Central Bank heads believe they are magicians who can
wave their magic wand to create whatever economic conditions they desire. But
the problem is that they are consistently wrong in their assessment of the
economy so they don’t know what to do with the wand. Also, the wand is not
magic but just bogus. And this is the dilemma of all central banks. They are
given unlimited powers to manipulate monetary policy and to print money.
But when you give infinite powers to someone who can neither assess the
situation properly nor understands the consequences of his actions, it is
like giving weapons of mass destruction to a bunch of kids. But it is
actually worse than that because the bankers are using the weapons to create
wealth for their banker friends. Thus, central banks have created mega wealth
for an infinitely small minority and unlimited debt and misery for the rest
of the world. What central banks are doing is to create booms and busts of a
magnitude that totally destroys the economy. And this is exactly what will
happen in the next few years again.
The world economy would function considerably better without central
banks. Instead of the massive booms and bust that we currently have, there
would just be natural self-correcting economic cycles of much smaller
amplitude. Because the turn of the cycle that is now beginning will change
the world for a very long time. One hundred years of mismanagement will lead
to economic and human misery that could last decades or even centuries like
the end of the Roman Empire.
There are no honest politicians
Back in December after the Fed rate increase, we discussed that the Fed
again made an incorrect decision which soon would have to be reversed. Well,
this week in her statement to Congress, Yellen started to backtrack. But like
all politicians she neither sees nor would admit to that most of the global
economic problems stems from US monetary policy. It is because the US has
lived above its means for over half a century and flooded the world with
worthless printed dollars that we are now in this mess. But since she is a
politician, she would ever admit to that. Instead this week she blamed global
market turbulence and higher risks from China as the reasons for conditions
being less supportive of US growth. It is amazing how politicians can never
be honest and see the log in their own eye rather than the splinter in their
neighbour’s eye.
It reminds me of Gordon Brown, the former labour prime minister who when
he was chancellor of the exchequer told parliament that he had abolished boom
and bust. But when the 2006-9 crisis started, he blamed international
conditions and not his own mismanagement of the U.K. economy. This is the
immorality of politicians; they take credit for all good things but blame
others for all the disasters they create.
US to join the negative rate club
So Yellen has made another mistake which she half admitted to. As I said
back in December, it will not be a question of no more rate increases but of
rate reductions and probably even negative rates. She confirmed that the Fed
is studying negative rates. She said “We would want to be prepared in the
event that we needed to add accommodation”. This Fed speak is just unreal.
Why can’t they ever use language so that ordinary people understand. Well we
know why. They create fancy terms like quantitative easing and accommodation
to make people believe that the Fed is doing something very complex and
clever. Why not use the proper words like money printing and interest
manipulation? But then the world would know it is just trickery so that is
why they must hide behind incomprehensible Fed speak. Anyway, Yellen knows
that negative rates are likely to come to the US and join the 13 countries
who have it already.
The competition who has the lowest rates is hotting up. Switzerland is
still leading with -0.75%. But Sweden is now catching up and just went to
-0.5%. (I promise it is just a coincidence that I am both Swedish and Swiss!)
Sweden’s economy is in relatively good shape currently so a rate reduction is
not really justified. But the Riksbank’s official reason was that inflation
is too low. What they don’t realise is that low or negative rates don’t
stimulate the economy. It discourages savings and therefore also discourages
investment. But the real reason to lower rates is not low inflation but to
win the currency race to the bottom. This is what Sweden and Switzerland are
competing for together with at least another 11 countries with negative
rates.
Investors have a misplaced faith in bubble markets
Financial markets have for years ignored economic reality and just
rejoiced over money printing and credit creation. We have said for quite some
time that these false conditions would end in tears and this is what is
finally happening since the start of 2016. This is of course just the very
beginning. There is no panic yet in markets but that will soon come. In the
last week I have met with a number of ultra-high net worth individuals. They
are worried but not enough to change their investment strategy which mainly
consists of private equity, hedge funds and property. Hedge funds in general
have had a bad 2015. Private equity investments are valued at fantasy prices.
Very few investors realise that they might only get half the valuation in
current market conditions. And it is fascinating how property investors
believe that they are holding a wealth preservation asset. Little do they
realise that bricks and mortar have zero value when buildings are empty with
no income stream.
Unprecedented wealth destruction
We will see the most massive wealth destruction in history in coming
years. Most investors will hold on until the bottom when maybe up to $200
trillion dollars’ worth of investments have evaporated. What is interesting
is that very few of the wealthy investors I meet hold gold or understand
gold. But that is of course natural since less than 1/2% of world financial
assets are in gold. Very few realise that the Dow and other stock markets
have lost 71% against gold since 1999. But more importantly, in 2016 the Dow
has already lost 22% against gold. Before this asset destruction is over, the
Dow will lose at least another 90% against gold. If investors realised that
just putting say 20% of their market investment into physical gold, they
would both insure their assets and preserve wealth.
2007-9 was just a warning shot
We are now seeing bad news everywhere. Take AP Möller Maersk for example.
They are the world’s biggest container shipping company and had a Q4 loss of
$2.5 billion. Their CEO stated that conditions are now worse than in 2008. I
repeat what I have said many times; the 2007-9 crisis was a light rehearsal.
What happened then will be dwarfed by the economic collapse in coming years.
In 2006 interest rates were a lot higher worldwide. In the US for example
short term rates were 5%. Since then there have been 637 rate cuts which have
led to 500 million people living in countries with zero or negative rates.
Also since 2007 governments have spent over $12 trillion buying assets, a
major part of which is worthless.
Will financial system survive
And finally investors are waking up to the fact that most banks are unlikely
to survive the coming crisis in tact or maybe not at all. Bank stocks around
the globe are down 20-40% this year. The cost of credit default swaps
(insurance) on these banks is soaring. Bond traders are describing the
situation as “worse than Lehman”. Banks like Credit Suisse and Deutsche Bank
are losing billions. Deutsche’s derivative book is 20 times German GDP and
the Swiss banking system is 7 times Swiss GDP, excluding derivatives. It is
not only bank client deposits which are at risk, but also any asset held in
custody such as stocks and bonds. Now is not the time to hold any major
assets within the financial system.
World economy rests on foundation of debt
We are now entering the very dangerous phase of the coming crisis.
Confidence is quickly evaporating and fear replacing it. We know that the
world economy is resting on a foundation of debt and false government
promises. The world is now starting to realise that most of this debt is
worthless and that governments’ empty promises add up to nothing.
There are so many black holes in the world now that any morning we can
wake up to find that a bank or a sovereign state has disappeared into one of
these black holes. Yes, governments will create more negative rates and print
unlimited amounts of money but to no avail. The process of assets imploding
could happen very quickly and unexpectedly. But whether it happens in a
matter of months or it takes up to say five years, the world will look very
different at the end of the coming calamities.
We saw the first phase of the downturn in markets in January. The current
correction up is likely to be short lived. Soon the problems in the world
economy are likely to resume with a vengeance leading rapidly falling asset
markets and currencies. Gold and silver will move up very strongly.
The lucky few who can afford some physical gold will weather the storm
better financially. But no one will escape the suffering that will hit the
world in coming years.
Egon von Greyerz
Matterhorn.gold
GoldSwitzerland.com