You never go full Australia

Monday, 13 September 2021 — Laramie, Wyoming

[7 min read]

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 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,
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.

‘They mainly attributed the peaceful dominion of religion in their country to the separation of church and state. I do not hesitate to affirm that during my stay in America, I did not meet with a single individual, of the clergy or of the laity, who was not of the same opinion upon this point.’

Democracy in America, by Alexis de Tocqueville

Does freedom pay?

Thank the long-suffering people of North Korea for their real-world/real-time test. The elite in North Korea has been telling them what to do for more than half a century…with predictable results — grinding poverty…and outright starvation.

And we are grateful. Otherwise, the theory — that the freer the society, the richer the people — would be just a theory…buttressed only by speculation, logic, and anecdotal evidence.

But the test on the Korean Peninsula was almost perfect. Same people. Same resources. Same climate. Same time (the test began in 1953). More or less the same starting position (the US had pulverised North Korea in the war; but so had it smashed up Japan and Germany).

The southerners chose freedom — moderated, as always, by government, social norms, and so forth.

The group in the North went for non-freedom…ruthlessly, sternly enforced by the Kim II-Sung and then Kim Jong-II communist governments.

The result? The South Korean economy is now nearly 100 times bigger than the economy of North Korea. The average South Korean has nearly 50 times more wealth.

He will live to an average age of 79, which is 11 years longer than the North Korean male (and a couple of years more than the average man in the US).

And to top it off, the free people of the South are between 1­–3 inches taller than those in the North, thanks to getting enough to eat.

Conclusion: Freedom makes a big difference in the economic world.

But does it work elsewhere?

Born unfree

Thomas Jefferson, in a flight of fancy or wishful thinking, wrote that ‘all men are born free’.

Clearly, they are not. They are born subject to the laws and regulations of the place they are hatched.

In the US, Forbes calculated that some 88,899 rules and regulations were brought in from 1995 to 2016 alone, along with 4,312 laws.

And a newborn also has his share of the US$28 trillion national debt. No matter that he had no say in it…and got nothing from it.

Religious crusades

But Jefferson and the Founding Fathers at least tried to put some things off limits to bossy-pants rulers. We now take religious freedom for granted. But that was not always the case.

Here in Ireland, for example, Catholics were punished, starved, marginalised, burned out, chased out…driven ‘to hell…or to Connaught’…and killed outright.

The ‘religious’ wars in Europe — 1522 to 1648 — took the lives of as many as 18 million people. And earlier still, the Crusades against heretics, the Ottoman Empire, and freethinkers lasted for hundreds of years — until the last Moor was driven from the Iberian Peninsula in 1492 in the Reconquista.

After that, some different religions were tolerated in some places at some times. In Transylvania, in 1568, for example, the Diet — the legislative, administrative, and judicial body — enacted the Edict of Torda. In it, Catholicism, Lutheranism, unitarism, and Calvinism were permitted, but they drew the line at outright religious freedom.

Jews generally required special permission to live in a city, except in Poland, where they enjoyed substantial autonomy, given to them in the Statute of Kalisz of 1264.

But it wasn’t until the founding of the US that real religious freedom was firmly established.

Instead of granting people the right to practice their religion — or ‘tolerating’ them — the idea in the First Amendment is that religion is none of the government’s business. The feds can give no permission; they have none to give.

The result? Here too, freedom paid off. Different sects competed for hearts, minds, and souls…and generally flourished without resort to violence.

Unfree speech

And how about freedom of the press? One of the cardinal values of a free and prosperous society — also guaranteed by the First Amendment — is the ability to say what you think — even if it is idiotic.

But among the dogma of the new woke religion is that saying the wrong thing can be almost as bad as violence. If it makes someone feel bad, they say it is a ‘micro-aggression’ and should be outlawed.

In the news yesterday was an item from Texas. The University of Texas is being encouraged to eliminate its anthem, ‘The Eyes of Texas are Upon You’, not because of anything in the song itself, but because it makes black students ‘feel unwelcome’.

Can you talk openly about race in the US today?

How about the coronavirus…and vaccines?

Or sex? You can be as gross and indelicate as you want…but try to talk publicly about the differences between the sexes…and why a man may not be ‘cut out’ to make a good mumma…or why you may not be able to turn him into a woman just by hacking off his genitals…and see how far you get.

Say what you really think and you could lose your job, your career, your friends…and be harassed into hiding.

And it’s not the government itself that shuts you up…but the ‘free press’…and the keyboard warriors on social media!

How so?

We’ll take a look at that Wednesday.

Regards,

Bill Bonner,
For The Rum Rebellion