Today the man who has become legendary for his predictions on QE and historic moves in currencies and metals warned King World News that we may see Dow 3,500 and $35,000 gold.
Each week Egon von Greyerz articles are published first on King World News
October 9 (King World News) – Egon von Greyerz, founder of Matterhorn Asset Management: For decades I have argued that human behaviour is predictable and repeats itself at regular intervals. But most humans and especially politicians believe that everything is different today and thus history has no significance.
This is why leaders of countries never learn from history. (Interestingly the only leader who regularly talks about and understands history is Putin.) Hard to grasp the reasons for most people paying no attention to history. Is it sheer hubris or just ignorance due to poor education?
WOKEISM REWRITES HISTORY
For future students of history as well as leaders, it will be very difficult to learn from history due to the current cancel culture. Wokeism in schools and universities is causing history books to be rewritten and curriculums to be changed. Books are burnt and statues and paintings are taken down. As I have asked in previous articles, where does the cancel culture stop? Throughout history countries have been invaded with land and other resources conquered. Should we give America back to the Indians and Australia to the Aborigines? And where do we stop to reverse and rewrite history?
INEPT WORLD LEADERS
For the few of us who are trying to learn from history, the incompetence of leaders is not just frustrating but incomprehensible. The world today has a bunch of leaders whose ineptness is mind boggling. There is not one statesman among this motley crew. But we mostly get the leaders we deserve. With a world economy resting on a house of unstable and worthless paper money, clueless and incompetent leaders have been elected to lead the world to the inevitable collapse of the current economic and financial system.
So let us look at the financial consequences for investors. In no way am I suggesting that these are the most important consequences but they are outcomes that are more easily quantifiable.
The more important consequences are of course the breakdown of the world economy and society with the resultant poverty, famine, deaths, social unrest and wars. This will involve a very serious setback for the world but not the end of the world. Countries and regions have experienced major setbacks before but not of a global magnitude.
But sadly such a disorderly reset is the only way to eradicate the current unsupportable global debt. As debt implodes so will all the assets that the debt supports. It is only after such a cataclysmic reset that the world can start growing again without the burden of an insupportable debt that prevents further growth from here.
This reset will also lead to the return of real values including family values…
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WILL ALFRED LOSE ALL HIS MONEY
Let’s return to Alfred a US citizen who was born at the end of WWII, I wrote an article about him in February 2019 called “Stock Investors like Alfred to Lose 98% of their Investment”
Well, Alfred was very lucky throughout his investment life. By putting all his savings and excess earnings into the Dow Jones he managed to amass a fortune of $14 million until the end of February 2019. He was even more fortunate to see the US market gain another 45% (including dividends) until the end of 2021. So his wealth had by that time grown another $6 million to $20.3 million.
As I wrote in the 2019 article, Alfred never sold and sat through every vicious correction for 77 years. So until January 2022, buy and hold had worked like a dream.
By the end of the first week of October 2022 Alfred’s portfolio is down from $20.3 in January to $16.2 million which is a loss of $4.1 million in 2022.
Currently Alfred is not the slightest bit worried as he has seen many corrections of 20% to 60% in the last 77 years.
Based on his experience, Alfred is not concerned although $4 million is a big paper loss.
But what if the dream is over for Alfred and it turns into a nightmare with all his gains evaporating in a market collapse of 90% or more like in 1929-32?
Well, in my view the odds are very high that we will see a fall of that magnitude.
A DEBT INFESTED WORLD
A debt infested world has lived on borrowed time since the debt feast started in 1971 when Nixon took the dollar, and therefore most currencies, off the gold standard.
And what a feast it has been with total US debt going from $1.7 trillion in 1971 to $92 trillion today.
That is a staggering 54X increase in US debt in 51 years!
It took 200 years to go from zero debt to $1.7t. But when you remove the shackles of the monetary discipline that the gold standard enforces, irresponsible and incompetent governments and central bankers only have one objective. Their principal policy is to hang on to power for as long as possible.
But when money runs out, like it did in 1971, there is only one way to stay in power and that is to buy votes. Thus the creation of $90 trillion debt since 1971 has been the most expensive bribery in history.
We must also remember that US Federal debt has increased every year since 1930 (with only a handful of years with surpluses).
The dilemma of creating money out of thin air of such a magnitude is that it leads to debts that can never be repaid, fake asset values which will implode and false human values resulting in misery and decadence. The inevitable consequences are economic and financial collapse. And that sadly is what the US and the world is facing next.
So what will be the market consequences of the coming (hyper)-inflationary depression followed by a deflationary implosion?
Let’s look at some enlightening charts:
1. THE BUFFETT INDICATOR – VALUE OF STOCK MARKET TO GDP
The total value of US stocks (Wilshire 5000) to GDP is one of Warren Buffett’s favourite indicators. It reached almost 200% in November 2021. The previous record valuations were 140% in 2000 (Dot Com Bubble) and 106% in 2007 (Sub Prime Crisis). A strong support area is the lows in the1970s at around 33%.
