Warning! Very long, but very interesting newsletter.
People don't have to deal with economics. So it was decided. Especially with regard to political and monetary economics. Just pay attention to how the information is handled. All the attention of the common people is daily distracted by frightening proclamations relating to some terrifying threat: diseases, pandemics, hospitals, terrorism, fires, catastrophes, glaciations, accidents, eruptions, earthquakes, murders, massacres and so on and so forth, but I challenge anyone to ask their neighbor if they know what the difference is between public debt and public deficit, even the person who claims to know a bit of everything, will most likely remain silent and at a loss for words.
In this economic moment, however, it is not easy even for those who are experienced to make exact forecasts.
When sailing in uncharted waters, the only thing we are sure of is the existence of the water. The rest are all variable. Having acknowledged this, anyone who tries to comment on the current economic and geopolitical situation can do so only with intuition, experience, daily study, evaluating everything with common sense. What can be said may or may not be true. Pay attention . Every economist always speaks from both sides of the mouth and always using the conditional.
So let's start with the known element: water! We are floating on an ocean of liquidity created in debt that rises, like an unstoppable tide under our more or less precarious boats. The risks are many: to sink, to end adrift, or to be overwhelmed by waves. (It is no coincidence that the word "waves" was also chosen for the virus)!
Liquidity surges come from all central banks. Monetary creation is global. All the central banks have flooded the field with too much new liquidity created out of thin air and are desperately trying to continue playing as if nothing had happened, creating a situation where it is difficult and tiring to move as in the quagmire of Fantozzi's ‘bachelors versus married couples’, a famous Italian comedy movie.
I'm also in the same situation as everyone. I am not able to make 100% accurate predictions of what will happen or when exactly this will happen, but by observing the present, that is, what is happening in front of our eyes, one can imagine that effects of the consequences of certain actions, will be seen sooner or later. If we see a person who is cutting down a tree, sooner or later, we know that the tree will fall. It could remain attached to a fiber even for a long time, so no one can establish the exact moment, but objectively, natural laws cannot fail to be manifested.
Same thing in economics. All this torrential rain of debt liquidity cannot be painless. The time will come, and perhaps it has already arrived, when the water turns into a wave that risks overwhelming those who are not ready. Like at the sea. If the wave arrives, you have to put the bow towards it and cut it in two, riding it safely and passing over.
Let's see how to do this.
In this regard, I have just finished listening to an interview with great experts in economic and financial matters released by the excellent channel Cambridge House International Inc. The guests of the show were : Raoul Pal of Real Vision, Brent Johnson of Santiago Capital and most famous of all, Peter Schiff of Euro Pacific Asset Management.
The interesting fact of this multiple interview is precisely that the experts interviewed are not completely in agreement on a single vision of how the crisis will develop from here on, precisely because these are uncharted waters. Never before have we seen interest rates at zero for over ten years and Quantitative Easing "open ended" that is, without a bottom.
Let's see the highlights of the interview, summarized here for me and for you, just to take stock of the situation at the end of February 2021.
The interviewer introduces the broadcast starting from the now unanimous consensus, deriving from the countless testimonies collected in his broadcast, among which, he also quotes the Canadian Prime Minister, that we are at the last round, at the final phase of a financial system, for how we know it, which has reached its structural limit. "The music is coming to an end and there aren't enough chairs for everyone."
Jay Martin, the host says: “I am also a family man and I am worried, what are the best decisions to make in this moment in which, never before, we have had to face and in our lives, the dramatic consequences of a financial collapse "?
Raul Pal: “It is not necessarily true that it’s all over, because there are still so many experiments to try and the end process can continue to last a long time. There is no final stop, a single and unique line beyond which we stop. There are a lot of negotiations going on that we are hearing about. Like continuous monetary issuance and the end of the dollar, debt jubilee, issuance of bonds with no maturity, so there are still some cards to play to keep the system alive. The question to ask is how long will the final phase last? And what form will it take? I think all three of us agree that it will end with the death of the fiat currency system. For me it is still not clear how it will end, but one thing is certain. There will be a fight.
