The end?

  • A ‘Deep State’ of recession
  • Next move, down
  • Jim wrote it, did you read it?
  • The Newman Show
  • Financial Anarchists

Nothing lasts forever.

Not even 26 years of economic growth.

As Bloomberg reports today:

Australia’s economy contracted the most in almost eight years last quarter as construction and government spending slumped. The currency plunged almost half a U.S. cent.

During the last quarter, the Aussie economy contracted by 0.5%. Analysts had expected a contraction of just 0.1%.

That’s a big miss.

But don’t worry, the Bloomberg report quotes Annette Beacher, head of Asia-Pacific research at TD Securities Ltd:

We’re still confident that this is just a perfect storm of negatives and we shouldn’t be talking about technical recessions — we should be talking about what rebound we can expect for the fourth quarter.

Well, that’s OK then. Nothing to worry about. But, what if Ms Beacher is wrong? What if the ‘perfect storm’ lasts longer than a quarter?

It’s not crazy to think that’s possible. After all, it has been 26 years since the last Aussie recession.

And Australia’s biggest export industry, natural resources, has been in a slump for five years. That’s bound to have an impact on the Aussie economy somewhere.

As we say, nothing lasts forever. Are you prepared for what happens next…?

Markets

Overnight, the Dow Jones Industrial Average gained 35.54 points, or 0.18%.

The S&P 500 added 7.52 points, or 0.34%.

In Europe, the Euro Stoxx 50 index gained 48.01 points, or 1.57%. Meanwhile, the FTSE 100 added 0.49%, and Germany’s DAX index climbed 0.85%.

In Asian markets, Japan’s Nikkei 225 index is up 71.55 points, or 0.39%. China’s CSI 300 is down 0.33%.

In Australia, the S&P/ASX 200 is up 36.11 points, or 0.67%.

On the commodities markets, West Texas Intermediate crude oil is trading for US$50.55 per barrel. Brent crude is US$53.54 per barrel.

Gold is US$1,169.94 (AU$1,575.71) per troy ounce. Silver is US$16.73 (AU$22.53) per troy ounce.

The Aussie dollar is worth 74.25 US cents.

A ‘Deep State’ of recession

Just over a year ago, Vern Gowdie wrote a book titled The End of Australia.

The title wasn’t to be taken literally. Vern wasn’t saying that Australia, as a nation state, would cease to exist.

But what he was saying was that Australia’s magical run of 25 years (now 26 years) without a recession would soon end.

Vern explained that the Aussie economy, much like the rest of the world, had only grown because of the huge levels of personal, business, and government debt.

As Vern wrote in the introduction to The End of Australia, under the subhead, ‘Unfortunately, no country on earth can remain permanently recession-proof’:

What I will demonstrate in this book is that the global debt crisis is coming to Australia’s shores.

And debt crises never have good endings…

Believe me, I don’t make this prediction lightly. And I have no interest in trying to scare you.

I’m simply following my research to its logical conclusion.

The global debt pile our lifestyles and retirement aspirations sit atop is the largest ever accumulated in history. Globally, hundreds of trillions (yes, trillions) of dollars have been created to finance our ‘cake and eat it too’ world.

The financial sector has grown obscenely rich on the ability to lend more and more dollars under a fractional banking system. And yes, the more they give out, the more interest income they receive, and the bigger the bankers’ bonuses. The remuneration structure rewards greater issuance of debt, not prudence.

Governments issue IOUs (bonds) like confetti to finance budget deficits. These deficits are the direct result of over-promising in politically popular programs, like generous welfare and healthcare arrangements. Taxes are raised to cover the shortfall, and within a few years budgets are once again in the red. Politicians simply cannot help themselves…they spend excessively to buy votes.

And in his latest book, How Much Bull Can Investors Bear, Vern addresses the issue of Australia’s recession-less economy head on:

To quote from the Guardian article:

“The treasurer, Scott Morrison, trumpeted the result and described it as ‘tribute to every Australian who has gone out there, gone to work, got a job, that is running or has started a business’.

“But Wednesday’s figures showed that growth in the June quarter had halved to 0.5% compared with the March quarter, and the Australian Bureau of Statistics said consumer and government spending were propping up other areas of the economy.”

