BEWARE OF THE BEAR – HE IS SOON BACK

By Egon von Greyerz

Founder and Chairman

May 8, 2020

As the world economy is about to implode, very few investors realise what will hit them. The dip buyers of stocks don’t understand that it really is different this time as the world is now facing the biggest destruction of wealth in history. Stocks, bonds, and property are likely to decline by at least 95% in real terms in the next few years. With both sovereign and private defaults, many bonds will go to zero and interest rates to infinity. 

We are not just talking about the US and Europe but the whole world, including China, Japan, and emerging markets. This will clearly involve a very unpleasant and disorderly reset leading to great suffering. But there is no other way of solving a gigantic debt problem caused by central banks. What these central banks are now doing is obviously a travesty. A debt problem of the proportions the world is facing can never be solved by  issuing more debt which is the fallacious solution central banks around the world are again embarking on. 

IRRATIONAL EUPHORIA PREVAILS

As 30 million Americans are unemployed and US GDP is expected to decline by 40% in Q2, the Dow Jones has rallied almost 6,000 points in the last 5 weeks. And the FAANG stocks (Facebook, Amazon, Apple, Netflix, and Google) have surpassed their all-time high. Appears like happy days are here again, at least for the permanently optimistic stock market investors who believe that all the money printed by the world’s central banks will again create another 10-year bull market. 

Investors are already looking past the Coronavirus. Few realise that CV is not the underlying reason for the collapse of the world economy but only the trigger. And for investors who clearly believe that there will soon be an end to this horrible pandemic, they sadly don’t understand that it is likely to affect the world for many years. And the hope of an effective vaccine for a virus that has so many different mutations seems overly optimistic. History confirms this. It normally takes years to develop a vaccine but even then, flu vaccines in recent years have only had a success rate as low as 30%. 

MY 1999 EPIPHANY

This market optimism reminds me of my 85-year-old aunt in Florida. According to her sister my aunt was so successful in buying tech stocks that she in 1999 also taught her cleaning lady how to make money in stocks. Before the tech boom, my aunt had never invested in stocks but now she was an expert like everybody else at the time. Well, this was a real epiphany for me watching the blind leading the blind to the stock market. This was the clearest sign of the end of a stock market bubble, like the shoeshine boy giving you stock tips. 

At the same time a friend of mine had built up a successful tech business I was involved in. This was the time when these companies made no profit but were still valued at 10x sales. I sensed that the tech bubble would end in tears. So I told my friend that we must sell the business and take cash only or stock that we could sell immediately. So we did sell the business to a Hong Kong based Nasdaq company and got rid of our shares straight away. Two years later, the Nasdaq had lost 80% and the company we sold to was bust. 

GALLOPING GLOBAL DEBT

No boom or bubble is the same. But what is clear is that global debt has grown from $80 trillion in 1999 to $125T in 2006 (at the beginning of the Great Financial Crisis) and more than $270T today. The acceleration in money printing taking place now is likely to take global debt to over $300T in the next couple of years. But that would be an optimistic base case. If we add bank failures as well as corporate bankruptcies, global debt could rise to in excess of $1/2 quadrillion. And once the derivatives bubble bursts, the world could face a debt in the $quadrillions.

STOCKS – SUCKERS’ RALLY 

So what we are seeing now is in my view a suckers’ rally in stocks that will end in tears for the dip buyers as well as for the perma-bulls. But this is normally how a bull market ends. A first fall with panic and then a strong rally that sucks everyone back in. And this is what we have just seen in the last 5 weeks. This corrective rally probably ended on April 29^th or it might last another few days. But the risk is to the downside and the next fall is likely to be devastating and a massive shock for investors. 

1929 vs TODAY 

We saw the same in 1929 when the Dow plunged from 381 to 190 and then rallied 50% to 300 before crashing to 40 in 1932.

The long term Dow chart below shows a recent turn in the quarterly MACD. This is very significant. There have been two previous downturns in this indicator this century. The first one was at the end of the tech stock bubble in 2000 which led to a 40% fall in the Dow. The second one was during the subprime crisis in 2007 with a 55% fall.  Today the MACD has turned from a much higher level and the fall is likely to be much greater.

Since I believe we are now at the end of a major 300-year cycle or possibly even longer, the fall this time will be greater than the 1929-32 fall of 90%, at least in real terms, measured against gold. During the coming hyperinflationary depression, the Dow might not decline >90% in nominal terms, especially if gold has a price with many zeros which is likely. For example gold in Venezuela is now VEF425 million (Bolivars). But since I expect that the relatively brief hyperinflationary period, maybe 1.5 to 3 years, will be followed by a deflationary implosion of assets and debt, we could very well see the Dow going down to the 500 to 1,000 level where it was in the 1970s until the early 1980s. That would be a 98% fall from here. 

US DOLLAR

It is not only Americans who use the dollar as a measuring stick but it is also used in many areas like commodities or in countries that don’t have a hard currency. It is of course a fallacy to measure anything in a currency that has declined continuously for 50 years. I showed in my article 2 weeks ago that the dollar is down 78% against the Swiss franc since 1970. 

Since 1971 the dollar is down 98% against gold, which is the only money that has survived in history. And just in this century, the dollar is down 83% vs gold.

GOLD

In February 2019 I wrote about what I called the Gold Maginot Line which gold had held below $1,350 since 2013. At the time gold was $1,320 and I forecast that this 6-year old resistance would break within 3 months. Gold broke out in early June 2019 and hasn’t looked back since. This was the signal that the gold uptrend would resume also in dollars.  In all other currencies, the uptrend was already confirmed. So just under a year later gold has gained $350 and is now $1,700. We are now likely to see a relatively fast move up to $2,000 and beyond. 

Technically gold has looked extremely strong for a while and has been due for a bigger move. When the technical picture predicts a move, there is normally always some trigger or fundamental factor that causes the move. The massive money printing by the world’s central banks provides the perfect backdrop for the accelerated debasement of the currencies and the rise of gold.

Many people are asking what I am forecasting regarding the gold price for this year and coming years. Since we have been invested in gold for 18 years, we have never worried about the price. It was always clear to me that money printing was going to accelerate and that the financial system would come under enormous pressure. Even to the extent that it might not survive in its present form. 

With that background, it is totally irrelevant what the gold price will be tomorrow or in 6 or 12 months time. We are holding physical gold to protect against a rotten financial system and currencies which will be printed to death. Why then does it matter if gold goes to $10,000 or $100,000 in today’s money or billions or trillions in hyperinflationary money? 

The alternative of not owning gold is not worth thinking about.

And if we after the hyperinflation get a deflationary collapse, gold will still be the only real money and will do a lot better than any other means of payment. 

So my advice is to not look at gold as a conventional investment and worry about where it is going or try to finesse the entry price. Also, it is totally irrelevant to measure gold in worthless printed money. Physical gold is critical life insurance and protection against the worst financial storm in history. That should be your only consideration. 

So don’t wait for the storm to pass but learn to dance in the rain.