Peter Schiff: "I agree that central banks will do everything imaginable to postpone judgment day as much as possible, but let's look objectively at where we are and at the enormity of the problem, even compared to 2008, or to the enormous growth of the debt. Let us remember that America, in 2008, managed to convince the entire financial world that the zero interest rate policy was a temporary emergency measure that would last a few months, after which, rates would normalize. The same for the Q.E. Meanwhile, the European Central Bank has brought rates into the negative zone and this makes the Federal Reserve's zero rates seem high. In the years from 2010 onwards, many countries, including emerging economies, were buyers of US Treasuries. Now they don't buy any more, on the contrary, there is a tendency on the part of investors, to want to get rid of these securities. So, if we look at the enormity of the money we still have to print and the enormity of the deficits, ($ 8 trillion a year against only $ 3.5 trillion in taxes). It's an unprecedented money printing press that's a mountain compared to what we've seen so far, from 2008 to now. Will we be able to reassure the world for a long time to continue printing money, continuing along this path? It's a bet I prefer not to make. I think we have reached the end of the line. This time the decline will be definitive and will end the crisis. What is beyond the crisis? I do not know! But I think it will be the end of the US dollar and I think the world will be a better world afterwards, without having the dollar as a global reserve currency. I think there will be great opportunities outside of the United States and I am very well positioned to profit from what comes next.
Brent Johnson: I also agree that we are approaching the END GAME, but we are not there yet. I think it will take longer than many predict. I think their juggling skills are very great. I don't think the crash will come tomorrow. It might, but I don’t think that it will. I agree with Peter when he puts the spotlight on the dollar, but the focus is always solely on the supply of dollars, while there is great co-responsibility also on the part of those who use these dollars, or the part represented by the demand for dollars. To get the price, you need a balance between supply and demand. True, the US is printing money like never before, but Europe too, even Japan, everyone is printing money. I can even say that the more dollars we print, the more the dollar could get stronger, because that would force everyone else to print even more. I think the signal that the system is about to collapse will be the dollar going up instead of the dollar going down.
Raul Pal: there is another element to take into consideration. Let's forget about the dollar. What I use is a basket of 27 currencies compared to gold. In this case, gold becomes the global currency and what we observe is that all these currencies depreciate against gold!
Peter Schiff: It is clear that all central banks are devaluing their respective currencies. All scriptural currencies are losing value compared to real money or gold. But I don't quite agree with the theory that all nations are involved in the same type of currency intervention. In order for the United States to run such colossal deficits, it takes, on the other hand, other nations capable of creating surpluses to allow Americans to lend and consume. If the US is big debtors, other nations are creditors. This is why I think the United States is in a particularly vulnerable position. We built our economy by setting it on the fact that we can print all the money we want to buy the things we don't produce. And we continue to borrow without saving, with the hope that the world will continue to lend us more and more money, when we cannot even repay what we have already borrowed. So I don't think this model can go on forever. It has already gone beyond the limit imaginable. Could it go on still? Yes, it could, but I wouldn't want to bet my money on it. I don't care if the game collapses tomorrow or 5 years from now. My investment strategy calls for security for now and for the next few years. I am positioned correctly.
Brent Johnson: Peter, I understand your reasoning, but I would like to show you how right now the whole world of investors is positioned on a strategy that sees the dollar crash with a simultaneous rise in commodities such as gold, copper, steel, timber, even projections on oil are at the highest levels. No matter who you ask, they all have the same strategy, that is, long commodities (commodities) and emerging markets and shorting the dollar. They may be right, but thinking of buying commodities and emerging markets with the intention of going against the tide is a wrong impression, because everyone is doing the same thing.