Paying tribute to workers and small businesses for playing a part in the positive GDP number is a good “pee in the pocket” political tactic. But it deflects attention away from the real contributor to our 25 years of economic success — the capacity for working Australians to go deeper and deeper into debt.

The 25th Anniversary of Australia’s unbroken economic growth happened with the release of the 2016 June quarter GDP growth figures. The number came in at 0.5%. Making it a full 3.3% growth rate for the 12 months to June.

All we need is another three quarters of positive GDP numbers and we surpass the Netherlands’ record of uninterrupted economic expansion.

The Lucky Country, indeed.

Not so lucky if the current quarter records another economic contraction.

In his latest book, Vern explains the vital role of debt in helping create the 25 years of expansion…and why it can’t last. Vern notes:

In 2010/11, Australia’s GDP was $1.32 trillion. Five years later, in 2015/16, our economic output has grown to $1.67 trillion.

Australia’s economy has expanded $350 billion over the past five years. On the surface it looks like a cause for celebration. But keep the bubbly on ice for a moment…

In 2010, Australia’s national debt (public, corporate and private) totalled around $4 trillion. The latest national debt tally is slightly over $6 trillion.

We’ve added $2 trillion to our national debt to create economic growth of $350 billion. It’s taken nearly $6 of debt to generate $1 of economic activity.

Put another way, the Aussie economy as a whole has spent $6 in order to buy a product worth $1.

Or, if you think of the Aussie economy as an investment, it’s the equivalent of buying a company on a price-to-sales ratio of six-times sales.

Any analyst will tell you that’s a hefty multiple. And it doesn’t always make sense to buy anything trading at such a big multiple.

There’s no getting away from it. It’s all about the debt. It’s all about the perpetuation of a debt economy.

And it’s all about the players with a vested interest in keeping this system going. It’s what author, Mike Lofgren calls, the ‘Deep State’.

It exists right here in Australia. Vern Gowdie has lifted the lid on its influence and interference in Australia, both politically and economically. Details here.

Next move, down

Be clear about this. TD Securities’ Annette Beacher could be right about a rebound in GDP. But the market isn’t so sure of that.

As the Australian Bureau of Statistics revealed the last quarter contraction, what did the stock market do?

That’s right, stocks went up…



chart image

Source: Bloomberg
Click to enlarge


What’s more, the bond market is now starting to think the next move in interest rates could be down.

Two days ago, the market had priced in a 98% certainty of the Reserve Bank of Australia (RBA) keeping the Cash Rate at 1.5% by next February.

Today, that probability has sunk to 86.7%.

Not only that, but bank stocks have bounced. The old theory is that lower interest rates are bad for banks, because it squeezes margins.

Not anymore. Not when the economy and the banking system are in danger of collapse due to the immense debt levels.

Lower interest rates are good for banks because they make it easier for indebted individuals and companies to repay their debts.

When it comes to banks, it’s no longer about hoping for expanded profit margins, it’s about hoping they can achieve any kind of profit margin at all.

Vern’s all over this story. Go here.

Jim wrote it, did you read it?

In last month’s edition of Strategic Intelligence, Jim Rickards wrote:

Expansions do not have any pre-determined length. Australia has not had a recession in 25 years, but by all measures, a recession in the next 12 months should not be unexpected.

If Australia goes into recession, expect the Aussie dollar to collapse. In consequence, you can expect a soaring gold price in Aussie dollars.

And if that happens, a certain type of leveraged investment could be your best way to profit from this move. Details here.

The Newman Show

Our colleague Callum Newman recently interviewed former News Corporation and Fairfax journalist, Michael West.

You can hear the interview on Callum’s podcast, The Newman Show. As Callum told me, West talks about how ‘newspapers are dead, business journalism is a joke in Australia, and no one takes on big end of town.

It’s sure to be an interesting episode.

To subscribe via iTunes, go here.

To subscribe via Stitcher, go here.

To listen on the Money Morning website, go here.

Financial Anarchists

On the subject of podcasts, also remember to tune in to the latest episode from the Financial Anarchists. Our new episode will be available to download from Saturday morning.

Cheers,
Kris