Last Stop Before a Second Great Depression


The fireworks have continued in the financial world in the last 24 hours.

The Dow maintained its slide into the red…falling another 205 points overnight. And China resorted to its first emergency measures to try and stall the inevitable.

China’s central bank fired a double-barrel shotgun to get money pumping through its financial system. It dropped interest rates by a quarter of a point. And it reduced the amount of cash its banks have to keep in reserve to 18% of deposits, from 18.5%.

According to The Wall Street Journal: ‘The latter move in effect injects about 678 billion yuan ($105.7 billion) to the Chinese financial system. Meanwhile, the reduction in the benchmark one-year lending rate, to 4.6% from 4.85%, should make it cheaper for Chinese companies to borrow.’

In their eyes, they had to do something.

In four days 22% — US$1 trillion or more — has disappeared from China’s stock markets.

Will these measures be enough? You know what I think. And I’m not alone. As Currency Wars author Jim Rickards said earlier this week:

‘In the end, all bubbles burst, I expect this will go down about 70% or 80% before it runs its course, but bubbles never go down in a straight line…

‘This could take multiple years and there could be rallies in the meantime. They need to cut interest rates, cut reserve requirements and cheapen the Yuan, sell their reserves and use that to prop up their markets. There is a lot they can do, but this is just going to grind lower…’

My new book, The End of Australia, examines what that grind is going to look like on the ground in this country. But, most importantly, it looks at a specific mix of assets that are likely to outperform significantly during this grind, which I call a ‘Long Bust’. Free copies start going out in the mail this Saturday.

I wrote this book as an antidote to what you’re going to continue to hear from mainstream media channels as this crisis plays out.

In truth, I only ever now watch the business channels for amusement rather than enlightenment.

The CNN program Quest means Business is a case in point. When asked about the recent rout on Wall Street and whether we are going to see another GFC, the host Richard Quest said words to the effect ‘Investors should not panic. The economy and financial institutions are far stronger than they were in 2008.’

I must live on a different planet. The world I see is far more unstable than it was in 2008. The addition of US$60 trillion in debt over the past six years leads me to that conclusion.

China quadrupling its debt load from US$7 trillion in 2007 to US$28 trillion in 2014, also tells me the so-called miracle economy is nothing more than a mirage. A point I have made often to the readers of my newsletter.

We saw this movie in the 1980s…it was called ‘Japan’. The only change to the storyline is that Japan only trebled their debt load. China just had to go one better.

In the 16 April 2015 edition of Gowdie Family Wealth, I made this observation (three months prior to the Shanghai Index correction):

With a slumping property market in China, investor attention has turned to the Shanghai Index. While the property market has been tanking, the Chinese share market has doubled in value over the past 12 months.

Share investing has become the hottest game in town.

No money, no worries…we have a margin loan for you.

‘… Lots of tears, anguish and ruined futures await.

Unless it is truly different this time, history once again has some very hard lessons in store for those who choose to ignore the facts.’

In all modesty, there was no great insight required to make this call. It was common sense.

Sadly, common sense in financial markets and economic commentary is not all that common.

There is an old (and in my case, well worn) saying, ‘There is no new way to go broke…it is always too much debt.’

Whether it be margin lending, geared property trusts, personal credit cards or Greece, the proverbial always hits the fan when too much debt is involved. Why we expect a different outcome bewilders me.

In my nearly 30 years in the investment business I have lived through the 1987 crash, the 1990/91 recession we had to have, the 1994 bond market rout, the 1998 meltdown of Long Term Capital Management, the dotcom boom and bust, the subprime debacle and the GFC. I’ve seen currency funds come and go, hedge funds fly high and fall hard, geared products (property, shares and mortgage funds) promise so much and return so little (if any) of investor capital.

Each one of these experiences taught me a valuable lesson. There is no ‘it’s different this time’. All crises and product failures are man-made. Greedy, egotistical, self-serving, power-hungry people who think they are smarter than the market. And for a while they can be. It’s that period of brilliant success when they are at their most dangerous. They actually believe their own press.