Peter Schiff: Instead I see that almost everyone is bullish in the American stock market and many people don't even imagine how badly the dollar could fall. The collapse of the dollar will be disastrous, out of control. People don't even imagine the devastating extent to which this will happen.
Raoul Pal: we agree that the dollar is on the way to decline, but it is always the reference currency for global trade in the 88% of every trade transaction in the world. Everyone needs dollars. Unless this mechanism changes, and both the Bank for International Settlements and the International Monetary Fund are talking about it, it is very difficult for the dollar to enter structural decline until the world moves towards a new system, as China is doing. True, the dollar will collapse at some point, but that is unlikely to happen at a time when it is still the main currency for world trade.
Brent Johnson: I am bullish on the dollar. This could be the best trade in history. I wouldn't tell you if I didn't believe it and if I didn't put my money on it. But this operation is only the springboard for the next big operation, the long-term one, the one with which I think both Raoul and Peter agree with me. Eventually, I too will get out of the dollar and dollar-denominated stock market to invest in emerging markets, commodities and foreign currencies, because I think that when the dollar has finished its last bullish phase, and the system will reset, orderly or messily, I will ride the wave of emerging markets for 5/10/15 years. I just think the system needs to be reset first. The debt must be reset. At the end of the story, my thesis is all about debt. Debt is equivalent to currency demand. This currency is the dollar. And as long as there is no other currency, the dollar will not be abandoned.
Peter Schiff: I too believe that the issue is all based on debt! I just believe that the debt will be written off by inflation. The problem we have with debt is that since it cannot be repaid, it must be done away with by inflating it, devaluing the dollar. Creditors will be repaid with a depreciated currency. See Brent, I am positioned correctly even if the dollar goes up, as you say. I have my stocks in emerging markets paying me dividends and am ready to face a dollar rise as well, but you, Brent, what will you do if I am right and the dollar has already hit its highs and will start declining from now on? What's your strategy for getting rid of your dollars quickly?
Brent Johnson: If that happens, I'm still well structured. I have never told anyone to sell their entire portfolio to get into dollars 100%. What I have said is to compose a diversified basket of investments with a small percentage of your portfolio by betting on a rise in the dollar. This way an asymmetrical protection is obtained which will bring excellent results. If you look at the composition of the investments in our portfolio you see that we have stocks, gold, we have cash available, short-term securities, all my clients have real estate, we have some Bitcois. I like Bitcoins even if they give me problems, but I see that there is great potential. If the dollar goes to zero tomorrow, we won't make as much money as those who bet in that direction, but we will still be okay. If there is a surge in the dollar upwards, there are big earning possibilities. It is not that I am going to tell people to sell their investments in gold or liquidate their total investments to buy dollars, this is not the case, but let's not forget that in the last collapse of March 1, 2020 all the assets in the world were sold indiscriminately to buy dollars. This is what I want to make people understand. At a time of severe and severe economic crashes, markets are desperate for dollars. We must be prepared because such events can happen suddenly and have devastating effects.
Peter Schiff: Yes, however, the dollar did not go up that much and it was very short lived.
Raoul Pal: I also think that the dollar could surprise us and become the bet of the year, but what seems to me most is that the dollar will end up becoming like the yen instead. The yen has been pegged to the dollar with a peg of around 105 for thirty years. This is a scenario that no one takes into consideration. The International Monetary Fund and all the central banks are working to prevent the system from collapsing. If Brent is right and the change goes to 130 the system collapses, but also if Peter is right and the peg goes to 70, the system will collapse all the same. So, the only way out, which nobody thinks about is that of a lateral phase of the dollar for an extended period of time with stakes between 110 and 85. In this case it would be a good solution for everyone, especially for those who bet on emerging markets. The worst thing for emerging markets is the volatility of the dollar, especially if the dollar goes up, but a stable dollar as we saw in the early 2000s is extremely powerful, because these productive countries don't have to worry about borrowing other currencies. I personally believe in the crypto currency market. We also commissioned a recent study with my Real Vision team and we would like to say that Bitcoin is one of the least correlated assets in the world being independent of the dollar and other currencies. I also really like physical gold. The official narrative that has attributed the denomination of Digital Gold to Bitcoin, however, constitutes an excellent anchor bias that gives solidity to the project and sets the conditions for significant gains for a certain period of time. After that? Then I will convert my Bitcoins back to physical gold. Right now I need performance. But I like to be optimistic with my investments and gold becomes a good investment in catastrophic times. That's why I like emerging markets, because I prefer to have an optimistic outlook. It is often nice, as an investor, not to have to talk about catastrophes all the time. I don't see any particular shocks on the horizon in the next 18 months.
