Welcome to the wonderful world of illusions. This is a world where few
people can see the difference between reality and fantasy. And maybe there is
no difference. Just looking at the US election and the candidates, it seems
like total fantasy from this side of the Atlantic. It is difficult to take
the whole election process as well as the candidates seriously. But this is the
world we live in today. Having in the last week seen people in many European
countries run around the countryside and cities chasing Pokémon Monsters, you
wonder if the presidential candidates might also be part of the same game.
Global stock markets are out of sync
It seems like markets are also an illusion. How else can the Dow be 63%
above the 2000 high whilst the Euro Dow 50 stocks are down 45% in the same
period and with Emerging Markets down 36%, Brazil and Hong Kong down 35%,
Nikkei down 25% and Shanghai down 49% all since 2014-15. We live in a totally
interconnected global economy but there just seems to be more skilled
illusionists in the US who can defy reality. With corporate profits declining
fast, with current account and budget deficits for half a century, with 95
million people not in the workforce, almost 50 million on food stamps, with
Q2 GDP at 1.2% (if real inflation rate was applied GDP would be negative) and
with exponentially growing debts of over $200 trillion (incl. unfunded liabilities),
you wonder what US investors are smoking.
The illusory Dow finished July at an all-time monthly high. Stock markets
in general tend to totally ignore reality and US stocks in particular are
living on a different planet. The Schiller P/E is now 27 with the average at
16, the US market is in bubble territory.
Stocks to decline by over 95% against gold
In spite of the manipulation of gold and gold stocks, gold will always
over time reveal the truth. And the truth is that the massively inflated US
stock market is underperforming in real terms in spite of making new highs.
Because since December 2015, the Dow is down 19% in real terms which of
course is against gold. This puts the Dow/Gold ratio at 13.6. The Dow is in a
long term down trend against gold since 1999 and is down 70% in 17 years. But
it won’t end there, this ratio will at least reach the 1980 low of 1/1 but
probably overshoot to at least 0.5/1. Will this mean gold at $10,000 and the
Dow at 5,000 or will it reach Martin Armstrong’s hyperinflationary level of
40,000 Dow which would make gold at least $80,000? In either case, the Dow is
likely to decline at least 95% against gold.
And against gold stocks, the Dow is down a massive 58% over the last 7
months. We are likely to see this index reach the 2011 level at least. This
means that the Dow will come down another 72% against the HUI gold index.
Global debt 30 x GDP
But the illusion doesn’t stop with stock markets. The global banking
system is an even bigger illusion. The financial system was bankrupt in 2006
but governments and central banks around the world managed to patch it up by
injecting $25 trillion and by allowing banks to value all toxic assets at
maturity instead of at market. Here we are 10 years later and the financial
system is now in a much worse state than it was in 2006. Global debt has
grown exponentially since then by 65% from $140 trillion to $230 trillion.
And this figure doesn’t even include unfunded liabilities and derivatives of
another $2 quadrillion or so. We are looking at total debt of over 30 times
global GDP. But that is a false comparison. Let’s say that 5% of GDP could be
saved annually to reduce debt and that would be very optimistic. Anyway, with
5% of GDP it would take over 600 years to get rid of all debt. However you
calculate it, the world is bankrupt and will never repay its debts. Nor will
the debt be serviced at any rate of interest above zero.
Bank stress test a farse
Global banks have just had an illusory stress tests. Countries like
Portugal and Greece were naturally excluded as their banks are bankrupt. The
criteria were set so that every bank would pass except for Monte dei Paschi
in Italy. Since the whole world knew that this bank is bankrupt, it was
impossible to cheat. Otherwise in the illusory world, all banks were
considered to be in decent health. The top performing banks were the Swedish
ones with Swedbank and Nordea shining. This is particularly fascinating since
only a few weeks ago, the regulator in Sweden, in an internal report, had
expressed particular concern that Nordea was severely undercapitalised to the
extent of SEK 50-80 billion. This report was quickly hushed down and clearly
ignored in the stress test.
The total failure of the IMF has just been exposed by the IEO (IMF
Independent Evaluation Office). IMF stands for International Monetary Fund
but International Manipulative Fund would be more accurate. Because the IMF
is a political entity that serves the political aims of its masters. The
recent IEO report has just condemned the IMF for total misjudgement and
complacency in connection with Greece. All projections and actions of the IMF
have been a total failure according to the report and have contributed to the
demise of Greece. In other words, the report confirms that the IMF hasn’t got
a clue. The IMF seems more interested in political manipulation than monetary
assistance. The IMF verbal intervention in the Brexit referendum on the
Remain side confirms this.
Central banks worldwide are really struggling in their futile attempts to
get out of the mess which they have created. In Japan, Abenomics is totally
failing in spite of unlimited money printing and negative interest rates.
Before the Japanese economy sinks into the Pacific there will be perpetual
bonds with no or negative interest and more helicopter money. Japan is doing
all it can to win the currency race to the bottom but currently with the yen
strengthening, the world is making the race difficult for Japan. The Fed has
since 2015 left the world with the illusion that rates would go up in 2016.
Already back in December when the Fed raised rates and indicated several more
increases, I stated that the US would also go to negative rates and it still
seems probable that this will happen in 2016.
Gold will be the only money standing
Turning to the US dollar, it looks particularly sick currently. It seems
likely that the dollar will soon start a major secular downturn. The world’s
reserve currency is greatly overvalued and due to the state of the US economy
discussed above with ever increasing debts and current account and budget
deficits, the dollar will soon start the final leg to its intrinsic value of
zero. It has been a 100-year race but it now looks clear that the dollar will
be first to the bottom of the major currencies. This will have significant
effects on both debt and stock markets.
Gold and silver will be major beneficiaries of the dollar’s decline. US
dollar based investors still have a window to get out of dollars and out of
the US. But soon there will be exchange restrictions that will prevent this.
It is very important not to own illusory or paper gold.
It must be physical gold and silver which is stored outside the fragile
banking system. ETF are not recommended. Most ETFs don’t hold the metals free
and clear, whatever they say. Also they store the gold and silver, if
they have it, in banks which is not where investors want to hold it. In
addition, the ownership is subject to counterparty risk since it is signified
by a piece of paper held within the financial system. Physical precious
metals, held correctly, is the best insurance investors can own against a
totally rotten financial system.
Egon von Greyerz
Founder and Managing Partner
Matterhorn Asset Management AG
matterhorn.gold
goldswitzerland.com
