Investors in most countries make the mistake of measuring their returns
based on their home market and their domestic currency. This might have
worked when they only had access to their local investment market. But that
time is long gone. Now we have a global economy and most Westerners have
access to securities worldwide. Still, in for example Germany, the UK or
Japan, investors measure returns in their local currency. Even more so in the
US. Due to the size of the US economy and the importance of the dollar, few
Americans look at investment markets or currencies in other countries.
US stocks – Poor performance and overvalued
Recently a reader commented that I personally have not considered the US
stock market as a good place to invest and therefore missed a massive
opportunity. Let me state that for many reasons the US market has not been a
good place to invest. Firstly, I consider a market which is greatly
overvalued as high risk and therefore best to avoid even if it can go higher.
It is of course totally right that someone who sold the US stock market in
2000 bought back in 2002, got out in 2007 and invested again in 2009 could
have made a lot of money. But that is not the way the average investor trades
except for in hindsight.
There are two main types of investors. The most typical investor seldom
sells and therefore rides through every storm in the hope that stocks go up
perpetually. That theory has worked wonderfully for long periods in the last
100 years. There have of course been periods of severe exceptions like after
the 1929 crash and the 1932 bottom. Investors at that time had to wait 25
years to get their money back.
Then there are investors who trade the market regularly. Many of these buy
high and sell low thus continuously underperforming the market.
S&P’s abysmal real performance
Overall stocks have been a great investment for the last 100 years due to
the massive credit expansion and money printing worldwide. But if we, for
example, critically analyse the real return for a US stock investor who has
been long the S&P index since the beginning of this century we get some
interesting results:
The above table gives very different results for the same investment. For
an American measuring in dollars, it looks like a decent return. But 55% over
16 years is actually only 2.8% per year (plus dividends) which is nothing
remarkable. Most Americans just look at their return in dollars. This is
acceptable if the currency is strong. But this is not the case with the
dollar which has been extremely weak since 1971. A country that continuously
lives beyond its means will always pay in the form of a weakening currency.
In relation to the Swiss Franc, the dollar has lost 77% since 1971 and 37%
since 2000. So if we measure the performance of the S&P index in Swiss
Francs since January 2000, it has declined by 4%! Most American investor will
think that this is irrelevant to them but that is flawed thinking. A return
of 55% that comes down to -4% if measured in a different currency, shows that
the gain measured in dollars is mainly due to the weak currency. Thus the 56%
gain is not a real gain but just a measure of inflation.
Gold reveals real performance
But to find out what the real performance of the S&P has been in this
century, we must use a currency that can’t be printed and that over time
maintains constant purchasing power, namely gold. And now the picture looks
very different. Instead of a 55% gain in fiat dollars, the S&P
has lost 65% measured in real money.
Governments constantly try to fool the people by debasing the currency.
This is why governments hate gold because it reveals the truth by exposing
their total mismanagement of the economy. Although the gold price is also
manipulated, especially in the paper market, it is still the best measure of
real performance. And the reason for this is that gold is the only money
which is not man-made. Gold is nature’s currency and will continue to
be the only money that will survive throughout history.
Coming back to the table above, very few people understand that an
illusory $55,000 gain actually is a loss of $65,000 measured in real money.
This shows how dangerous it is to measure performance and wealth based on the
wrong measuring rod.
As I have explained in many interviews and articles, the
destruction of paper money will soon accelerate as governments around the
world try to save a bankrupt world economy and financial system. In relation
to gold, stocks, bonds and property will all decline by another 90% at least
in coming years.
Globally we now have the most perfect recipe for disaster:
- All major economies, USA, China, Japan, Europe and
Emerging markets have debt which have grown exponentially and will never
be repaid.
- The financial system has a gross exposure of over $2
quadrillion. This will all collapse when counterparty fails.
- With the Trump administration leading, the world will
soon enter the final spending spree which will accelerate the velocity
of money and lead to hyperinflation. This will in turn finish off the
value of most major currencies until they reach zero.
- 1-3 above will result in a deflationary implosion of the
financial system. This will get rid of all debt and reduce the value of
most assets by at least 90%.
- This total debt destruction is the only way to put a
world on a sound footing for future growth and prosperity.
The Antidote
Gold will of course perform very well during the coming hyperinflationary
period and could reach levels seen during the Weimar Republic.
But the absolute level of the gold price is totally irrelevant. What is
more important is that gold will be the best form of wealth preservation and
insurance. Gold will also at least maintain its purchasing power but most
probably perform a lot better. Gold also does well in deflationary periods
although it will then come down from the hyperinflationary highs. But so will
prices of all goods and services. At the beginning of the deflationary
implosion, there is unlikely to be a functioning banking system. Gold will
then be the only money available and therefore play a critical role.
2017 looks like the year when gold and silver could challenge the old
highs. At current levels, physical precious metals are the cheapest insurance
and best wealth preservation investment that anyone can own.
Egon von Greyerz
Founder and Managing Partner
Matterhorn Asset Management AG
goldswitzerland.com