Peter Schiff: That's true. Bitcoin had an extraordinary performance. Frankly, I didn't expect it. But it has nothing to do with gold. Gold is a safe haven that retains its value. Bitcoin, on the other hand, is a very speculative digital token. Maybe the price will still go up a lot or maybe it will collapse. We must not look at gold with the same measurements. Gold is a tool that allows you to preserve value. Whoever is buying Bitcoin is not trying to safeguard any kind of value. Those who buy Bitcoins only think about getting rich. I think Bitcoin is a very risky asset and if you really want to risk it, there are other assets that are just as risky but have a lot more substance behind them with less downside risk. I remember when, at the end of 2017, everyone was convinced that Bitcoin would continue to rise exponentially without stopping to 200-250 thousand, until in January 2018 the Bitcoin collapsed by 70%. I expect something like this to happen again, a drop to 70-80% only this time it won't recover. I don't think there is a limit to how much it can go down when speculative buyers start selling.
Brent Johnson: There is one thing Peter said that is very important. When he said that the March 2020 slump with the simultaneous rising dollar spurt was short lived. He is right! It was short lived because the Federal Reserve stepped in and printed an avalanche of dollars. But I think that this mode of operation may not always happen and that central banks may lose control. And I think that when the first central bank loses control, there will be a contagion effect on the whole world. It could be a problem that starts from Italy (min 33:23) because the ECB loses control.
Raoul Pal: but also Japan! We already talked about it, right Brent. What if Covid cases increase and Japan has to shut down its economy and the Japanese central bank BOJ is forced to issue even more economic stimulus? It now has 80% of its treasury bills. If it reaches 100%; this is the end!
Brent Johnson: I don't know exactly what's going to happen. What I am sure of is that if central banks lose control it will not be a nice thing. If the dollar does not go up it is a good sign, because the world knows that when the dollar starts to go up, that’s when the "wrecking ball" comes!
Peter Schiff: I totally agree! Everyone was desperate to keep the dollar alive. We must keep our eyes on the interest rates of long-term Treasury government bonds and we must control the price of gold. If the long-term Treasury rate starts to rise along with the gold price, that's a very strong signal that the end is near. The US government will try to prevent rates from rising. But the only way there is to stop rates from rising is to print more money to buy the bonds, adding fuel to the inflation flames. At this point, the Federal Reserve will have to monetize the municipal debt of all 50 US states. When those who have invested in gold realize that the Federal Reserve will not try to fight inflation, but will increase it, then the price of gold will rise along with interest rates. That will be the beginning of the end.
Raoul Pal: If we look at the Federal Reserve's balance sheet we see that it has increased enormously without creating inflation. There is no "inflation genius". Without the speed of circulation of money, there can be no inflation. Japan has shown us how long you can keep printing money without creating inflation. And, unlike the dollar, they have a currency that no one else needs. The Yen was supposed to collapse, but it didn't! So, we don't know what's going to happen. We have to be intellectually honest with ourselves. We do not know! And that's ok. We have to observe and make the appropriate decisions as they arise and I think it is possible, in a reflation scenario, that both rates and gold can go up together.