I doubt however that the 1970s support will hold after the Epic mega bubble we have just seen totally fuelled by tens of trillions of exploding dollar debt.
Especially since 2009, the debt intoxication of investors has driven stocks to dizzy heights which is likely to result in a hangover that will not only take years but probably decades to recover from.
So poor Alfred, this is not what he needed at the tail end of his investment life. But sadly he like most investors don’t know better since the Fed until now has saved them.
2. PRICE EARNINGS RATIO – BOTH PRICE AND EARNINGS TO DECLINE
I remember well when I moved to the UK in 1972 and worked for Dixons first as Finance Director and later as Vice-Chairman. Dixons was a camera and audio/TV retailer at the time quoted on the London stock exchange. I received my first options at £1.32.
Two years later after an oil crisis in the Middle East and a coal miners’ strike in the UK (with only 3 days of electricity) stocks crashed across the globe. The Dixons share price collapsed from 132 English pence to 10 pence. So my options were 93% out of the money!
Dixons had a strong balance sheet and still profitable. But profits declined by around 75%. (It wasn’t easy to demonstrate TVs and HIFI in candle light.)
So from earnings per share for Dixons of 6.6 pence in 1972 went down by 75% to 1.6 pence and the PE ratio went from 20 to 6. That was the best lesson I ever learnt to as a young man to experience what can happen to markets. Anyway, I then joined the board at 29 and we went on to build the business to the biggest consumer electronics retailer in the UK and a FTSE 100 company.
Most investors today (and certainly not Alfred) would not believe that the shares of a successful company can decline as much as 93% but I was fortunate to experience this when I was young and did not have much to lose.
So as the debt bubble fuelled market collapses from a historical and epic uber-valuation, I would expect the S&P PE ratio to overshoot the 7 level in 1980 and go below 5 as shown in the chart above.
3. DOW / GOLD RATIO TO GO BELOW HISTORICAL LOWS
Since the gold window was closed in 1971, the fluctuations in the Dow/Gold ratio have fluctuated dramatically. This is what can be expected when most of the gold trading takes place in a heavily manipulated paper market. The whole false financial system based on worthless paper assets is now under tremendous pressure.
For example, the UK’s mini-budget two weeks ago led to a massive decline in the pound and a near collapse of the UK bond market. The Bank of England, at the request of pension funds, had to support the bond market to the extent of 65 billion pounds.
This shows the fragility of markets today when a relatively minor event can lead to a possible collapse of the UK financial system and therefore also the global system since everything is connected.
The problem was as expected in the $2 quadrillion derivative market which had been used to hedge interest risk by the pension funds. Virtually every financial instrument traded today includes a major element of derivatives.
So when we look at the Dow/Gold Chart we must bear in mind that most of the trading in the Dow and Gold is in derivatives and that by a multiple of many 100 times.
The Dow/Gold ratio was at 1 in 1980 which means that the Dow was 850 and gold $850. The ratio then reached a peak in 1999 as gold fell and the Dow was strong. Since then the ratio has gone down to 17 or 62%. This means that gold has strongly outperformed the Dow.
If the Dow goes down by over 90%, like in 1932, we would expect the ratio to reach the support of 0.5 which means for example 3500 Dow and $7,000 gold.
But the current massive over valuation of stocks and undervaluation of gold is likely to take the ratio to the 0.2 level of the early 1800s and even overshoot.
As the gold paper market collapses, and gold can trade freely but with massive physical demand and very little gold available, I would not be surprised to see a 0.1 ratio. That could lead to 3,500 Dow and $35,000 gold.
That gold price would also more accurately reflect the massive growth in money supply as gold today is massively under valued in relation to the growth in US money supply as the chart below shows.
MARKETS
Just a final word about markets. US stocks and all global markets look extremely vulnerable even in the short time as I have been saying since mid-August.
Another short term fall of 15-20% is very likely on the way to much bigger falls in the next 1-3 years.
Bonds look very bad as credit risk as well as inflation deteriorates.
Gold and Silver look very strong and have started the move to much higher levels. They may in the very short term be under a bit pf pressure as stocks fall but that shouldn’t last long.
The world economy is in a total mess financially and geopolitically. Protection in physical precious metals is essential…This will link you directly to more fantastic articles from Egon von Greyerz CLICK HERE.
Billionaire Pierre Lassonde Calls Major Bottom In The Gold Market
***To listen to billionaire Pierre Lassonde discuss the major bottom in the gold market as well as where he believes the price of gold is headed CLICK HERE OR ON THE IMAGE BELOW.
***To listen to Alasdair Macleod discuss the unfolding banking crisis and how it will impact major markets including gold and silver CLICK HERE OR ON THE IMAGE BELOW.
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