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A hyper-inflationary depression has always been the inevitable end to the biggest financial bubble in history and, this time, it will be global. Hyper-inflation will spread from country to country just as the coronavirus has….starting most likely…in the U.S. and [within] the EU…quickly be followed by…Japan and most [other] developing countries.
This article is an edited ([ ]) and abridged (…) version of the original article by Founder and Managing Partner of Matterhorn Asset Management, to ensure a fast and easy read.
COVID-19 Is Just the Catalyst
…The crisis that the world is now encountering has not been caused by the COVID-19, it is just the catalyst…The real cause of…[this] crisis is the [action of the] Central Banks. They have been pouring fuel on the fire for 50 years by continuously reducing the cost of money until it became free in 2008 when rates were reduced to zero and, since then, we have also seen negative rates around the world…[which] are not just a total paradox but also absolute lunacy…
We Now Have the Perfect Storm
Governments around the world have issued virtually unlimited debt which will never be repaid increasing the risk of lending to them exponentially. Instead of much higher rates to reflect the massive increase in debt, plus severely elevated risk, central banks have got away with defying the laws of nature
buy [by] falsely manipulating rates…[and, as such,] the cost of money today neither reflects the risk nor the demand. All it represents is malicious manipulation to serve governments and their masters the central bankers…[Unfortunately, however,] like all fake markets, this one will also end, not just badly, but catastrophically.
…We now have the perfect storm. Virtually every government in the world is now committing billions and trillions of dollars, euros, etc. in fruitless attempts to save a collapsing world economy...Businesses are hemorrhaging cash and so are individuals…Estimates predict a 40-50% fall in Q2 2020 GDP in the U.S….[and this] erosion…we are experiencing is the start of a secular downturn which soon will become a hyper-inflationary depression…
Very soon we will see debt around the world come under enormous pressure:
- Borrowers will start defaulting…[which] will lead to bonds crashing and rates surging.
- Central banks will then lose control of interest rates as long rates first go up and soon also pulling the shorter rates up. Rates can easily go to 15-20%.
- Many bonds will go to zero and rates to infinity…[and], since the majority of the $1.5 quadrillion derivatives market is interest related, this market will also blow up.
All this will lead to unlimited money printing and currencies crashing fast to their intrinsic value of zero. At that point the entire financial system will be unrecognizable and parts of it non-existent. All of this could happen very quickly, possibly within the next 6 -18 months…
The Everything Bubble Will Burst
Stock markets, in their first leg down of the new secular bear market, reached a 40% loss in most countries and that in less than 4 weeks. We are now seeing a typical correction that can go a bit higher but, when that is finished which could take 1-3 weeks, the next devastating down-leg will start. Anyone trying to catch this falling knife will be slaughtered.
Bond markets might hold up for a bit longer with massive central bank manipulation and money printing. Junk bonds will first start crashing and constant downgrades will turn a lot of debt to junk. Much of corporate debt will go the same way and within 6-12 months also sovereign debt will come under attack.
Property markets – industrial, commercial, retail and residential – are in a major bubble and are already starting to disintegrate…There will be no buyers, no financing and many forced sellers. A perfect recipe for a collapse.
Before the secular bear market has bottomed in these three markets, prices will be down 90-100% in real terms…[which will lead to] a hyper-inflationary depression that could come and go very quickly within the next couple of years. Thereafter, we will most probably see a deflationary implosion of all assets and a collapse of most of the financial system.
…This is not the end, however. It is just another phase in the world economy to correct excesses of the [last] 100 or 300 years or even 2000 years. Once debt has imploded and all asset prices have come down from current fantasy valuations, a new system will emerge built on sound values and principles. And then the cycle starts all over again.
Gold Will Maintain Its Value
…In a world where prices of most assets are about to implode, gold is life insurance and virtually the only asset that will maintain its value in real terms. Silver is also likely to do very well, and will most probably outperform gold, but gold is safer and much less volatile.
…Gold…has just broken out and is now likely to go to $1,700 on its way to the old high of $1,920 and thereafter much, much higher…Remember, though, that you are not holding gold to measure the gains in debased paper money but, instead, you are holding physical gold as insurance against a broken financial system that is unlikely to be repaired for a very long time.