In today’s Money Weekend we put aside the events of the week and in the markets for a chat with Vern Gowdie, the latest editor to join Port Phillip Publishing.
Vern is working on an exciting ‘Family Office’ style project that will draw on his nearly thirty years’ experience in financial planning. You might have seen a couple of his articles appear in Money Morning over the last few weeks.
One thing we can say right off the bat is that Vern’s position is the complete opposite of regular Money Morning editor Kris Sayce.
Kris is backing a rising market over the next few years. Vern is anticipating a falling one.
But the differing views don’t end there, so we thought you might like to hear his take on the market today and the message he’ll be bringing to investors across Australia with his new service…
CN: How is your view different from the other editors at Port Phillip Publishing?
VG: Without differing views there would not be a market. Everyone would either be a seller or a buyer. Differing views are healthy.
When I read the research of the other editors, we are not that dissimilar in our broad view of the global economy. They are highly critical of central bank intervention and the distortions this madness has created in markets. Our views differ on what this meddling will do to global share markets.
Some editors expect the Fed’s levitation act to support higher equity prices, whereas others have a more bearish outlook. For reasons I will explain shortly, I am in the extremely bearish camp. Also, the other key difference is in our approach to asset allocation — the other editors are very much Alpha investors (individual stock selection and trading strategies) while my investment philosophy is purely Beta (index investing). The passive investor approach.
CN: Can you expand on why you are so negative on the share market?
VG: To paraphrase Heath Ledger’s character The Joker, ‘Why sooo bearish?’
As the saying goes ‘If it walks like a duck, quacks like a duck and looks like a duck, it must be a duck’. This market looks like a Secular Bear,has performed like a Secular Bear and has P/E contraction like a Secular Bear —therefore my conclusion is it must be a Secular Bear.
Every Secular Bearmarket since 1900 has ended when the index P/E reached single figures. The S&P 500 index P/E currently sits around 20x. So unless ‘this time is different’ (the most infamous phrase in investing) a 50% reduction in P/E still awaits us from this Secular Bear market.
The P/E reduction can happen in three ways:
- The price remains static while earnings increase (this is what has happened since 2000). The S&P 500 is only slightly above its 2000 level while earnings have more than doubled over the past thirteen years. The S&P 500 index P/E in 2000 was 42x.
- The earnings remain static while the price falls.
- Earnings and price both fall — this is the dire (extremely bearish) outcome I think awaits us.
Think about this math:
- Earnings $1 million x P/E 20 = $20 million
- Earnings fall 40% (due to deflationary conditions created by The Great Credit Contraction and P/E falls to the level experienced during The Great Depression – the last global credit crisis)
- Earnings $600,000 x P/E 5 = $3 million
- Market correction of 85%. Ouch!
CN: So you’re betting against the central banks?
VG: The Feds are not ploughing trillions of dollars into the markets for nothing — they know what’s at stake. The world’s greatest period of Credit Expansion inflated assets well above their intrinsic value.
The Great Credit Contraction job is to deflate the asset bubble. This has not happened — yet! The Feds see it as their mission to stop the natural forces of the market. Good luck with that mission.
As the tide goes out on the market, no company (no matter how strong it is) will swim against the force of this current. It’s for this reason I prefer to invest in an asset class as opposed to individual stocks.
For the time being I do not want to be in the asset class of shares. There is far too much downside for my liking. In my opinion, the share market at current levels is high risk/low return.
When shares represent a low risk/high reward proposition, buying the ASX 200 index will be the easiest way for passive investors to participate in its inevitable recovery.
My investment approach will appeal to cautious investors looking to protect their capital in an uncertain world.
CN: What can readers expect from your new publication?
VG: As from 1 July 2013 the financial planning industry is being legislated into acting in a client’s best interest. You would think this would happen without Canberra’s intervention. However commissions, volume bonuses and institutional ownership of financial planning firms have created situations where conflicts of interest exist between the planner and the client.
What the readers can expect from the ‘Family Office’ newsletter is what Canberra is legislating for — absolutely 100% unbiased views on what I believe will assist investors protect and improve their capital.
The newsletter will be as much about education and guidance as it will be about where to invest. Any asset allocation I make will be the same one I am undertaking for my family portfolio.
Whether readers adopt the recommendations is entirely up to them. Transparent, independent advice without paying a fee that is based on a percentage of funds invested — this is the new face of financial advice.
CN: What’s a common mistake people make in regards to financial planning?
VG: Impatience. Markets will do what they have to do in their own sweet time. Trying to chase a certain return because you need it to achieve your goals is a recipe for disaster.
Patience and an understanding of the risk and reward offered by all asset classes is the best way to protect and promote your capital. Sometimes you have to stand still to go forward.
CN: Thanks for your time, Vern.
Editor, Money Morning
From the Port Phillip Publishing Library
Special Report: Panic of 2013
Markets and Money: QE is Dead, Long Live QE
Money Morning: We’re Buying This Crashing Stock Market
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