Peter Schiff: I think Japan has some characteristics that make it the exception to the rule, but I don't think it can keep going indefinitely, but whatever happens in Japan will be smaller compared to what will happen in America. Thinking they can do as Japan, has given a false sense of tranquility, but those who hope to get by as Japan did, expect a bad awakening.
Brent Johnson: Peter and I agree on a lot of things, but I think the dollar will go up along with rates and gold. In a context of general disaster, the dollar will lose value more slowly than other currencies.
Raoul Pal: I think nominal rates will go negative and stay in the negative zone for a long time. I don't think the interest rate spike will come because central banks are buying their own State’s treasury bills.
Peter Schiff: But this will create monstrous inflation because the interest rate on corporate bonds will skyrocket and central banks will have to buy those too!
Raoul Pal: no, there will be no inflation!
At this point the interviewer takes the floor and asks his guests to provide advice on how to best prepare to survive the turbulent times we are facing.
Jay Martin Cambridge House International Inc: where do you put the money?
Brent Johnson: I haven't changed my wallet much in the past two or three years. I still have investments in equities, especially large-cap American blue chip companies, although I expect a correction that will not be as drastic as last March. Maybe a minus 15 - 20%. I am short on short term interest rates because I believe they will go down before we’ll see that rise we talked about. We have gold in the portfolio, but also this asymmetric allocation to the dollar. I still believe that there will be a rise on the dollar and that this will come as a surprise to many.
Peter Schiff: I haven't changed my strategy in twenty years! I've been preparing since the dot com tech. bubble burst, ever since Greenspan lowered rates to 1%. We made a lot of money from 2000 to 2010 in emerging markets, gold, oil, foreign currencies and even shorting subprime mortgages, but we were surprised by the strength of the dollar over the next decade and didn't perform as well. It took longer than I had imagined, but now the problem is amplified exponentially and I am correctly positioned to benefit from it. We have open positions in shares of mining stocks (gold and silver), we have a lot of physical gold, industrial metals, emerging markets, agricultural commodities. Even though the big crash hasn't come yet, my predictions have come true. I have said it since the first day that Q.E. would never end. And when Trump said he would pay off the debt and instead did immensely more. Only the big crash hasn't come yet. The stock market bubble has been inflated even more and the debt bubble, still immensely bigger and this has created the illusion of prosperity. But in the end, I think I will be right about everything and that the final collapse of the whole system will occur. Even though we have avoided it for twenty years, I don't think we will be able to avoid it for another twenty.
Raoul Pal: in our portfolio we have: gold, shares of mining companies in the gold sector, dollars, bonds and a ton of Crypto. Personally. I have everything in crypto currencies. It is the biggest gamble I have ever made in my life because I truly trust that it is a very important technology based on real value. What will happen in the next 18 months? I do not know. But for now the whole digital space is exploding with super innovative technology and new business models. Right now, for me: Crypto!
After this very important interview, let's move on to the conclusions. We can say that we have understood that there are various possible scenarios that converge, however, on the fact that we are in fact in a moment of great upheaval. What we have seen is that all the experts agree that right now it is crazy not to have physical gold. Physical gold is the lifeboat. Those who have it are saved. Who does not have it, goes to the bottom. The interview also offers other ideas to thrive in these dramatic moments, such as the world of crypto currencies. Personally, the reasoning published in the previous newsletters remain valid for me: WHAT TO DO part 1 and 2. This interview, however, if evaluated together with the previous newsletters and forecasts that I have published in the double newsletter KONZEPT 1 and 2, represents a good amount of important information.
In these stormy waters, each of us will have to be able to navigate our own lifeboat and stay afloat. It will be difficult to be able to save anyone else, besides ourselves and our families. There is no time or way to save everyone. Besides, most people don't even want to be saved, because they wholeheartedly embrace their doom, giving blind faith to the Great Reset project. People go straight into the compactor, into the Soylent Green factory, and into the Metropolis furnace. We must try to save something and above all to save our lives.