Dear Reader, Could the government prop up the stock market indefinitely? I mean, they may take another couple more bites out of interest rates this year... there’s also talk of QE coming to Australia. Whatever you need to do to keep the party going, right? ‘Not this time’, says Rum Rebellion co-conspirator Vern Gowdie. Central banks are still reacting to the events of 2007 and 2008, says Vern. They are effectively pumping the global economy full of steroids, completely blind to the possibility that this strategy will, sooner or later, lead to organ failure. According to Vern, there will be a major crash (maybe soon)...and after that, we may see indefinite money printing. Which, of course, is good news for you — IF you follow Vern’s advice and cash out in time for the recovery! Vern expands on this very point in today’s video, the second in our five-part series, leading to the publication of Vern’s new and important research report on the perilous state of the Australian market at the start of this new decade. You can expect to see that next Wednesday. Click the thumbnail below to watch today’s clip, titled: ‘Could the Government Prop up the Economy Indefinitely?’ And for more from Vern, read on... Regards, | Greg Canavan, Editor, The Rum Rebellion |
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Open Your Eyes to the Real Lies By Vern Gowdie Seeing the future requires us to open our eyes. As best we can, we have to try to sort out the real from the unreal. Being told you can cure a debt problem with more debt, is not real…it’s in the realms of fantasyland. Yet, plenty of people have bought (or, more to the point, borrowed) into this carefully orchestrated version of ‘reality’. The higher markets go, the more blinded people are to what’s really happening…overvalued assets become even more overvalued. Sight is only ever restored after the inevitable and highly predictable correction has happened. Leonardo da Vinci was a man way ahead of his time. A true visionary. Among da Vinci’s many inventions were the tank, the helicopter, the flying machine, the parachute, and the self-powered vehicle. He said…‘Blinding ignorance does mislead us. O! Wretched mortals, open your eyes!’ Blind ignorance is what took the financial world to the abyss in 2008. And there was none as blind as those inside the system. These extracts are from testimony given to the ‘US Financial Crisis Inquiry Commission’, held in April 2010 (emphasis is mine): ‘I think all of us bear — not just all of us at Citi — failed to see the potential for this serious crisis,’ Robert Rubin, former Clinton Treasury secretary and member of the Citigroup board of directors. ‘In hindsight, it's very hard to see how these structured products could have been accepted in the way (that) they were accepted, ’ Charles Prince, Citi CEO The subprime time bomb was hiding in plain sight…as the movie The Big Short showed us, others saw the problem with crystal clear clarity. Just because detonation took longer than expected, it didn’t change the reality of the situation…tick, tick, tick…the bomb was still active. In hindsight, 2008 was only a dress rehearsal. With foresight, we can outline the case for a much larger disruption to the global economy…one that threatens to unwind much of the growth of recent decades. Since the early 1980s, the global economy has grown due to increasing reliance on more and more people going deeper and deeper into debt. To facilitate this ‘growth’ model, interest rates have fallen from the high teens down to barely zero (or beyond). When you strip away all the economic mumbo jumbo, that’s the central bankers ‘growth’ model. The share market has been a major beneficiary of this ‘growth’…the Dow Jones index has increased 29-fold (from 1,000 points to 29,000 points) over the past 37 years. While this compound effect is now seen as ‘normal’, I can assure you it’s not. The previous 29-fold increase in the Dow (from around 35 points to 1000 points) took almost 90 years. Do you think it’s sheer coincidence the accelerated growth of the past four decades has occurred precisely at the same time as baby boomers reached their adult years? Or, are the two joined at the hip? If, like me, you think it’s the latter, then you’ll realise the global economy is nothing more than a giant Ponzi scheme. The global economic pyramid scheme requires an ever-expanding base to support the apex AND (this is a very important, and) that base must have the financial means to support ever-expanding debt levels. If we want to see what may lay ahead, it’s critical to look at the quantity and quality of future population growth. Population growth Population growth (along with debt) has been a major contributor to GDP growth…in Australia and other major economies. ‘Australia has been increasingly relying on more people, rather than improved productivity, to lift economic activity.’ Business Insider, March 2018 And then there’s this extract from a Financial Times article written by Ian Goldin (professor of globalisation and development at Oxford University), my emphasis added: ‘Cutting immigration will hobble economic growth. It’s that simple. New research I have conducted with Citigroup suggests two-thirds of US growth since 2011 is directly attributable to migration. In the UK, if immigration had been frozen in 1990 so that the number of migrants remained constant, the economy would be at least 9 per cent smaller than it is now. That is equivalent to a real loss in gross domestic product of more than £175bn over 15 years. In Germany, if immigration had been similarly frozen the net economic loss would be 6 per cent, or €155bn.’ Immigration has played an integral role in increasing GDP numbers. Faced with population pressures, governments are forced to borrow to fund infrastructure projects…another boost to the GDP numbers. Pressure is placed on property prices…forcing people to borrow greater sums of money…another boost to GDP numbers. Immigration can be a valuable source of economic growth provided it’s ‘quality’ and not ‘quantity’. If the immigration intake is based on bringing productive skill sets to your country then that’s quality immigration. People who make a positive contribution to the economy can help grow the pie for all. They are also in the financial position to take on debt…the lifeblood of our credit-fuelled system. Whereas, accepting unskilled people into your country only serves to artificially boost GDP. Governments spend money they don’t have to provide a variety of support services — welfare benefits, healthcare, public housing, legal aid etc. This spending counts as economic activity, but it’s literally a false economy. Europe’s refugee crisis is an example of growth in quantity not quality (productive output). Former US Federal Reserve senior financial analyst, Danielle DiMartino Booth wrote (emphasis is mine): ‘…the migrant crisis and its price tag may appear to be a relatively new phenomena driven by the devolution of Syria. To the Italians, the saga has stretched on for a generation. By way of geography and proximity and little more, Italian taxpayers are obliged to bear the brunt of the cost of the immigrant crisis. ‘Consider that the population of foreign born residents has quadrupled since 2002 to over five million. With that as a starting point for calculating the tab, is it any wonder taxpayers are affronted by the $15,000 per annum, per capita effective tax hike to cover the cost of the hundreds of thousands of migrants who continue to flood Italy’s shores?’ Before anyone takes this out of context as a cold-hearted view of the world, this is not a discussion about society’s humanitarian obligations. It’s about whether the population base can… a) Continue to expand in numbers sufficient enough to support the apex, and b) Whether that expanding base has the means to continue borrowing at an exponential rate. Governments digging deeper into taxpayer pockets to fund humanitarian programmes is NOT how an economy generates sustainable organic growth. But it is one sure way to create a backlash against immigrants… As reported in World Politics Review on 30 July 2019: ‘Late last year, a decree abolishing humanitarian protections for migrants in Italy became law. Pushed by far-right leader Matteo Salvini as part of a crackdown on migrants and refugees, the law threatens to drive Italy’s migrant community further to the margins as anti-immigrant sentiment rises across the country.’ Quality (value added) immigration is becoming a rarer commodity. The following chart (based on UN projections) shows annual population growth in both the developed (OECD) and developing (BRIICS) worlds in terminal decline. Future global population growth is dominated by poor countries (the green band)…predominantly Africa. In the foreseeable future, global immigration — in economic terms — is likely to be more quantity than quality. And that has repercussions. The backlash in Italy — to the rising cost of quantity immigration — is not an isolated case. ‘Campaigning on a platform of lower taxes and privatization, while capitalizing on growing resentment within Greece over migration, Mitsotakis and his right-wing New Democracy party won a landslide victory in parliamentary elections in July, securing nearly 40 percent of the vote. ‘…resentment is mounting over the burden of migrants and asylum-seekers already in the country. New Democracy is seeking to harness that resentment for political gain, in part by ramping up its anti-migrant rhetoric.’ World Politics Review, 15 January 2020 When the next credit crisis hits and people feel poorer, what’s playing out in Italy and Greece will spread through Europe and to other countries…which means ‘quantity’ immigration is likely to be restricted. In Australia, discontent over immigration has also bubbled to the surface. The Financial Review, July 2018: ‘…domestically, the tensions in that Australian success story [multiculturalism] are increasingly obvious. ‘Whether it's the violence of Sudanese youth gangs in Melbourne or political calls for a radical decrease in the annual intake, questions about Australia's immigration levels and approach are becoming much louder.’ Those murmurings have been heard in Canberra. As reported by SBS News on 6 September 2019: ‘The number of migrants granted permanent residency has dropped to its lowest level in a decade as the [Australian] government pursues its "congestion-busting" approach.’ When the next crisis hits and unemployment rises, the murmurings will turn to howls of protests. ‘What do we want?’ ‘We want Australian jobs for Australians.’ Immigration numbers (in both quality and quantity) are likely to be reduced significantly to appease aggrieved electorates. From both a statistical and political viewpoint, it appears that the ability to expand the base of the global Ponzi scheme (in sufficient numbers) is rather limited. Absent a fresh injection of new borrowers (with the financial capacity and desire to borrow), the future is not going to be a repeat of the past. When your eyes are opened up to how the model operates, you can see the real lies in the growth story we’re being told. Regards, | Vern Gowdie, Editor, The Rum Rebellion |
