Will the average stock portfolio gain 1,900% to make up for the coming 95%
fall? This is the unenviable task that investors will be facing in years to
come.
Six weeks ago I wrote about Alfred, a 74 year old man who during his life
made a $14 million fortune in stocks by always being invested in the Dow.
Alfred never analysed the US or the world economy. Nor did he analyse a
single stock. Always being in the market was his secret.
Alfred is not a deep thinker, so he hasn’t thought about how fortunate he
has been. During his 74 year life, there has been no major war. Nor have
there been any depressions and economic downturns have been minor. He has had
a job all his life and has thus never been exposed to unemployment. Alfred,
like most investors, has been totally unaware that he has had major
assistance from the government which throughout most of his life has expanded
credit and printed money.
Alfred has been lucky to be shielded from any major calamities. So have
his children and grandchildren. His children are in their forties and have a
good education and good jobs. His grandchildren are between 10 and 17 years
and have also had a very good life.
Thus, three generations have so far had economic prosperity and no wars.
This is a unique period in history. To have 3/4 of a century without a major
war or economic misery is remarkable.
Just basing the prospects in the next few decades on probabilities,
Alfred’s children and grandchildren are unlikely to be facing the same sunny
prospects that Alfred has had the privilege to enjoy. Economically, the world
has been digging its own grave. Decades of deficit spending, and credit
expansion has given Alfred a standard of living and quality of life that his
offspring are very unlikely to see.
GLOBAL DEBT HAS TREBLED AFTER ONLY 19 YEARS IN THE 2000s
How could that debt ever be repaid? We are only in the 19th year of this
century and global debt has already more than trebled from $80 trillion to
$250 trillion. Part of this debt has contributed to Alfred’s wealth of $14
million. This incredible debt creation has bolstered asset markets for the
benefit of the top 1% in the world with the remaining 99% lumbered with the
debt. But they are of course never going to repay it.
When the debt crisis starts, which probably will happen within the next 12
months, there will be more deficits more debts and more money printing.
Central banks are going to attempt to inflate the debt away, but they can of
course never solve a debt problem with more debt. This time the biggest QE
operation in history will have no effect. In 2007-9 the total QE, credit
expansion and guarantees were at least $25 trillion. Next time around, it is
likely to be in excess of $100 trillion as the $1.5 quadrillion derivatives
blow up when counterparties fail. When the world discovers that central banks
are failing with their hyperinflationary money printing bonanza, there will
be panic.
MODERN MONETARY THEORY OR JUST MORE MONEY THEORY
So can the coming economic collapse be stopped by MMT
(More Money Printing)? Hardly! In 2007-9 the Fed, ECB and other
central banks managed to kick the can down the road for a decade which is
remarkable bearing in mind how near the system then was to total collapse. But
this time the can is just too big and no kicking will dislodge it.
NO ONE IS PREPARED FOR THE COMING 95% FALL IN STOCKS
At some point in the next few years, the biggest asset and debt bubble in
history will implode. The debts, which no one can repay, will be worth zero.
And all the assets that were artificially inflated by this debt will also
implode. There will be very little or no money in circulation since the banking
system will fail.
So what will happen to Alfred and his savings that he was planning to
leave for the next generations? Well, stocks are likely to decline by 95% in
real terms. This might sound like scaremongering and highly incredible. But
we must remember that in 1929-32, the Dow lost 90% and it took 25 years for
the Dow to regain the 1929 level, and that was with inflation. Today, the
situation is exponentially worse, both for the US and the world, whether we
look at debt, asset bubbles, currencies or derivatives. Thus a 95% fall in
real terms is certainly very likely. This means of course that many stocks
will go to zero and most companies that are highly leveraged will not
survive.
No investor is prepared for a 95% fall, including Alfred. Poor Alfred,
when his $14 million portfolio goes down by 95%, it will be worth a mere
$700,000. But still worse, his pension that he has built up over 50 years
will most probably be worthless. And don’t think that the government will be
able to help Alfred at that point. They obviously can’t since their tax
revenues will be minimal. Nor will they have any ability to issue debt of any
significance. The credit worthiness of a bankrupt borrower is negative so no
one will buy debt instruments that are not worth the paper they are written
on, even if they yield in excess of 20% which is likely. Also, virtually
nobody will have any money to invest since they have lost it all in the
crash.
