Investors
today have Hobson’s Choice. But they still don’t understand the options open
to them.
Thomas Hobson had a livery stable of 40 horses in Cambridge in the 16th-17th
centuries. But customers only had a choice of one horse. They could either
take the one nearest the door or none at all.
So Hobson’s choice in simple terms means “take it or leave it”.
Below is the choice of asset classes investors have today and where 99% or
more of global liquidity is invested in. The problem is that these assets are
massive bubbles as a result of unlimited credit creation and money printing
in the last few decades.
If we assume that the horses in the stable represent the asset classes
below, they will all be a very poor choice regardless of which one is nearest
the door:
- Stocks will decline by 75-95% in real
terms as the stock market bubble implodes
- Bonds will lose 90-100% of their value
as sovereign and private borrowers default
- Property values will implode by 75-95%
with rates at 15%+ and no credit available
- Private Equity investments will lose
70-100% slaughtered by high leverage and rates
- Cash will either be bailed in or lost
in bankruptcy of banks or totally debased by governments
EVERYONE WILL TAKE IT AND NO ONE LEAVE IT
The problem is that no investor will “leave it” as they
all have been conditioned to putting all their funds into one or several of
the asset classes above and that is their Hobson’s choice. Very few will be
overly concerned about the risks before them today and nobody can believe
that all the horses in their investment stable can be lame or unfit. Thus,
everyone will “take it” as they will continue to believe
that these assets will go up for ever.
CASH WILL BE WORTH-LESS
Some investors might reallocate part of their assets to cash as market
volatility increases.. But they can’t earn any return on their cash with
rates anywhere from negative to just positive. And then they have the bail-in
risk as banks incur major losses. Then, as all currencies finish
their run to ZERO, the complete debasement of money will have completed its
course. Remember that they have already all lost 97-99% since the
Fed was founded in 1913.
Decades of investment gains, which are virtually all due to credit
expansion, have led investors to believe that markets always go up in the
long run and also that they have magical money making skills. Little do they
understand that virtually no skills have been required to make money
in markets in the last 70 odd years. See my
article about Alfred, a stock market winner with zero talent.
STOCK MARKETS IN FINAL INNINGS
What few realise is that we are now in the very final innings of an
investment game that will end badly. Major stock markets in many countries,
including the Dow and S&P, are now finishing their bull market moves,
both short term and long term. The fundamental position has been indicating
high risk for a while and the technical picture is now confirming that we
are ending a major secular bull market that will turn into a catastrophic
secular bear market which will be devastating for the world.
Markets are likely to top very soon. Whether the bear
market will start with a crash or just an initial slow move down, we will
soon see. In either case, the autumn of 2019 will be one that investors will
not forget. Because that will be the time when sentiment will change course
dramatically. Confidence and euphoria will turn to fear and despair.
Once the market realises that this time central banks have no weapons left in
their armoury and that money printing or lower rates have no effect, there
will be real panic. When the last crisis started in 2006, US rates
were above 5% and German rates over 3%. Today US rates are around 2% and
German negative. In addition 23% or $13 trillion of Sovereign debt now has
negative rates. So virtually no margin to make meaningful interest rate cuts.
UNLIMITED MONEY PRINTING
Yes, there will be massive money printing because that is the only thing
Central Banks know. But we must remember that global debt has doubled since
the last crisis. In 2006 global debt was $125 trillion and today it is $250
trillion. None of that money has benefitted the general economy but instead
only inflated asset markets. When the next money printing round starts, no
one will benefit. The world will realise that you cannot create wealth by
printing worthless pieces of paper or adding zeros on a computer. And
finally, this time central bankers will learn that they won’t be able to
solve a debt problem by adding more debt.
We will most probably see central banks lowering short term rates, as they
do every time they panic. But after a brief period of low rates, the long end
of the market will most probably go the other way and long term rates will go
up. As the panic in the bond markets, both sovereign and corporate, leads to
major liquidations of bonds, long term rates will rise. The 10 year US treasury
rate, which has gone from 3.25% to under 2% in the last 8 months, has most
probably bottomed and will in the next 2-4 years be back in the teens where
it was in the early 1980s.
LEAVE HOBSON AND TAKE GOLD
So let’s go back to Hobson. Investors will go for Hobson’s lame horses,
which in their case will be bubble assets like stocks or bonds and maybe some
increase in liquidity. Virtually nobody will think of alternatives. Very few
are aware that there is an asset class that has outperformed stock
markets since the beginning of this century. As the chart below shows, Global
Equities have lost 70% against gold since 2000 and are likely to lose another
95% in the next 3-6 years.
So instead of protecting against the total wealth destruction that the
world will experience in the next few years, as all the bubble assets
implode, investors will take Hobson’s choice of lame assets that will be
virtually worthless by 2025.
Why not follow the Silk Road countries that continue to
buy the annual mine production of gold. As the chart below shows, since the
financial crisis started in 2006 these countries have bought almost 30,000
tonnes.
GOLD – NEXT TARGET $1,600 – $1,750
Since gold broke the Maginot Line at $1,350 just under a month ago, it has
consolidated around the $1,400 level. The next target is $1,600 to
$1,750. Once gold breaks out of the current trading range, we will see a fast
move up to that level.
The $1,350 level is now extremely strong support and as I have already
stated, the price is unlikely to go below that level more than momentarily. The
risk is now to be left behind in the coming biggest gold bull market in
history. All the surprises will be on the upside.
Gold will reach multiples of the current price, but we are not
invested in gold for the coming major price move but for protection against
the massive risks in all financial markets and in the financial system. Gold
is insurance and gold is wealth preservation.
BE READY FOR SILVER EXPLOSION
Finally, a word about silver. Silver is much more volatile than gold and
therefore not the same degree of wealth preservation. Still, we are likely to
see a most spectacular move in silver starting shortly.
Silver is incredibly undervalued and depressed and once it breaks
out, is likely to explode.
Below is a chart of silver adjusted for real inflation. As the chart
indicates, the silver peak at $50 in 1980 would today be $840 adjusted for
real inflation. That shows what the real potential for silver is.
Holders of physical gold and some silver will not only protect
their assets but are also likely to see the price of both metals reach levels
that are difficult to fathom today.
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.
GoldSwitzerland.com
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