As we move into the beginning of the second quarter after a wild start to the 2016 trading year, today the man who has become legendary for his predictions on QE, historic moves in currencies, and major global events, just warned that people must now prepare for a massive global collapse.
Global Collapse And Capital Control Alert
Egon von Greyerz: “The bank stocks are now warning investors that it is time to get money and assets out of the banking system. As you know Eric, we warned investors long before the 2006 – 2009 crisis to get out of the banking system. At that time banks were saved by a $25 trillion global package but that won’t happen again. Credit worldwide has increased by 70% since 2006 and the banking system as well as the world economy are now in a massively worse condition than they were at that time…
In Volatile Markets, Is Wealth Preservation King?
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Egon von Greyerz continues: “At the last crisis governments saved the financial system with the biggest bail-out program in history. So both bank depositors and bankers were saved by governments printing and lending money.
WARNING: Get Out Of The Banking System
This was of course at the expense of ordinary people who are now on the hook for the massive increase in government debt. But since every government in the world is increasing debt exponentially, nobody ever worries about repaying the debt. And of course the debt will never be repaid. Instead, within the next few years it will implode in a wave of sovereign defaults. At the same time, all the assets that were inflated by this debt will also implode such as stocks, property and bonds.
So Eric, the banks will not be saved by governments next time. Instead there will be bank bail-ins. This means that depositors’ money and assets will be used to save the banks. But since most banks are leveraged 20-50 times and much more if derivatives are included, bank customers’ assets will not be sufficient to save the banks. Therefore I would expect a global program of money printing on a scale that has never been seen before. That won’t save the world either but it will lead to hyperinflationary shockwave before we get a deflationary implosion.
Bank Stocks Crashing
Coming back to the bank stocks, they are now crashing both in the US and in Europe. In the US they are at a multi-year low against the broader market and in Europe banking stocks have fallen 20% in four weeks. Deutsche Bank and Credit Suisse shares are now back to the 2009 lows. The recent increase in money printing by the ECB only had a very short-term affect, and now the market is smelling blood in the streets. It is an absolute certainty that most banks are insolvent if they valued their toxic assets at market prices. QE will not change that but it might give the banks a stay of execution for a few months.
It is very clear to me that bank stocks are telling us what some of us have known for some time, namely that we are now entering a period when the market starts to recognize the severe risk in the financial system. Ironically, the zero or negative rate policy of central banks is also contributing to the demise of the banks. Firstly the banks cannot earn a real margin on any money deposited. Secondly the low rates totally kill any incentive to deposit money. Without strong savings, investments will also decline. And in a deflationary economy with low rates, it is impossible to earn a real return on investment without taking big risks.
Repeated IMF Warnings
The IMF is now warning about the systemic risk in the life insurance market. With low rates, they can’t earn a sufficient return for their investors. So instead, thIs $24 trillion industry is taking very risky bets in order to earn higher returns. The same is happening in the pensions market. Most pension funds, both private and government, are severely underfunded. Before this crisis is over, there will be very little left in the pension industry for the poor retirees.
A lot of indicators worldwide are telling us that the global economy is now starting a severe downturn. World trade is declining fast and so are profits in many countries. Industrial production is also coming down and in Japan for example, it has now fallen the most since 2011. The problems in Greece are still unresolved. Their banks are in a mess. Unemployment is 25% and GDP is down 27% since the crisis began.
Disaster In Greece And Across Europe
Remember that in the 1930s depression in the US, GDP was down by 32% and Greece is not far from that level. The problem is that Greece is bankrupt and the only solution is for the country to default, leave the EU and install a new currency. The situation is not much better in Italy Spain, Portugal or even France. Emerging markets used to be the growth engine of the global economy. China, India, Brazil and Russia accounted for 50% of global growth in the last 15 years. But with collapsing commodity prices, all these countries are now in a severe decline.
With all countries staring to deteriorate, the World Bank is constantly revising global GDP down. It has gone from 4% last year to 2% in January and today 2.5% growth forecast for 2016. I would expect it to go negative in real terms in 2017.
Collapsing World Economy
With an extremely fragile financial system and with a world economy which is declining rapidly, wealth preservation is becoming ever more important. Stocks have recovered considerably in some countries after the fall earlier in the year but I expect the downturn to resume soon. And virtually every stock market has fallen against gold in 2016.
Gold has performed well this year and is up between 7-18% in various currencies. Gold is up the most in US dollars, +18%, as we are now seeing the dollar weakening against all currencies. Against the Swiss Franc for example, the dollar is down 5% since January. I expect the dollar decline to accelerate in coming months as the overvalued dollar starts the last leg down to its intrinsic value which is zero. Many other currencies will follow. Because of the continuous debasement of all currencies, it is a fallacy to measure performance or wealth in say euros or dollars. The best measure is of course gold since it is the only money that has survived intact throughout history.
As you know Eric, I think it is essential to own physical gold and to store it outside the banking system and outside your country of residence. Not to store it in banks is obvious because if the banking system fails, your gold will at best not be accessible for a longtime. But more likely, when a bank fails, bank customers will find that the bank has pledged their gold to someone else or sold it.
The reason why it should be stored outside your country of residence has been proven in history many times. When governments come under pressure, they become oppressive. At that time many people will want to leave their country. This was the case for example with the Jews in Germany and the Asians in Uganda. Many of them held gold in a different country like in Switzerland and this gave them funds for a new start. Also, when a currency comes under pressure like the dollar will, there will be exchange controls. At that point your money will be locked in. It is also likely that governments will then force people with bank assets to buy treasuries to prop up the country’s failing economy. These treasuries will of course become worthless as governments issue unlimited amounts of them.
An advantage for US residents is that physical gold stored under their own control abroad does not have to be reported to the IRS. Any capital gain due to a sale must naturally be declared.
Gold Bull Will Send Prices To New All-Time Highs
Eric, we bought important amounts of gold for investors in 2002 at $300 per ounce. We have since seen $1,900 and are currently at $1,240. At the $1,240 level, the price adjusted for real inflation is virtually the same as in 2002. So gold today is not only unloved, but it’s also undervalued. In addition it has now finished the correction and is resuming the long-term uptrend to new highs. So not only is gold the best insurance or wealth preservation asset that anyone can hold, but it is also an excellent investment at current levels.” ***KWN has now released the extraordinary audio interview with legend Art Cashin discussing his greatest fear and the the implication of this for the gold market and much more and you can listen to it by CLICKING HERE OR ON THE IMAGE BELOW.
***KWN has also now released the fantastic audio interview with Rick Rule discussing the gold and silver markets and what he is doing with his own money right now and you can listen to it by CLICKING HERE OR ON THE IMAGE BELOW.
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