What’s coming…and how to take advantage

Wednesday, 20 November 2019
Adelaide, Australia
By Bernd Struben

  • Markets
  • If consumption falls…

Having some idea of what’s coming and how to take advantage of it, hopefully gives us an edge. Remaining calm and rational while others succumb to attacks of panic.

Vern Gowdie, The Gowdie Letter

Some records are meant to be celebrated.

Like the world’s fastest person. That’d be Kenya’s Eliud Kipchoge. He holds the official world record, running a marathon in only two hours, one minute and 39 seconds.

Or the world’s fastest computer. Google’s Sycamore processor currently claims that title. The quantum computer can, allegedly, solve a problem in 200 seconds that it would take the world’s fastest super computer 10,000 years to crack.

In the investment world, today’s record or near record high stock prices are also worthy of celebration. Unless you’ve been betting against the market.

Other records, on the other hand, would better be given a pass.

Like the hot dog eating record. That one goes to Joey Chestnut who ate 74 hot dogs…plus the buns…in 10 minutes. Impressive? Maybe. Gross? You bet.

Then there’s the record heat sweeping through South Australia today. It’s currently 43 degrees outside my window. I’m waiting for my Doberman pup, playing in the yard, to spontaneously combust. (Don’t worry, she can come inside to the cool whenever she wants.)

But a new record we could really all do without is our household debt pile. Which, according to NAB, has just reached new heights:

chart image
Source: Sydney Morning Herald (SMH)
Click to enlarge

If ever there was an unsustainable trend, you’re looking at it in the above graph.

For the first time…ever…Aussie household debt is more than twice the annual income. 202% more, to be precise.

Leading the pack in this lamentable record is Victoria. Where, according to the SMH, ‘the debt-to-income ratio has reached 212 per cent. It is followed by NSW households at 191 per cent while Queensland households are at 183 per cent.

The total household debt pile now stands at a mountainous $2.5 trillion. And this in a low to no wage growth environment.

Should we be concerned?

Very much so, says NAB’s senior economist Kieran Davies.

From the SMH:

‘[Davies] said even though interest rates were at a record low, the debt servicing ratio of households was just short of the peak reached in 2008 when the official cash rate was 7.25 per cent. It is currently just 0.75 per cent.

The high debt left the country’s households, particularly those in Victoria and NSW, at an increased risk in any downturn.

Can you envision what’s going to happen when the long elusive inflation returns to rear its ugly head? When the RBA will have no choice but to ramp up interest rates to keep a lid on soaring prices?


More, after a look at the markets…


Overnight, the Dow Jones Industrial Average closed down 102.20 points, or 0.36%.

The S&P 500 closed down 1.85 points, or 0.06%.

The Nasdaq moved the other way. Demonstrating continued investor appetite for technology stocks, the Nasdaq gained 0.24%, closing at a new record high.

In Europe the Euro Stoxx 50 index closed down 8.36 points, or 0.23%. Meanwhile, the FTSE 100 gained 0.22% and Germany’s DAX closed up 14.11 points, or 0.11%.

In Asian markets Japan’s Nikkei 225 is down 172.43 points, or 0.74%. China’s CSI 300 is down 0.49%.

The S&P/ASX 200 is down 94.72 points, or 1.39%.

West Texas Intermediate crude oil is US$55.17 per barrel. Brent crude is US$60.91 per barrel.

That puts WTI down 3.1% since this time yesterday. Smack in the middle of my US$50–60 forecast for 2019.

Why the sharp fall?

The same reasons that have been keeping a cap on crude prices since oil began to tumble in October 2018. Namely, fears that the trade war will continue to dent global demand alongside surging US supplies and stockpiles.

Official US government figures are due out today (overnight our time). But Bloomberg tells us the American Petroleum Institute reported  US crude stockpiles surged 5.95 million barrels last week. That’s ‘according to people familiar with the data’.

Oh, and it looks like Russia will…at best…stick with its current production cuts. Further cuts are ‘unlikely’, according to Reuters.

