Charles Ponzi must be turning in his grave! His pyramid scheme in 1920
guaranteed returns of 50% in 50 days and 100% in 100 days. And initial
investors clearly achieved these returns but most of them were too greedy to
cash in. His total scheme “only” lost $20 million ($225 million in today’s
money) for the investors. In comparison, Madoff cost his investors $18
billion. At least Ponzi became famous for his achievement. So far Madoff has
not achieved fame.
But both Ponzi and Madoff were small time crooks compared to governments
and central banks today. Because whether we take, Japan, China, the EU or the
USA, they have all created Ponzi schemes which are exponentially bigger than
what Ponzi did. Admittedly no government is promising the 50% return that
Ponzi did or Madoff’s 10-12%. Instead they are giving investors of their
“Ponzi” bonds the illusion that they will receive the capital back. To
paraphrase Mark Twain, investors are neither going to get the return
ON their money nor the return OF their money, at least not in real
terms.
A country cannot survive on nail bars, pizza delivery and Facebook
How could any major nation ever repay their debt? Take the US, they have
increased their debt every single year since 1960. And at that time it was
only $280 billion and today it is $19 trillion. Anyone under the illusion
that their investment in US treasuries will be reimbursed in real money needs
a reality check. So there goes $19 trillion down the drain. The US used to be
a major manufacturing nation. In the mid-1940s manufacturing wages were
almost 40% of GDP. Today it is below 10%. A major economy cannot survive on
nail bars, pizza deliveries or Facebook, especially since average real wages
for the majority of US workers has not increased since the early 1970s. Even
worse, profit (EBITDA) growth has turned down since 2010 and is now negative.
China, Japan or EU – which one will be the first to fall?
So what about China. Well their total debts are up 16 times in this
century and is still growing rapidly. But their GDP growth has been coming
down since 2008. From an incredible year on year growth of 25% in 2008, China
is now supposedly growing at 5% per year. Even that figure is hard to believe
bearing in mind the slowdown in trade, transport, container traffic etc. It
is Emerging Markets’ investment that has been propelling global growth and as
that stops so will the world.
What about Japan, the world’s third largest economy? They have been in
trouble since the early 1990s but have survived due historically high savings
as well as the rest of world buying their goods. The only dilemma is that
this has been achieved at the cost of a massive debt expansion and zero
interest rates. In 1990 Japanese government debt to GDP was 70%. Today it is
a massive 250%, the highest in the industrialised world. The balance sheet of
the Bank of Japan back in 1990 was 10%. Today it is over 80% and will soon be
over 100%. As a comparison, the Fed’s balance sheet is “only” 25% of US GDP.
The Japanese economy will definitely not survive the Ponzi scheme that the
country has created.
I could go on. The EU super state is a total failure that will drag all
the member countries down. We know that Greece, Italy, Spain and Portugal are
bankrupt and so will France soon be. But Germany has also been dragged into
this mess and their banking system will not survive the exposure they have to
Europe. The massive leverage of Germany’s banks and the derivatives position
is guaranteed to bring Germany as well as Europe down. Also, Germany’s life
insurance companies are in trouble like most insurers in the world. They have
been told by the regulator to increase their capital at a time when profits
are declining. I have said it many times, insurance companies as well pension
funds are not going to survive the coming global downturn. The consequences
are obvious, insurance cover of all kinds will disappear and so will most
pensions. Very few people are aware of these risks and the repercussions will
be horrendous.
Conventional wisdom is just conventional
We know that we currently are in the midst of the biggest Ponzi scheme in
history. It would have made Charles Ponzi green of envy. We also know that
virtually no one sees that the emperor is naked. And even for the few who can
see it, it suits them not to tell anyone. I recently had a discussion with a
retired top London banker. To him it was clear that assets in the major
economies are greater than the debts and that these countries have no problem
paying the interest on their debts. Therefore, he saw no problem in
continuing as we are. The fact that debt is increasing exponentially and
interest rates are manipulated to zero or negative and that currencies
accelerating to the bottom did not worry him. Well it seems to worry nobody.
There appears to be 7 billion Krugmans in the world. Sadly, conventional
wisdom is just conventional and not wise at all!
There are innumerable examples of the total mismanagement of the world
economy and the massive bubble of the financial system. But sadly only a
minuscule fraction of one percent of the world population realise the catastrophe
facing the world.
Gold – the cheapest and most effective insurance on the planet
We don’t know of course when these risks will turn to
reality. And I admit that it has taken longer than I expected. But when risks
are major, it is critical to protect yourself against them. We all know that
we can’t buy fire insurance after the fire. This brings us back to wealth
preservation. It is not a coincidence that some of the most successful
investors in the world are recommending physical gold as insurance against
the risks that I have just discussed. Ray Dalio, the founder of an extremely
successful hedge fund recently said “If you don’t own gold you know
neither history nor economics”.
And Stan Druckenmiller, a hedge fund manager that
returned an average of 30% p.a. over 25 years just told investors to sell
stocks and buy gold.
It seems clear that gold finished the correction at
$1,046 in December 2015. We are now around $1,300 and will probably move to
the $1,400 level quite soon. But short term movements are totally
irrelevant. Gold at $1,300 is an absolute bargain. It is the most cost
effective insurance that anyone can buy against a bankrupt world economy and
financial system. The beauty of buying gold as insurance is that the
“premium” you pay for the insurance i.e. the price of gold is very likely to
increase substantially in value in coming years. Could there be a
more perfect insurance against global risk than physical gold. I
doubt it!
Egon von Greyerz
Founder and Managing Partner
Matterhorn Asset Management AG
matterhorn.gold
goldswitzerland.com
