RISK ON: WAR, ECONOMY, DEBT, DOLLAR – RISK OFF: GOLD

by Egon von Greyerz, Gold Switzerland:

Totally irresponsible policies by Governments and Central Banks have created the most dangerous situation that the world has ever experienced. Risk doesn’t arise quickly as the result of a single action or event. No, risk of the magnitude that the world is experiencing today is the result of many years or decades of economic mismanagement.

Cycles are normal in nature and in the world economy. And cycles that are the result of the laws of nature normally play out in an orderly fashion without extreme tops or bottoms. Just take the seasons, they go from summer to autumn, winter and spring with soft transitions that seldom involve drama or catastrophe. Economic cycles would be the same if they were allowed to happen naturally without the interference of governments. But power corrupts and throughout history leaders have always hung on to power by interfering with the normal business cycle. This involves anything from reducing the precious metals content of money from 100% to nothing, printing money, leveraging credit, manipulating interest rates, taking total taxes to 50%+ today from nothing 100 years ago, etc, etc.

GOVERNMENTS DOING GOD’S WORK

Governments will always fail when they believe that they are gods. But not only governments believe they perform godly tasks but also hubristic investment bankers like the ex-CEO of Goldman Sachs who proclaimed that the bank was doing God’s work. It must be remembered that Goldman, like most other banks, would have gone under if they and JP Morgan hadn’t instructed the Fed to save them by printing and guaranteeing $25 trillion in 2008. Or maybe that was God’s hand too?

We now have unmanageable risks at many levels – politically, geopolitically, economically and financially.

This is a RISK ON situation that is extremely dangerous and will have very grave consequences. There is one very small but important silver lining which I will return to later.

1. RISK ON – US POLITICAL SITUATION AND WAR

When there are numerable risks that can all cause the collapse of the world economy, they all have equal relevance. However, the political situation in the USA is very dangerous for the world. This the biggest economy in the world, albeit bankrupt with debt growing exponentially and real deficits every year since 1960. Before the dollar has collapsed, the US will still be seen as a powerful nation although a massive economic decline will soon weaken the dollar and the country, burdened by debt at all levels, government, state, and private.

What makes the US particularly dangerous today is that the President is a lame duck. Both political parties are working against him and are trying every trick in the book to get him impeached. The Elite or powers that be are obviously also doing what they can to outmanoeuvre Trump and make him ineffective. But Trump is a fighter and will not give up easily. As he is virtually paralysed when it comes to any political or economic decision, what remains is military actions or war. As commander in chief, he has the ultimate say in pressing the nuclear button. He, like most of us, understands the catastrophic consequences of nuclear war. And we are not talking about just the US and North Korea. We would see China, Russia and many other countries involved. Wars are often started by an impulsive and power-hungry leader, which we certainly have in Kim and Trump.

Real power in the US comes from major sectors such as defence, energy, big pharma and investment banks. Their “contributions” to virtually all politicians is where the real power lies. When a leader is under major political pressure on the home front, starting a war quickly diverts the attention from domestic problems. And Trump would of course get total support from the military since their whole raison d’étre is war.

For Trump, a war would mean that he takes total control and all domestic squabbling is forgotten. He would be the king war maker and the “saviour” of the US.

Except for all the extreme consequences of a nuclear war, there will of course be serious economic implications such as stock and bond market collapses, dollar fall etc. There would also be massive money printing.

Hopefully it won’t come to this and Kim and Trump will realise the global catastrophe nuclear war would involve. But the risk is extremely high.

2. RISK ON – GLOBAL STOCK MARKETS

Stock markets worldwide are all in bubble territory. With volatility at historical lows and valuation at historical highs, stock market investors are displaying a total disregard for risk and reason. No trees grow to heaven even if it looks like it right now. Yes, bubbles can grow even bigger like the Nasdaq in 1998-2000. But investors should not worry about missing the last few points on the way up when the subsequent fall is 80% as happened to the Nasdaq 2000-2.

Virtually every stock market around the world is vulnerable. Below are monthly charts of the Nasdaq, TSX – Canada Nifty- India and Dax- Germany. All are showing a similar picture. They are severely overextended and have made new highs with bearish divergence. This means that the new highs are not confirmed by momentum indicators which are showing weakness. Other technical indicators are confirming that we are seeing long term tops in all stock markets and that the next major move will be a vicious and sustained fall. Thus, stocks are very high risk today medium to long term.

ndx_bubble.png