The picture I’ve been painting for you all year continues to come into sharper focus. Barring a major war in the Persian Gulf, I believe 2020 will see crude prices fall another 10–20% from here.

Good news for Aussie consumers at the bowser. Not such good news for Saudi Arabia’s Aramco IPO. US$2 trillion? Tell them they’re dreaming!

Turning to gold, the yellow metal is trading for US$1,471.79 (AU$2,162.49) per troy ounce. Silver is US$17.05 (AU$25.05) per troy ounce.

One bitcoin is worth US$8,118.32.

The Aussie dollar is worth 68.27 US cents.

If consumption falls…

Getting back to Australia’s growing debt pile…

Rocketing, unsustainable debt is a theme we sound the alarm on here on a regular basis. And it’s one our wealth preservation expert Vern Gowdie warns will usher in an epic stock market and property collapse.

Precisely when that will happen is anyone’s guess.

The world’s most powerful politicians, central bankers and billionaires have all aligned to keep this house of cards standing.

To date, that’s been enough.

But let’s not forget that household consumption makes up more than half of GDP in most developed nations. In Australia, it’s around 57%. Which is why our esteemed Treasurer recently urged consumers to spend up big to help stave off a recession.

But with the income to debt ration of the average household now standing at a whopping 202%, how sustainable is a consumer spending spree? Assuming you can even get one going.

No more sustainable than the ballooning debt captured in the chart up top.

Which brings us back to the importance of having an exit strategy for your investment holdings. Like stop-losses, as discussed in yesterday’s Insider.

The ASX and global markets, already at or near record highs, remain in an upward trend. And that trend could run for another year…or more. Though almost certainly not without some painful short term corrections.

But as we looked at yesterday, even when the wider market is marching higher, individual stocks can take a drubbing. Like the ASX listed Prospa Group, which is down 44.9% since its 11 September peak. Or the Canadian listed Aurora Cannabis, down 77.4% since March.

Those kinds of losses are hard to recover. Really hard.

I showed you this chart yesterday. It’s from Monday’s edition of The Gowdie Letter. But with a debt implosion building on the horizon, it’s worth showing again.

chart image
Source: BizNews
Click to enlarge

What you’re looking at is how much you need to gain to offset a given loss.

A 10% loss can be offset by a fairly easily achievable 11% gain. But as your losses magnify, recouping them becomes ever more difficult.

A 60% loss, for example, requires a 150% follow-up gain just to break even. And I don’t have to tell you that 150% gains don’t come along every day. Not in specific stocks. And certainly not across your entire portfolio, should the broader market crash hard.

That’s why Vern recommends proceeding with extreme caution. And preparing your portfolio now for the inevitable crash. (Details here.) As he pointed out earlier this week, according to his metrics ‘this is the most expensive market in US history’.

Vern’s money isn’t going anywhere near these ultra-frothy markets. He’s even signalled his intent to recommend selling the Perth Mint’s PMGOLD ETF. That’s up 30% since he recommended it to his readers.

But unlike the gold bulls — including many of his colleagues here at Port Phillip Publishing — Vern sees gold selling off during the coming crisis. Possibly back below US$1,000 per ounce.

Here’s Vern:

There are a number of governments and corporates in developing and emerging markets holding US dollar (USD) denominated debt.

When the proverbial hits the fan, investors seeking safety of capital will pour money into US Treasuries.

This will force the USD to strengthen.

When that happens, the cost of the USD debt in local currency terms will go through the roof… unless you are holding a USD-based commodity.

What’s the world’s most readily tradeable USD commodity? Gold.

Vern makes a good point.

If debt addled developing nations start selling their gold holdings to keep from defaulting, the supply spike amid subdued demand could reveal the haven asset isn’t as safe as most investors believe.

This isn’t the kind of advice you’re going to get from the mainstream financial media. Or from almost anyone else.

But it’s the kind of advice Vern packs into his market crash survival guide. And shares each week in The Gowdie Letter.

You can get the details on both…right here.