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Lethal cocktails rarely end well

By Vern Gowdie - posted Monday, 4 November 2019


Others may choose differently. That’s fine. We all have to live with the consequences of our actions.

The consequence for me has been a capital base that’s made glacial progress. The purchasing value of our portfolio is not — currently— being maintained.

I stress, currently, because that dollar in the bank could — if a significant downturn eventuates — buy two, three or four shares for the price of one today. We’ll see.

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Experience has taught me — that on balance — it’s better to err on the side of caution.

The Great Depression and the GFC, the two most severe economic downturns in modern history, were a result of too much debt in the system.

Current debt levels dwarf both those periods. The pile is massive. And unlike 1929 and 2008, it is now a global problem.

Developing (especially, China) and emerging markets have all added to their pre-GFC debt piles.

On the other side of this debt, there are those who’ve lent the money.

And with ultra-low rates, lenders are being forced to lower their standards and increase their risks.

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Here’s an extract from the October 2019 IMF Global Financial Stability Report (emphasis is mine):

Lower-for-longer yields may prompt institutional investors to seek riskier and more illiquid investments to earn their targeted return. This increased risk-taking may lead to a further build-up of vulnerabilities among investment funds, pension funds, and life insurers, with grim implications for financial stability.Furthermore, institutional investors’ strategies to search for yield may introduce additional risks. Low yields promote an increase in portfolio similarities among investment funds, which may amplify market sell-offs in the event of adverse shocks.’

In order to deliver the rate of return required to keep investors satisfied, institutions are all chasing the same higher returning, lower quality offerings.

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This article was first published on Rum Rebellion.



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About the Author

Vern Gowdie has been involved in financial planning since 1986. In 1999, Personal Investor magazine ranked Vern as one of Australia’s Top 50 financial planners.
His contrarian views often place him at odds with the financial planning profession today, but Vern’s sole motivation is to help investors to protect their own and their family’s wealth. Follow him on Twitter @RumRebellionAus

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Creative Commons LicenseThis work is licensed under a Creative Commons License.

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