Alfred may not need much money to get by since his house is paid for and
his $700,000 portfolio might be sufficient to scrape by with a very frugal
lifestyle.
STOCKS MUST RISE 1,900% TO RECOVER A 95% FALL
So is there any chance for Alfred or his heirs to recover part or all of
the original value of the portfolio? Very unlikely, I would say. As the chart
below shows, a 95% decline in the value of the portfolio means that the gain
from there must be 1,900% to get back to the original value. We must remember
that the world will have gone through a massive reset which has decimated the
world economy and productive capacity. It has also made debt financing
extremely difficult.
DEBT IMPLOSION AND EROSION OF PRODUCTIVE CAPACITY
Thus, the world will experience a devastating wealth and debt implosion
accompanied by an erosion of productive capacity. Whether this all happens
very quickly or over an extended period, only future historians can tell the
world.
Whatever governments and central banks try to do to save the world, they
will fail this time and the suffering for the world will be tremendous. In
addition to financial hardship, we could also see social unrest, civil war
and war.
All this sounds extremely alarming and depressing and it clearly is if it
comes true. But there are some real advantages too. Firstly, the world could
never continue to grow soundly on a foundation of debts and derivatives of $2
quadrillion. Only by eliminating this toxic debt can the world economy
recover again. It will be like a massive fire, clearing out all the deadwood
and allowing green shoots to come through again.
IT WON’T ALL BE BAD
Another benefit will be that moral and ethical values will return. Rather
than ruthlessly chasing false values like the golden calf or the 7 sins like
greed, envy, gluttony, wrath etc, the only way to survive the coming period
will be virtues like kindness, true love, humility, honour, honesty,
integrity and real friendships. Family and close friends will again become
the kernel of society and extremely important for spiritual and physical
survival.
We must remember that whatever happens it won’t be the end of the world.
It will be different and there won’t be the decadence that signifies the end
of a major era like we are experiencing now. Life will go on and although
many people will suffer severely during the transition, the coming reset will
create a better world.
LAST HURRAH FOR STOCKS?
The events that I describe above will probably start in 2019. We are
likely to see the beginning of the stock market collapse this year or
possibly early 2020. Fundamentally, markets are guaranteed to implode.
Technically we might still see the last hurrah with markets making new highs
before they turn down in earnest. So whether they go down from here or see a
few months of higher highs is totally irrelevant. The risk is massive and the
coming fall will be devastating and extended.
GOLD FINISHING CORRECTION BEFORE MAJOR MOVE
Gold is going through a final correction that could last a few weeks. But
the downside is very limited and once the correction has finished, we will
see gold penetrate the Maginot Line at $1,350 and quickly go to $1,600. It is
also possible that we will see a new gold high in dollars above $1,920 in
2019. Remember that gold has already made new all-time highs in many
currencies, so we will not see strong resistance at $1,920.
As always, investors should not follow the West which officially sold a
major part of its gold until 2000. Since then, they have most probably either
covertly sold or leased most of its gold to the wise people in the East. And
that gold will never come back to the West.
China, India, Russia and Turkey understand the Golden Rule:
“Whoever has the gold makes the rules”. They know that owning
physical gold is the best protection against a bankrupt financial system and
a failing world economy. That is why they are continuing to accumulate gold:
Looking at the chart above, these 4 Eastern Countries have since 2005
accumulated 34,000 tonnes of gold. This is the majority of global mine
production. They know that gold is the ultimate protection against a rotten
currency system and a failing world economy and bubble stock markets.
So who to follow? The foolish West or the Wisdom of the East? – Not a
difficult choice.
Egon von Greyerz
Founder and Managing Partner
Matterhorn Asset Management
Zurich, Switzerland
Phone: +41 44 213 62 45
Matterhorn Asset Management’s global client base strategically stores an
important part of their wealth in Switzerland in physical gold and silver
outside the banking system. Matterhorn Asset Management is pleased to deliver
a unique and exceptional service to our highly esteemed wealth preservation
clientele in over 60 countries.
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