We are now approaching the final mania in markets. The Dow seems to be on
its last swansong. Investors have been determined to take it up to 20,000. So
far, the market has been twelve points from this magic level. At the same
time treasury bonds are crashing. The 10-year yield has gone from a 1.4% a
low 1 ½ years ago, to 2.5% now. Normally stock market investors would worry
about higher interest rates but currently the market is in a euphoric mode so
any bad news is ignored in this final crescendo. Memories are very short in
markets. A few weeks ago, everyone was forecasting that a Trump win would be
a disaster for stocks and for the world but now he is clearly a godsend. A
market that has gone up 3X since March 2009 is clearly no concern. A risky
Shiller p/e of 27, and 56% above the average, is totally ignored by this
exuberant market.
Also, the market is taking in its stride that Trump will take debt levels
up by a minimum of $10 trillion or 50% in the next few years. Higher spending
and lower taxes seem to be the perfect recipe for a higher stock market.
Interest rates to reach 1970 levels of above 15%
In recent articles I have discussed the 35 year interest cycle turning and
this is clearly happening with a vengeance. Higher interest rates will lead
to higher deficits and still higher borrowings. And so we have the perfect
vicious circle that leads to the whole caboodle collapsing. But before we
will have interest rates as high as in the 1970s to 1980 when we saw rates in
the high teens in many countries including the US. This will of course mean
that no one will afford the interest costs on their house, car or credit
card. And no government can pay the interest on their surging debt. But that
won’t be a problem either because all they need to do is to print more money
to cover the interest. This would be the perfect perpetual motion financing
model. However, the consequences are clear – collapsing currencies and inflation
leading to hyperinflation.
Global stock markets diverging – a major warning signal
But the current stock market bonanza in the US is likely to be short
lived. It is not just the massive overvaluation which is pointing to that.
Technical indicators indicate that we soon will see a major downturn.
If we look at every other market in the world, none of them confirms what
is happening in the US. We must remember that the US is not an isolated
economy and totally dependent on what is happening in the rest of the world.
The time when a major economy can diverge from the rest of the world is gone.
There can be a slight time lag but in the end, there will be a global
convergence.
Performance of some major stock markets in relation to their
respective highs:
US stocks to fall 90% like in 1929-32
In a converging world market, the divergences between the US and other
major stock markets are a major warning signal that the overvalued US market
is living on borrowed time. In real terms, the US market is likely to fall at
least 75% in the next few years and probably 90% as it did in 1929-1932. The
conditions and risks today in the US and the rest of the world are
substantially worse than in the 1930s.
If the US market indices fall 90% in real terms, they will fall at least
95% against gold and probably a lot more. This is something that virtually no
investor can see today and that is why the shock will be of a magnitude that
will shake the world and create a demand for physical gold that can never be
met. We will reach a point when there will be “no offer” for gold. The trader
or bank will have no physical gold to sell and therefore he cannot sell it at
any price regardless of what the buyer is prepared to pay.
Swiss National Bank – the world’s largest hedge fund
Looking at risk in the world and all the black swans circling above us,
the Swiss National Bank (SNB) is clearly a potential black swan. In
connection with the Swiss gold referendum two years’ ago, I forecast that the
Swiss national bank would not be able to hold the EUR/CHF peg at 1.20 (1 euro
= 1.2 Swiss franc). Before the referendum, the SNB declared that it would be
a disaster for Switzerland if the peg would cease. As all central banks do, the
SNB lied to its people as they let the peg go six weeks later at a cost of
tens of billions of Swiss Francs.
The SNB like the Swiss banking system, used to be a bastion of safety. But
sadly that is all in the past. Swiss banks are now taking the same
unacceptable risks as all international banks with massive leverage and major
off balance sheet derivative positions. The SNB is no longer a central bank
but the world’s largest hedge fund. Their balance sheet, as at 30 Sep 2016,
is CHF 720 billion which is 10% above Swiss GDP. It is also CHF 80 billion
above the 31 Dec 2015 level. As a comparison, the Fed’s balance sheet which
is much too big is “only” 23% of US GDP. But is not just the size of the SNB
balance sheet which is a major concern but also the constituents. Around 75%
of the balance sheet is in foreign currency speculation. Most of it is in
Euros and a bit in dollars. CHF 100 million is in stocks, mainly US. So a
problem in Euroland with a fall in the Euro and a US stock market crash would
bankrupt the SNB. But like all central banks, they will have an elegant
solution. They will just print additional billions of Swiss Francs. The
consequence of that is for the Swissy to join all other currencies in the
race to the bottom.
Swiss banking system – too big for the country
But it is not just the SNB which is a major problem. The Swiss banking
system is too big for the country at 5X Swiss GDP. This is far bigger than
any major economy and in line with Cyprus when their banking system
collapsed. But that’s not all, the total derivatives in the Swiss banking
system, at CHF 25 trillion, is 38X Swiss GDP – a totally mindboggling figure.
I am not saying that Switzerland is worse than any other country. The Swiss
economy is better managed than most countries’. Also, as one of the oldest
democracies in the world with strong traditions, an excellent political
system and rule of law, Switzerland is probably one of the safest countries
in the world. But no one should believe the Swiss banking system and currency
is superior to other countries. I would not recommend anyone to hold major
wealth preservation assets, including gold, in any bank anywhere in the world
including the Swiss Banks.
But due to the best political system in the world and strong traditions in
storing and refining gold, Switzerland is the safest country in the world to
vault precious metals as long as they are held outside the banking system.
Physical gold market very strong – paper price false
Talking about gold and silver, they are being pushed down further after
the Fed decision. But the move in the last few days has mainly been a US
dollar move. Gold in most other currencies has not moved much since the Fed
move. As usual we have seen major manipulation. The recent legal case with
Deutsche Bank is proof of that. They got away with only $60 million fine
which is ridiculous in relation to the damage they are doing to market participants.
Next we will see many other banks under attack, like Barclays, HSBC, UBS etc.
Deutsche is just the tip of the iceberg and the tape recordings of the
traders’ conversations is clear evidence that there is regular and major
manipulation of the precious metals as we have always known. This is another
big black swan that will have major consequences for the gold and silver
paper markets.
We have heard from the Swiss refiners that in recent weeks they have at
times had to pay premiums to buy gold due to shortages. So no one should
believe that the paper price has anything to do with the real gold and silver
markets. We are getting nearer to the point when the truth will hit this
market.
I would not like to be a holder of paper gold or silver at that point.
Egon von Greyerz
Founder and Managing Partner
Matterhorn Asset Management AG
matterhorn.gold
goldswitzerland.com
