Diamond Tiaras And The First Great Recession

February 21, 2019

Oct 22, 2019

I know I speak about the impending recession… like… A LOT these days! I will admit I do have an obsession with it, but it does not come from a place of malice. I was never the snot-nosed kid who burnt ants with a magnifying glass; I was the kid trying to save them.

My obsession with recessions firstly comes from the understanding that a recession is one to tip the scales back into balance. It is where fortunes are lost, but more importantly to those who understand the mechanics, it is where fortunes are made. Opportunity knocks, as they say, you just need to be around to answer the door. My fascination with this particular recession comes from observing what I can only describe as selective blindness by everyone who had a chance to stop it. Now, I am not talking about you, my only beloved reader (thanks, mum); I am talking about the people in power. Let us look locally before we talk globally. It almost starts like a bad joke…

A banker, an accountant and a politician walk into a bar. The accountant says "hey guys, we are worried about the economy because unemployment is on the rise and people are worried about a slowing economy so they are saving and not spending. We are going to drop the cash rate to make money cheaper for you guys. Politician, can you build more schools and roads to create more jobs and spread some cash around. Banker, can you pass on the discount so that people have more money in their pockets and they will start borrowing more money to buy more things. We all know that the average person will always spend what they earn - chuckles - and it is better spent in the economy than adding to your huge profits"

The politician says "now, I would love to help you out there accountant, but the problem is my political party is only in power for another couple of years. A few years back, this guy Peter Costello had the national budget in a surplus, which means they had money left over after they did their budget so that means if our party has a surplus then we are a success and the people will vote us back in next election"

The accountant responds "I don’t think that is how it works, friend. I was talking to my mate, the economist and he says that your success should be in propping up the country by spending the money that people pay you in taxes to create new jobs and grow the country’s citizens’ personal wealth; not hoard it away for a fictitious reason your voters do not care about"

The politician decides that he doesn’t like the tone of the accountant and ignores him. Meanwhile, the banker has been giving both of them the finger as he sits in the corner,

thinking to himself: remember that royal commission you both put us through and the restrictions of lending and servicing you jammed down our throats. Well, you can both f***

yourselves until things get so bad that you have to loosen up those restrictions. Until that happens, we know there is going to be a recession so we are going to hoard all the gold to weather the storm.

The moral of the story is that the key players in our economy are essentially playing a game of monopoly. They know what is coming, but are all playing a different game on the same board.

Now, I think Philip Lowe, head of RBA, is doing the absolute best he can with the tools that he has, but he should change tactic because the government is clearly not going to

listen. He needs to work on loosening up the servicing criteria so that people can refinance and start buying some investment properties or start a small business. It’s the banks that control the money flow in the country. In today’s society, the economy is less moved by government spending on infrastructure compared to spending levels contributed by the average Australian in a property boom.

So that is Australia. The RBA is freaking out, not a good sign. Banks are hoarding cash, not a good sign. Government has no idea what an appropriate monetary policy looks like coming into a recession. So the latter is either ignorant of the recession or has adopted the banks’ approach and think hoarding money will help them. Either is stupid.

Here is some super scary stuff on the international scale. Ray Dalio, the owner of Bridgewater Associates, the largest hedge fund in the world with around 160 Billion US dollars in assets under management (that is a theoretically $1 gazillion metric tonnes AUD given how weak our dollar is at the moment), has come out and made some comparisons to the 1930s global market and he has said that the world is in a "great sag" *

For those of us who were not around post-roaring 20s, the 1930s is most commonly referred to as the Great Depression!! In America, GDP fell 27%... the deepest after that was during the GFC in 2007, where it fell 5.7%... I think you are starting to see the lines I am drawing here. We are in an era where current monetary policy and interest rate easing is not going to be of much help, and the big economies that helped prop up the world eco nomy during the GFC are at the limit of their cash rates. Europe, Japan, Israel and Australia are already heading for a zero cash rate before the big show has even started.

So Ray says that the world is experiencing the greatest wealth gap since the 1930s and that is creating political stress. I will be honest, I don’t see how myself, but this is the guy that the world could have a global financial crisis in 2007 before the term was even coined, so I’ll nod along in agreement. Ray pulls some interesting facts together, * including his assessment that “the top one-tenth of 1% of the [US] population has a net worth that is approximately equal to the bottom 90%.” That means 327,200 people in the United States have the same amount of money as 294,480,000 people!! How many diamond-encrusted tiaras can you have, right?!