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There’s More Than One Way to Go Broke By Bill Bonner What next? CNBC: ‘Stocks ended lower Tuesday after the Centers for Disease Control told Reuters that a traveler from China was diagnosed with the first U.S. case of coronavirus, in Seattle. ‘The Dow closed down 152 points after falling as much as 200 points. The S&P 500 shed nearly 0.3%, while the Nasdaq dipped 0.2%. ‘Shares of casino and hotel companies Wynn Resorts and Las Vegas Sands fell more than 6% and 5%, respectively, amid fears that the coronavirus outbreak in China would dent international travel.’ A virus! Could a microscopic bug be the ‘pin’ this bubble has been looking for? Who knows. But something will pop it sooner or later… The day the world ended We’ve been calling September 17, 2019 ‘the day the world ended’. On that day, a spike in short-term lending rates — in the ‘repo’ market — threatened the US government’s deficit spending…and blew the doors off the Federal Reserve’s ‘normalisation’ policies. The Fed has been adding some $100 billion per month to the nation’s money supply since then. (Paid-up readers of The Bonner-Denning Letter can look for more on that in our January issue, out this evening.) Of course, we are exaggerating the finality of the situation for dramatic effect. The world goes on. But it’s not the same world. And the new world will probably be a lot less agreeable than the old one. And the disagreeableness of it will increase greatly when the bubble blows up. Then, prices won’t be rising; they’ll be falling — hard. Prices of financial assets, in particular. That is when the printing presses will really get rolling. The Fed will have to inflate even more aggressively to stop the market from falling. But today we’re not looking at the future. We’re recalling the past. We’re not looking beyond the end of the world, in other words. We’re looking at when it began. As we’ll see, there’s more than one way to go broke… Remember the 70s? ‘This reminds me of the early 70s’, said an old-timer yesterday. Do you remember what happened, Dear Reader? We do. We were out of college, out of the Navy…and just entering the workforce. If we recall correctly, we earned barely $120 a week as a roofer’s helper. It wasn’t much money. But it was only temporary, until we found a real job. And life back then wasn’t so expensive. With $120 you could buy three whole ounces of gold. Or, you could invest in stocks; with seven weeks’ worth of wages, assuming we spent nothing, we could buy all 30 of the Dow stocks. Gold was the better bet. Over the next 10 years, the Dow went nowhere. In 1981, it was about where we found it in 1971. But wait… The old money was gone. In its place was new money, a new dollar from which the gold link had been removed. Now it was called a ‘Federal Reserve note’, meaning that it was a liability — a debt — owed to you by the central bank. Most people barely noticed the difference. The new dollars looked almost exactly like the old ones. They spent like the old ones, too. What difference did it make if the foreigners could no longer redeem them for gold as promised? Well, it made a difference to the Arabs. Oil producers noticed that getting new dollars for their oil was not the same as getting old dollars. The price of gold rose from $35 in 1970 to over $100 in 1973. Arab exporters were still taking $3 for a barrel of oil. In real terms, their incomes had been cut by two-thirds. In October of 1973, OPEC announced an embargo on exports. The ostensible reason was to target nations supporting Israel in the Yom Kippur War. The hidden motive was to get the price of oil back to where it had been when the dollar was still real money. Naturally, the feds reacted unwisely. They imposed price controls; rather than ration gasoline with higher prices, they rationed it by wasting everyone’s time. We had begun a new job by then, in Washington, about a 30-mile drive from home. Gas lines had formed. In order to get the gas we needed, we got up at 4 am to get in position, sleeping in our truck until the station opened… The great inflation The first oil shock set off the Great Inflation. The Consumer Price Index was at about 4% in early 73. By 1975, it rose to a peak of 10%, eased off, and then rose again to end the decade at 14%. People blamed the Arabs. But the real price of oil — in gold — merely went back to 1970 levels, before the new money was put in place. And the real villains weren’t in Riyadh. They were in Washington. As for investors, they thought they went nowhere in the 70s. But that was just another illusion caused by the new dollars. In real money, they lost 92% of their stock market wealth. Prices held steady in nominal, new dollars. But in old-dollar terms, they collapsed. So what do you think? What would you tell the young man just starting out today? Buy stocks? Or buy gold? Or let’s put the question another way. Are the feds likely to inflate more or less than in the 1970s? To be followed up… Regards, | Bill Bonner, For The Rum Rebellion |
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