Update - December 2018

[John]

Hello everybody!

It’s been almost three years since I posted an update to this group. I feel I can’t put it off any longer.

I’m going to keep this as brief as I can

Disclaimer: Remember that I’m not a qualified investment advisor. So the content contained herein should not be considered investment advice. It is a description of my personal research and views on economics and markets in case anyone finds it interesting or helpful. But, as in all things, you must make up your own mind and take responsibility for your own financial decisions.

Here are the dot points for anyone that is interested:

Firstly, what I was wrong about:

• I was obviously wrong back in January 2016 when I was expecting the global economies to enter a major downturn within a year or so of that date. This is not the first time I’ve underestimated the ability of economies to stumble along for extended periods and “kick the cans” further down the road than I thought possible. Hopefully I’m learning that these large ships take longer to sink than I might expect.
• I was wrong about the US economy and where it was headed. After much thought and research, I now feel I have a much better handle on the situation. The summary is that the US economy is the “least worst” economy in the world right now, and will continue to occupy that position for many years yet. Because Europe and much of Asia (particularly China) is in much worse positions, capital has been leaving (and will continue to leave) those economies and relocate to the USA. The consequences of this are very important to understand.

After scanning my prior posts, it seems I was right (albeit early) about pretty much everything else - so there’s that ;-)

Moving right along, my outlook is as follows:

• My expectations that Europe will suffer a major economic crisis and the Euro common currency system will break apart are coming to fruition. My view is that this is now utterly inevitable - there is nothing anyone can do to stop it.
  • Societal disruption is an unfortunate side-effect of significant economic declines and so it’s no surprise to witness increasing damage to the social fabric of Europe. Unfortunately it’s going to get a lot worse before it gets better.
• The best of China’s boom years are well and truly over. It’s mercantilist growth model can go no further. What comes next is either:
  • Many more years of much needed grinding and difficult adjustment… economically choppy “treading water” with mild-to-medium social unrest, OR
  • One or more steep economic declines over the coming years with higher levels of social unrest.
• Major disruptions in the bond markets. The highest grade US corporate debt and short-dated US treasuries will do OK I expect, but everything else will not have a great time. Worst off will be foreign (that is, non-US) debt denominated in US dollars - that is likely to get slaughtered. This is because it seems very likely that US interest rates have bottomed and will generally be on a rising trajectory over the next many years (perhaps even more than a decade). This will put further strain on indebted enterprises and governments as their interest payments put significant negative pressure on their books.
• Capital will continue to flow to the USA. There’s a couple of related points on this:
  • The US dollar will continue to rise in value relative to almost every (if not every) other currency. I expect this trend to last for a number of years yet.
    • As an aside, I expect the US dollar to rise so high that it eventually triggers a global currency crisis (many years down the track).
  • Even if the USA enters a recession in the coming year or so (and there’s a decent chance that it might), however badly the USA economy goes it’s highly likely that Europe (and China) will fare even worse. In other words, I expect the USA economy to relatively outperform all European and Chinese economies over the next many years.
• There is a massive pension crisis globally. Pension funds are absolutely hammered by the double whammy of extremely low interest rates and negative demographics (ageing population). Things in this space are going to get a lot worse before they get better. Unfortunately this issue will also fan the flames of social unrest as the hordes of people approaching retirement age discover that their promised pension payments are significantly reduced (and in some cases nonexistent).

Moving closer to home (for me):

• The epic multi-generational Aussie property bubble seems to FINALLY be bursting - for real, this time!
  • I’m watching the main metrics of the property market closely and it’s already really bad this time and shows no sign of bottoming yet. It many areas the market is so damaged that you could make a case for calling it already “seized up”. This is consistent with the fact that this time there are multiple independent forces pushing down on the Aussie property market. Those forces have a lot further to run yet.
  • What I find fascinating is how the Aussie banks (and average Aussie Joe Mortgage) have actually pulled this house of cards down on their own heads. I was not expecting them to pull it down on their own heads so willingly. The Banking Royal Commission correctly exposed the widespread fraud going on in the mortgage lending world and average Aussie Joe mortgage was cheering it on and relishing the fact that bankers were getting wrapped over the knuckles for loaning them more money than they should (which they foolishly accepted). But in doing so average Aussie Joe Mortgage is shooting himself in both feet (and the groin) because by causing the banks to clean up their act they’ve caused new loan issuance to dry up, the rapid consequence of which is that the buy side of the property market has dried up drastically.
    • I should’ve been tipped off to the fact that average Joe Mortgage would be so foolish when I witnessed the widespread support for the campaign to make the internet giants Amazon/Google etc pay Aussie tax for goods they sold - the consequence of which has been that Amazon etc now offer a reduced range of products to Australians and Australians now pay higher prices due to tax now being applied. You can argue that this is a fairer situation, but nothing about this change is in the average Australians best interests.
• For multiple reasons which I won’t go into for sake of brevity, I think the Australian economy is well on the way to entering a protracted (read multi-year) recession. Hopefully not a depression but it’s entirely possible.
• My analysis is that the Australian dollar has nowhere to go but down for the foreseeable future. This will help support Australian exporters and the tourism industry, but will seriously undermine the purchasing power of the of the (minority) of Australians that actually have savings. For what it’s worth, I’m allocating a good chunk of my family’s savings to US dollars. For years I’ve been expecting it to go below 50 US cents, and it’s already well on the way to that level.
• If the Aussie property market seriously seizes up, the Australian banking system will quickly enter high distress because Aussie banks are leveraged to the eyeballs in property mortgages. If this occurs, then the savings of depositors would be at risk.
  • I have researched the details of the government deposit guarantee scheme and, in summary, it’s design is POOR. As of right now, the scheme is entirely unfunded. The design is that if a bank goes under, the government will print money to make depositors whole (up to the specified limits) and then charge the banks left standing (which means charge the depositors of those banks) a fee to recover the monies paid out to depositors of the failed bank. It shouldn’t take you too long to work out the flaws in this plan.

That’s all for now. I hope these comments help you in your planning for your financial future.

All the best

John