There’s no doubt about it. In the coming years, the world faces a major debt crisis. When this financial calamity hits, expect even Australia to blow up.
Yes this is a big call. And no doubt, a few readers will be scoffing over this somewhat ‘outlandish’ statement.
In fact, last night I shared dinner with a close friend of mine who runs a very successful private wealth firm. We were talking investment strategies over a couple of glasses of Argentine Cab Sauv and a steak.
My friend said he was putting 50% of his client’s funds into ‘safe’ government bonds. I could see the logic. The stock market has been extremely volatile lately. Plus, he wants to protect his clients from the pain of another Global Financial Crisis.
Nevertheless, I urged him to reconsider. Australia is bankrupt, like every other country. The next major crash won’t be an exact replica of the GFC. In this respect, while a deeper correction is possible short term, we won’t see a crash in the stock market. The real pain will be felt in the bond market in 2016/17.
We’ve never experienced a bond crash
We’ve never experienced a bond crash in our lifetime. Everyone has been led to believe that bonds are safe and stocks are risky.
Talk about a crash and everyone thinks stocks.
And, more recently, property.
But no one ever believes that the bond market could crash. Tell people that governments will default and lose your retirement, and they’ll think you’re crazy.
Trust me! I know.
Yet, government bond defaults have happened many times in history. I’m not just talking about Argentina or Venezuela either.
The last time a bond crash hit the world was in 1931–33. Governments across Europe and emerging markets defaulted entirely on their bonds.
And here’s a little-known fact…
In early 1931, the Australian government defaulted on its bonds interest payments— forcing a reduction from 9% to 3%.
Even US bond punters were feeling the pinch. Americans feared that the global debt crisis would hit their shores. At the time, thanks to the gold standard, US government bonds were backed by gold. And with the panic on the cards, US punters were swapping their government bonds for gold at a rapid rate.
Then in 1933, US President Franklin Delano Roosevelt (FDR) confiscated gold. And afterwards, FDR devalued the dollar — and by part government bonds — by increasing the price of gold from US$20.67 to US$35 per ounce. This meant that the US dollar and government bonds were devalued by 41%!
So don’t be mistaken. The Great Depression wasn’t caused by the stock market crash. It was mainly caused by the crash in the bond market. The property market even traded at cents to the dollar.
The devastation of wealth led to the 1935 US Social Security Act — socialism was born. And ever since, people have relied on government to look after them.
Indeed, a big mistake!
Government will not be there for you during the next crash. Because we are facing another crash in government.
It’s the End of Australia
Make no mistake. This government crash will be bigger than ever before. After years of fuelling economic growth with debt, the leverage party is well and truly over.
My colleague Vern Gowdie has been talking about this for years. By now you’ve probably heard of his new book, The End of Australia, which Port Phillip Publishing is offering for free to anyone who orders one online. If you haven’t yet, you can check it out here.
In this book, Vern shows that Aussie debt to GDP was less than 140% in 1990. It’s now greater than 250%! This an unsustainable level. And Vern Gowdie has a lot to say on the topic,
‘The central bankers and politicians are trapped in a bind of their own making — they cannot confess that the whole growth thing is a fraud that cannot logically be maintained without going deeper and deeper into debt.
‘But very few people ever question the continual growth premise.
‘Because we have been conditioned to think this is normal.
‘Conditioning plays a huge part in how we see the future.
‘Conditioning also heavily influences our investment decisions. Whatever the recent market performance has been (good or bad) it is extrapolated into the future. Instead a sustained market trend should be a signal to do the complete opposite.
‘Hyman Minsky, the Economics Nobel Laureate, noted ‘stability breeds instability’. This was Minsky’s ironic way of describing complacency. The longer the good times last, the more convinced investors become that things will stay that way.’
Stock market seems ready to crash
Vern’s comments on conditioning couldn’t be truer.
The California State Teachers’ Retirement System (CalPERS) — the United States second-largest pension fund — believes that a pending bond crash is out of the question. This isn’t surprising. Bonds are in a 30 year bubble and haven’t seen a crash since the 1930s. CalPERS are conditioned into believing that a crash can only happen in the stock market.
And now it plans to move as much as $20 billion (12% of the fund’s portfolio) into US Treasuries, hedge funds and other complex investments.
You’ve got to ask yourself, why?
Nevertheless, this is hardly good news for stocks in the short term. Just who will buy the tens of billions of stocks that pension funds will decide to sell?
Then there’s still large uncertainty surrounding the US Fed decision, Greek elections, and the Chinese equities market…to name a few.
A stock market correction won’t last long
So yes, the stock market may correct and make deeper lows in the months ahead. But nothing like we saw during the Global Financial Crisis. This time around, we’re looking at a maximum 30% correction from the May 2015 high.
Yet, this stock market correction just won’t last…
The big risks exist in the bond market — which is trading at a 30-year bubble. This is already evident from the rapidly shrinking growth in the world economy, escalating debt levels, rising unemployment, and ever more burdensome regulation and taxation policies.
When governments default on their bonds it will wipe out many of the big banks, pension funds, and insurance companies across the globe. That includes here in Australia. This will in turn hit overleveraged financial products, such as real estate and derivatives, hard.
Stocks will become the safe haven during this crisis.
Indeed, many who don’t see this play, will lose everything during the bond market crash. CalPERS will surely be sorry if it goes ahead with its plans to move out of stocks. In this case, don’t make the same mistake. If you want to protect yourself from this disaster, Vern’s book lays out some very simple advice here.
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