Protecting your wealth – short term earnings v capital losses

We spoke yesterday of the risk of inflated financial markets and where that leaves gold (a must read in our view if you missed it).  In the last couple of days we’ve also seen yet another EU deadline ignored by Greece and the whole Grexit / debt default issue still at large as just one of a number of ‘pricks’ circling the engorged financial markets bubble at present.

Vern Gowdie also strongly believes a major financial markets meltdown is nigh and lists his 6 main reasons below.   Vern rightly points out too that those worried about loss of earnings by not being invested in yielding assets right now, would very quickly forget the forgone earnings when faced with capital losses should the market take a 60%+ fall…  We include his 6 reasons unedited as follows:

  1. You cannot solve a debt crisis with more debt. The world is US$57 trillion more indebted than it was in 2008. If the world teetered with accumulated debts of US$142 trillion in 2008, how is it going to fare now that it has US$199 trillion (and growing) of debt? This is the biggest debt pile (as a percentage of GDP) the world has ever seen. Every single debt crisis in history has the same unhappy and messy ending. What makes anyone think this one will have some kind of ‘rom com’ happily ever after type ending?
  2. Reversion to the mean. Every single long term US share market valuation metric has the needle pointing to either over-valued or extremely over-valued. Unless we’ve entered a ‘new normal’ in valuation metrics, reversion to the mean is still a valid mathematical assumption.
  3. Baby boomers — the drivers of credit based consumption for the past 30-years — are transitioning en-masse into retirement. A lower return investment environment means the cavalier credit card fuelled purchases of yesteryear are being replaced with a more cautious cash based consumer attitude — at least until Generation X comes through in sufficient numbers to pick up the slack.
  4. Central banks openly buying government bonds (to finance government budget deficits) has a look, feel and smell of ‘something is not quite right’ about it. If this is a sound economic principle, why wasn’t it being done before the GFC? In my simple world, this constitutes a case of ‘desperate times calling for even more desperate measures’. Hardly a sound basis for investing in risk assets.
  5. Ultra low and even negative interest rates are a reflection of a very sick that is on life support courtesy of global QE efforts and history making interest rate settings. The sick (and getting sicker) economy is at odds with a booming share market. If something can’t continue, then it won’t. Either the economy regains health or the share market joins it in the intensive care ward.
  6. China quadrupled its debt from US$7 trillion to US$28 trillion between 2008 and 2014. This explains our GFC saviour, the ‘mining boom’. Debt accumulation of this magnitude and pace is impossible to maintain — unless of course it is different this time. Even if China just takes ‘a breather’ and debt levels stagnate for a couple of years, the loss of momentum is enough to bring the perpetual debt machine (global economy) to a halt. On the other hand, what happens if a major Chinese bank declares itself insolvent due to poorly collateralised lending? Watch out below!  ”

Vern’s observations above and on missed earnings compared to large capital losses are bang on.  However whilst Vern is saying get 100% out of the financial market right now, the reality is the central banks could keep this game going for a little longer with good earnings and capital gains to be made if you have the risk appetite.  We preach balance rather than one way bets.  There is little denying the truth in the 6 reasons above.  You can be prepared for that crash by having a good chunk of your wealth in gold and silver and have stop losses set on your shares to at least minimise your capital losses.  Just recall the message yesterday though, when (not if) it happens the flight to gold and silver will be enormous and the prices will rise accordingly.  Leaving your purchase until then will be too late.