Ray also states * that “also like the 1930s, we have a rising power challenging an existing world power in the form of China-US challenges.” This is all a lot of random bits of information when we are talking about a world recession or perhaps it’s going to be the Great Global Financial Depression, the GGFD (just remember I coined that first, trademark pending).

You see, the issue that we have is the same as our education systems: our monetary policies are dated, we are using mechanics that are from the old world industrial evolution era when the world was large and we communicated with the telegraph. Today, the world is very small and countries’ economies are reliant on each other, to the point that current US President Donald Trump can intimidate Turkey by threatening to ruin their economy. I hate to hazard how much that would then affect the rest of that region's economies, including Europe, and the devastating toll that would then have on an emerging free UK post-Brexit. It’s not just the countries to consider; it’s the people in them. When speaking about economics, we often think the country, but the economy is made up of flesh and blood. The amount of business on a global scale that affects the local ecosystem compared to the 1930s would have been the speculation of a sci-fi novel in that era.

It is a new world and a new time. We saw the effects of this during the GFC and, as mentioned in my earlier posts, it was a band-aid solution. When the chickens come home to roost, I think we will find they are actually emus. It is indeed a very ugly duckling. Because I have not had my fill of proverbial poultry expressions, let's talk some turkey. This is the era of information overload. We have news coming at us all day from every angle, from the radio on the way to work and phones, from news, forums, Facebook, friends, advertising signs etc. We hear good news and bad news all day long. The issue with this is we only reading the information that people want us to see, they are telling us what our opinions are. I am not saying it’s all a conspiracy and get out your tinfoil hats; I am saying that it is their view from where they stand with the information they have or from who told it to them– it’s a huge Chinese whispers game.

I am just as much a victim of this as you are, so what I do is I go find the facts. History is full of them. Have you heard the expression hindsight is 20/20? Well, you don’t need to be a genius to google some historic information. When you are talking things like economies and recessions, we are talking about failures in the system and it’s the only system that we have, so go look at what happened in the past (I may have just broken the magician's code and given away the trick for all the economists out there).

Here are the hard facts about recessions in the United States (I use the US data because what happens in Vegas... destroys the Australia economy). Since the first recorded recession in the US in 1785 there have been a total of 48 recessions. These are broken up into three eras.

- Early Recessions (1785 - 1834): 11 recessions over 49 years, and in recession for roughly 26 years. The average time between recessions was 2.3 years.

- Free Banking Era to the Great Depression (1836 - 1927): 24 recessions over 91 years,and in recession for 43 years. The average time between recessions was 2.1 years.

Great Depression onwards (1929-2009): 13 recessions over 80 years, and in recession for roughly 16 years. The average time between recession was 4.6 years.

Looking at the facts, it is not only likely that we will have a recession; it is inevitable. It is a part of the system that we are in. What I did find on my analytical treasure hunt (and I promise to stop boring you with all these facts and numbers in a moment) is that on average, people were lucky if they could go longer than three years without a recession up until 1990.

Since then, in our last three recessions, the time between has been eight, ten and six years. That means that, as a whole, we are getting better at the game, but it also means a larger correction. The other issue is that all generations after the baby boomers have no real idea of what a recession is. Sure we were all around for the GFC, but it was hardly felt in Australia because we were coming off the back of the mining boom, but the baby boomers remember 19% interest rates!!

Okay, this has turned into more of an essay than the snappy I-told-you-so ramble that you are used to hearing from me. I will finish this off by saying: yes, there is a whopper of a recession coming because there has to be one. This one is going to be a monster because we didn't fix the issues from the last one and a recession is rebalancing and distribution of wealth. With Ray telling us that 10% of the top 1% of US citizens have the same net worth as 90% of their population.... this is going to be a monster.

Now, I did start this article with the intention of telling you all the silver linings of a recession

and how to capitalise on it, so think of this as a cliff-hanger at the end of your favourite TV series. I promise the next article will be all about how to get your grubby fingers on some of those diamond tiaras.

Take care, gang, and don’t forget hindsight is the best map for the future.

Shaun Fox


* Reid, D. "Ray Dalio Say the World is in a 'Great Sag'; and Echoes the 1930s" 18 October 2019. CNBC.

https://www.cnbc.com/2019/10/17/ray-dalio-says-the-world-is-in-a-great-sag-and-echoes-the-1930s.html

(accessed 21 October 2019).

* Ibid.

* Ibid.