Let me ask you a rather pointed question. Could you afford to lose $304,347? I know I couldn’t. That kind of loss would set my retirement plans back by years. Not to mention the sailboat fund.
But these are exactly the kinds of losses you can make if you’re heavily invested in stocks and then the stock market crashes.
And the S&P ASX/200 is well underway into crash territory.
Have a look at the chart below. As an avid skier, I’d say that looks pretty good. Especially the bit from the 19th to the 24th. Definitely expert terrain. As an investor…not so good.
Source: Yahoo Finance
After essentially trading sideways since early May (with significant losses on any given day usually recouped on the next trading day), things took a drastic turn for the worse on 4 August. In the following three weeks the ASX plunged from 5,697 points to a low of 4,929 on the 25th. That’s a 13.5% loss, representing about $120 billion.
Then the bargain hunters moved in. And the ASX rallied more than 7% towards the end of last week. Pundits thought it might well be the beginning of a sustained rally. But as I wrote in the Port Phillip Insider last Friday, I doubt it.
This week has proven those doubts correct. On Tuesday the ASX lost another 2.1%, shedding an additional $32 billion of investor cash. And yesterday…well you can hardly call a 0.1% gain a rally.
Now, this may not be the beginning of the great crash quite yet either. But I’d certainly prepare yourself for more market volatility ahead.
$7 trillion erased from Chinese share markets
Compared to what’s happening with our northern neighbours, the $120 billion loss on the ASX is chump change.
Since the sell-off began in June, the value of Chinese equities has halved.
Poof. That’s the sound of $7 trillion in investor’s cash going up in smoke. And this despite the Chinese government’s herculean efforts to keep the market propped up.
To give you some perspective on just how large a number that is, let me write it out. $7,000,000,000,000. Or $304,347 for every man woman and child in Australia. Gone.
That’s the nature of stock markets. You can make a lot of money with the right investments when things are going your way. And you can lose just as much — or more — when the market turns against you.
And if you think holding blue chip companies offers you a level of protection, you might want to check the performance of the major banks and mining companies.
BHP Billiton [ASX:BHP] lost a staggering 26.5% from 4 May to 24 August. During that same time Australia and New Zealand Banking Group [ASX:ANZ] lost 22.5%. Does that sound like safe and secure investing to you?
When it comes to protecting your wealth, and biding your time to grow it safely, no one knows more than my colleague and good friend Vern Gowdie.
Here’s what Vern wrote to his subscribers in Gowdie Family Wealth last week:
‘What happened when China’s share market had a major meltdown on Monday? Chinese officials responded with lower interest rates and reduced bank reserve ratios. The sole purpose of this strategy is to encourage borrowing to stimulate the economy. More debt. Just what an over-indebted system needs.
‘These programed and predictable responses from policymakers is why the system is in terminal decline.
‘There are two very powerful forces zeroing in on a collision course. Neither side will give.
‘The central bankers and their political masters do not possess the humility to turn back and admit they were wrong.
‘The Great Credit Contraction cannot change course unless retiring baby boomers once again decide to become credit addicted consumers.
‘What we are seeing now in the markets is a little push and shove between both forces. Nothing really serious. The real collision is yet to come. And it will be ugly… Listening to the financial media you get the impression the past week’s volatility is “the historic fall”.
‘Not so fast. This was not even a drum roll to the main event.’
I know…let’s borrow the money!
Speaking of over-indebted systems, this headline from The Age caught my eye last week. ‘Victoria eyes borrowings to pay for new major projects’. The article went on to say:
‘Victoria is considering ramping up borrowing to pay for future infrastructure, with Treasurer Tim Pallas promising to throw out the “populist” political rule book decrying debt.’
And then there was this in Business Day: ‘“Hold fire” urged on loan curbs’.
‘The chief executive [Brett McKeon] of the country’s largest mortgage broker, the newly listed Australia Finance Group, has urged the banking regulator to “hold fire” on more moves to cool the investor lending market.’
Right. That’s the answer. More debt.
Perhaps Tim and Brett should have a look at the graph below. If we can go back to the skiing analogy, you’d want to strap on a parachute for this hill.
By the way, I lifted this graph from Vern’s new book, The End of Australia. I had the privilege of being one of the first to read this book when it hit my desk for an editorial review a few weeks ago.
And, despite the rather depressing title, it’s actually an uplifting book. That’s because Vern boldly points out all the cracks in the system. Cracks you might not be aware of. And he gives you some really useful ways to avoid being swept away when all those cracks finally align and the financial dam bursts.
Best of all our publisher, Kris Sayce, has decided to send a hard copy of this book for free to any readers who order one online. You’ll receive details on how you can receive your free copy soon.
In line with the premise of the book, Vern has just launched a brand new service. It’s called The Gowdie Letter. And if you want to protect your wealth during the next market crash — whether that happens later this year or several years down the road — there’s no better investment service out there.
You see, all of Vern Gowdie’s 30 years’ experience tells him we are on the verge of an economic collapse equal to or greater than the Great Depression. And this time around China won’t be there to spare Australia from the full force of the market collapse.
While most mainstream advisors are telling you the sun will come out again, so go and play on the beach, The Gowdie Letter is your alternative. It may not be sunny. But the idea is that you’ll be safer (and much wealthier) in 10 years’ time from receiving a more sober and realistic analysis of what’s going on…what happens next….and what you should be doing about it now.
To find out more about The Gowdie Letter and how you can receive your free copy of The End of Australia, go here.
Managing Editor, The Daily Reckoning
Editor’s note: This is an edited excerpt of an article that first appeared in Port Phillip Insider.