Falling in behind are the investment industry product sellers. To be fair there are some — not many — independent thinkers and boutique firms within the financial planning ranks. But with the vast majority of financial planners directly or indirectly tied to the major institutions, objective and reasoned advice is in short supply.

The latest hot products are pushed onto an unsuspecting public who think the past is going to be the future. The end result is investors get burnt…again.

With all that is happening in the world, why does this matter?

Let me join the dots for you.

The world has well and truly geared up for growth. There is over US$200 trillion ($200,000,000,000,000) of debt in the system. The only way this will ever be paid back is if the economy can grow at a faster rate than the debt compounds. This is not happening.

China was the big hope. But as I have pointed out, China is a mirage. Spending US$21trillion you don’t have in a space of six years is not growth, it is stupidity. Yet we are told ad nauseum in the press about the genius of China’s officials. Since when did spending like a drunken sailor qualify as genius? If it does, I was a genius at 18.

All those other geniuses — central bankers, finance ministers, treasury officials, mining company CEOs and banking executives — somehow believed the miracle was the real deal and geared up. China would be the engine propelling us all to economic prosperity.

Finally the truth about China’s fake economy is being revealed, and these geniuses are shocked. Please spare me.

All my experience tells me we are on the verge of an economic collapse equal to or greater than the Great Depression.

Australian households are going to feel the full force of a market that’s sole purpose is to correct the serious imbalances that have built up in the system over the past 35 years.

Where do the majority of households obtain their financial guidance from? Financial planners aligned with major institutions and Industry Super Funds and/or the talking heads on the business channels.

Australians are being told the sun will come out again, so go and play on the beach. Meanwhile, underneath the surface the economic pressures of too much debt and negative growth are building. When that pressure becomes too great, a market tsunami will be unleashed.

What we are seeing at present are the initial shocks. This is not the big one. When that one hits, it’ll be too late to act.

My soon to be released book The End of Australia shows you how to move to higher ground and avoid the fate of most Australian households.

Keep an eye on your inbox Saturday to learn how you can get your free copy.


Vern Gowdie,
Editor, The Daily Reckoning, Australia

Publisher’s Note: This week we’re running a series of short three-minute videos on Facebook, where I (Kris Sayce) ask Vern about his views on the world economy, and especially what it means for Australia. After four decades or more of almost unlimited credit growth, Vern says that the Australian economy in particular is heading for a major shock. Go here to watch these critical videos now.

Vern Gowdie

Vern Gowdie

Vern Gowdie has been involved in financial planning in Australia since 1986. In 1999, Personal Investor magazine ranked Vern as one of Australia’s Top 50 financial planners. His previous firm, Gowdie Financial Planning, was recognized in 2004, 2005, 2006 & 2007, by Independent Financial Adviser magazine as one of the top 5 financial planning firms in Australia. He is a feature contributing editor to The Daily Reckoning and is Founder and Chairman of the Gowdie Family Wealth advisory service and editor of the Gowdie Letter To follow Vern's financial world view more closely you can you can subscribe to The Daily Reckoning for free here.

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3 Comments on "Last Stop Before a Second Great Depression"

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1 year 1 month ago

So if your predicting the end of capitalism with all the doom and gloom, Why should we bother buying your book to protect our wealth? if its as extreme as your indicating, the social fallout would be so ferocious, any body with any hint of wealth would become targets, law and order would crumble. By the sounds of it the four horsemen are circling, why not just go with the flow, and welcome the new social order regardless of good or bad?

John G
1 year 1 month ago
Vern, Thank you for your thoughtful articles. I have been a long time reader of the Daily Reckoning for many years. Through this time I have watched the markets and maintained my own share portfolio. With its own fair share of pain! The 2008 GFC an interesting period and to see how governments have responded is interesting to say the least. The world has embarked on a world of debt monetisation, which we all know will end badly. I always remember the old saying that most money is created, invested and destroyed within three generations. Governments are doing a fine… Read more »
1 year 1 month ago

Another good article, Vern. Especially liked your comment ‘In truth, I only ever now watch the business channels for amusement rather than enlightenment.’ Perhaps on a par with watching ‘dead cat bounces’, except I do feel kinda sorry for the newbies that get caught up in them.

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