‘If you’re gonna play the game, boy…you gotta learn to play it right. Every gambler knows that the secret to survivin’ is knowin’ what to throw away and knowin’ what to keep. ‘Cause every hand’s a winner. And every hand’s a loser. You’ve got to know when to hold’em and know when to fold’em.’
— Kenny Rogers ‘The Gambler’
The casinos of the world are relatively quiet.
The wheels are spinning. The cards are being played. The slot machines keep turning over.
But no one is winning or losing much of late.
According to J Lyons Asset Management, over the past 40 days, the Dow Jones has traded in its tightest range for nearly a century…up or down 2.27%. The last time the 40-day range was even close to this level was from December 1922 to February 1923.
We have a temporary (and, rare) standoff between the house and the players.
A good time to see what investment cards you’re holdin’ in your portfolio.
Do you have a winning hand?
The best and most brutally honest response to that question is: ‘I hope so’.
Because none of us — including the smartest people on Wall Street — know for sure what constitutes a winning investment hand in this casino.
Some, with far shorter timeframes, may have better odds of holding a winning hand.
But for long term investors, gambling their retirements on the roll of the interest rates dice…or the flip of a stimulus card…or the spin of the political wheel…or the toss of a coin on a European banking crisis…there are no certainties in this game of chance.
The ‘gambling’ (investment) industry has been built on the mantra of ‘shares for the long term’.
The promoters of the property gaming house — with megaphone in hand — tell us that holding a handful of negatively geared properties is better than a royal flush…a guaranteed long term winner.
And others (like superannuation funds) say holding different suits — some shares, property, fixed interest — in your hand will win out in the long term.
As part of the campaign to convince you to lay your bets with them, each promoter shows you the high odds of past successes.
Roll up, roll up.
Shares have gone up 11% per annum (including dividends) over the past 35 years.
Property values double every decade. Our balanced fund has done 8% per annum since inception.
When comparing these stellar past results with cash earning 1.5%, it’s a fair bet that most punters playing with a deck stacked with shares, property and balanced funds believe they’ve been dealt a winning hand.
But what if the rules of the game have changed and nobody has bothered to inform the punters?
What if, in this new casino, aces are now twos…and twos are now aces?
How weird would that be?
Suddenly, you’d have to rethink your whole game.
Here you are, holding onto what you thought was a winning (and paid for) hand, only to find out someone had changed the rules. That Royal Flush literally got flushed without anyone telling you. After all these years of playing the game and being told about how good the long term odds were stacked in your favour, you end up losing your shirt.
How angry would you be?
Mad enough to demand a Senate Inquiry or a Congressional Hearing?
We were duped. The deck was rigged. The dice were loaded. The wheel had magnetic stoppers.
The casino bosses have to be held accountable for tens of millions of baby boomer gamblers who’ve now lost their retirement chips.
But who’s going to be held liable for rigging the system?
The Wall Street promoters? The central bankers? The spineless politicians?
Good luck trying to issue any of these parties with anything more than a parking ticket.
While some of us think central bankers should be sharing a prison cell with Bernie Madoff…what we think, and what happens, are two very different things.
All the inquiries in the world aren’t going to change the outcome.
The individual gambler should have heeded Kenny’s sage words — ‘You’ve got to know when to hold’em and know when to fold’em.’
Shares, property and bonds have all been winning hands during a prolonged period in which credit expansion and interest rate contraction prevailed.
Since 1990, Australia’s total (public, corporate, private) debt has increased sixfold…from $1 trillion to over $6 trillion.
Remember the interest rates we had leading up to ‘the recession we had to have’ in 1990–91?
Since our last official recession, interest rates have fallen from 18% to 1.5%.
Baby boomers are also now 25 years further down the path in their lifecycle.
If you don’t think these dynamics played a major role in driving asset prices higher — with compound returns greater than any other period in recorded history — then your logic is at odds with mine.
With the issuance of that much debt, why do you think banking sector shares have done so well? Why do you think capital city property prices are among the most expensive in the world?
That additional $5 trillion ($5,000 billion) of debt had to go somewhere.
The house rules over the past three decades have been simple — borrow, invest in growth assets, and let the momentum of increasing debt levels do the heavy lifting.
If you continue holding this hand of past winners, you have to either think/believe/hope/or not have given any thought to whether these dynamics will continue in the future.
Can debt levels increase another sixfold — to $36 trillion — over the next quarter century? Perhaps. But how is this going to happen?
Since 2008, banks have been forced to hold more Tier 1 capital…restricting their capacity to lend to the same extent.
Will interest rates fall further to make debt even more affordable? Maybe, but there’s not a lot left to wring out of the interest rate cloth.
In a world of very competitive labour costs — and an increasing uptake of automation across all sectors of the economy — how are Australian wages going to outpace these market forces so households can finance the higher debt levels? Good luck with trying to figure that one out.
Will retiring boomers — faced with lower investment returns, the prospect of working to 70, a cutback in age pension receipts, and longer life expectancies — suddenly start another credit-fuelled consumption binge? Highly unlikely.
Will Gen X and Y, weighed down with housing debts (thanks to boomers pushing up property values), HECS fees and the prospect of higher taxes (to pay for boomer welfare) replicate the boomer consumption model? Possibly not.
If the dynamics have changed, then the rules of wealth creation have changed, too.
In the previous game of debt accumulation, cheaper debt servicing costs, and boomer’s living beyond their means, shares and property were the aces to hold.
Cash was a pair of twos.
The new game — called ‘capital preservation’ — means ‘You gotta learn to play it right.’
In this new game, the rules are simple: A pair of twos is the winning hand.
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You can hold a handful of aces and hope to bluff, but the market will call your bluff.
This is a high-risk game. Investors are gambling their future on that very future being a repeat of the past.
Every gambler knows that the secret to survivin’ is knowin’ what to throw away and knowin’ what to keep.
If you cannot afford to gamble your money away, then now is the time to look at your capital survivin’ strategy.
Throw away assets that have the capacity to fall substantially in value — before others wake up to the fact the rules of the game have changed — and keep assets that preserve your hard-earned capital.
Taking chips off the table to play again another day is the difference between the astute investor and the gambler.
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