current climate.

That’s why most people won’t do them.

But if you want to know what they are, click here.

But in merely presenting the above hypothetical scenario, is it being…

  1. An alarmist?
  2. A bearer of doom and gloom?


  1. A realist?

It depends on your market experience.

And even for those who’ve been through the ups and downs of recent decades, will the coming decade or two present us with a totally different set of conditions?

Could we be facing a post-1990 Japan market experience…a long and torturous path to lower lows?

Nikkie Price Index

Source: Macrotrends

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Or a 1965 to early 1980s US market experience…an 18-year journey to nowhere?

Dow Jones Price Outllook

Source: Macrotrends

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Can anyone say with absolute certainty that neither of these outcomes await?

That would be a very brave call.

While the post-1965 Dow and post-1990 Nikkei market experiences were different, they did have one thing in common…each of them happened after an extended market boom.

Booms, that on paper, made people feel wealthier. Made them feel content and made them spend more. But this wealth was not really real…it was only on loan to those who bought into the illusion.

US$44 trillion at risk of being vaporised

Yesterday’s Rum Rebellion included this chart on the 70-year relationship between household net worth and disposable net income.

On average, net worth is around 550% of disposable income.

There are times when the ratio has been above and below this level, but eventually, there’s a magnetic pull back to the 550% level.

Federal Reserve Economic Data

Source: Federal Reserve Economic Data

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The current reading of almost 800% shows just how successful the Fed’s asset price inflation programme has been.

Shares. Property. Bonds. Cryptos. They’ve all been beneficiaries of interest rate suppression and wave after wave of QE.

Anyone who has a portfolio with some or all of these appreciating assets is feeling pretty good. Contentment levels would be elevated.

But is this wealth real or illusory?

Yesterday’s Rum Rebellion also included this chart on the dollar value of the net worth-to-disposable income percentages.

The current reading of almost 800% equates to US$140 TRILLION of net worth.

Federal Reserve Economic Data

Source: Federal Reserve Economic Data

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For now, this value — on paper — does exist.

In the current environment, people are prepared to buy Bitcoin [BTC] at US$62k or a property in LA for US$5 million or Tesla at US$1,000 or all of the above.

With history and the mathematical principle of ‘reversion to the mean’ as our guides, the net worth to disposable income ratio should, sooner or later, fall back into the 550% range.

When that happens, US$44 TRILLION will be shredded from the value of shares, property, bonds, and cryptos…and that’s just in the US.

When that wealth destruction comet plunges into the US pond, you can rest assured the waves are going to wash up on Australia’s coastline.

Unless, of course, this time is different and the long-term relationship of net worth being an established multiple of disposable income has been irrevocably broken.

That’s what people also thought in 2007. Then came the equal and opposite force of the GFC. The fall in US share and property markets wiped out US$11 trillion in net worth…restoring the long-held mathematical relationship between net worth and household income.

When might this happen?

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

96% probability of a fall within the next 12 months

The 18 October 2021 issue of The Gowdie Letter endeavoured to answer that question.

When markets move into extremely over or undervalued territory, standard valuation models — based on the logic of math — are rendered temporarily redundant.

Emotions take control of the wheel and steer the market to much higher highs or much lower lows. However, all is not completely lost.

There are some internal signs that, when combined, do provide some guidance on when those emotions might exhaust themselves.

One such predictive model was the topic of discussion in the 18 October 2021 issue of The Gowdie Letter:

Panic/Euphoria model

Providing us with shorter-term guidance is the Citi (formerly known as Citigroup) “Panic/Euphoria” model.

For the technically minded, this is the blend of data behind the Panic/Euphoria model reading…

Panic/Euphoria involves nine different trackers that are weighted equally.

“The math incorporates put/call ratios, short interest, retail money market funds, margin debt, the average of American Association of Individual Investors and Investors Intelligence bullishness, gasoline prices, NASD trading volume relative to NYSE volume, the CRB commodity price index, and the premiums paid for puts and calls.

The various inputs are adjusted using techniques including rolling averages, smoothing and detrending and these specific details constitute its proprietary nature, but the outcomes are quite crucial.

Citi has been modelling the Panic/Euphoria data since January 1987.

What’s been the accuracy of the Citi model been over this 34-year period?

To quote from Citi (emphasis added):

the model was built on subsequent market outcomes using a combination of predictive correlations to enhance the chances of investing success.

“For instance, a ‘panic’ [or euphoria] reading registers a 96% probability of S&P 500 gains [or losses] in the next 12 months versus a 76% random probability, thereby shrinking the range of statistically imperfect information.”

When the model enters either zone (Panic or Euphoria), there’s a 96% probability of gain or loss on the US market over the next 12 months.

Here’s the latest chart from Citi:

Panic Euphoria Model

Source: Citi Research

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The Panic and Euphoria zones are above and below the thicker, light blue horizontal lines.

The inverse relationship between investor mood (blue line) and subsequent 12-month return (grey shaded areas), is quite evident.

In 1987, the market internals signalled a mood of euphoria. The result 12 months later? Close to MINUS 30%.

The Euphoria reading at the peak of the dotcom boom resulted in a near MINUS 40% return 12 months later.

In 2007/08, investor mood again wandered into the Euphoria zone. 12 months later, the US market delivered an almost MINUS 50%.

Look where the current reading is…the market is deep into Euphoria territory.

What possibly awaits us in 12 months’ time?

According to Citi (emphasis added):

“‘Our panic/euphoria model remains very elevated and is warning of coming losses,’ the analysts said in a Citi research note…

This is the longest period of ebullient readings without a market correction since 1999/2000 and we anticipate that something will give.

The longest period of ebullient readings since 1999/2000…wow, that should be ringing warning bells.

No market ever stays on a permanent high.

Yet, investors act as if they do.

We know — based on the Fed’s own data set — net worth has gone way beyond the norm.

We know markets are most definitely not cheap…every single reliable valuation model tells us they are expensive.

We know booming markets bust.

We know the gains made in the final months and even years of a booming market get blown away in a matter of months in a savage bear market.

We know paper wealth is NOT real…only money in a government-guaranteed bank deposit is really real.

Where do you invest in an Everything Bubble?

The contrarian asks ‘What’s the only asset that’s not in a bubble?’

Cash and term deposits.

If reading that makes you cringe, then that’s good.

In a world that’s head over heels in love with all things shares, property, bonds, and cryptos, you want to be in the arms of the unloved.

Only money in the bank is really real.

Due to the good graces of an upbeat social mood, the value in all the rest is only on loan to you.

When that mood changes, so too will the bottom line of those quarterly statements.

But there are other moves you can make — besides going to cash — to protect yourself and preserve your wealth. Find out what they are here.


Vern Gowdie Signature

Vern Gowdie,
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.

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