Earlier in the month I shared with you the first part of an interview I recently had with a publisher in Germany who’s considering bringing our newsletter to the German people. Here’s the rest of that interview…
Mr. German Publisher: Where do you think that the final reckoning will start? In the stock market? With interest rates? In real estate?
Me: I think the stock market will peak between February and May, if it hasn’t already peaked on January 27, and real estate will follow on a lag. Rising Treasury rates are a “pin” to burst this bubble, along with dangerously volatile cryto-currencies. Rates in Japan and Europe for sovereign bonds are unbelievable underpriced due to strong ECB QE policies. Italian bonds at 1.8% versus U.S. at 2.75%… are you kidding me?!
Note that commodities were the first bubble to burst between mid-2008 and early 2011. The bitcoin bubble burst starting in mid-December 2017. Stocks look to be following suit. Real estate will be last, but likely by mid-2018.
Mr. German Publisher: Do you expect a new euro crisis, in the face of potentially rising interest rates in Europe and the upcoming elections in Italy?
Me: Absolutely. Italy is already bankrupt at the private debt level and has the highest debt ratios at the sovereign level outside of Japan and Greece. AND, their demographic trends get even worse over the coming years and decades (as does Germany’s). How is Germany and the EU going to keep bailing out Italy when their economies weaken ahead due to bad demographics trends and a global crash.
Mr. German Publisher: What do you expect the Dow Jones to do in 2018?
Me: I think that the first crash (not a mere correction) in 2018 will be 40%-plus, taking the Dow down to 16,000 or so. Ultimately the crash will be down to 5,500 on the Dow by 2020 and possibly as low as 3,800 by late 2022. I know that is a serious forecast, but that is what my longer-term indicators suggest. And this is what has happened historically in the winter economic season of our 80-year cycle.
Mr. German Publisher: A crash usually means a recession ahead. Do you have any faith in President Donald Trump’s policy of easy money and low taxes for companies?
Me: I don’t! He’s come in after nine years of QE and free money and lowered tax rates – another free lunch. The problem is that corporations tend to average 18% of GDP in capital investment and don’t respond to lower taxes. They invest when they need more capacity. Companies around the world from China to Japan to the U.S. to Europe have excess capacity right now. They prefer to take the free lunch money and low rates and buy back their own stocks, design mergers and acquisitions, and increase dividends to benefits their shareholders, not consumers, workers, or the economy.
Mr. German Publisher: What development do you see for interest rates?
Me: I see U.S. 10-year Treasury rates going up to around 3.0%, and we’re already close to that. Then I believe they’d drop down to near 1.0% in a deflationary scenario. So, that’s the first place to buy in this down scenario ahead. I call it the Fixed Income Trade of the Decade.
Mr. German Publisher: How long will it take until we have “the worst” behind us?
Me: I would say we don’t pull out of this depression environment until around 2023 or so.
Mr. German Publisher: Are there asset classes that will NOT suffer, but maybe surge instead?
Me: Long-term Treasury bonds in the U.S. and AAA corporate bonds will do best, just like they did in the 1930s.
Mr. German Publisher: Should investors buy of cheap stocks during the crash?
Me: You shouldn’t buy stocks just because they’re down 10% or even 40% in a major bubble burst like this. Stocks are typically down 70% to 90% in such a once-in-a-lifetime major bubble burst. I’m projecting losses of 80% in this burst. Once we get close to that level, then investors can start fishing for bargains again. But, as I explained in my book, Sale of a Lifetime, this time around you can’t just throw darts at a board to find those fortune building stocks. You’ve got to be selective!
Mr. German Publisher: How should I prepare – as an investor and a citizen, father, husband, real estate owner, and employee?
Me: Take your gains from this unbelievable bubble in stocks and real estate and cash in while you still can. Take your money and run! Keep your job and kiss your employer’s ass. Start businesses on the sidelines if you can.
Mr. German Publisher: Do you look to the future with optimism or pessimism?
Me: I study longer-term trends, which are exponential in nature, and I was the most optimistic forecaster in the late 1980s forward. But the biggest demographic and debt trend is reversing. The next global boom will be more in the emerging markets like Southeast Asia and India. It will be very mixed in the developed world… Australia, New Zealand, and Scandinavia will be the exceptions with stronger demographic growth after 2020. And Australia and New Zealand are on the cusp of this Asian boom ahead. Germany has the second worst demographic trends ahead and the worst exposure to the inevitable debt meltdown in Italy and southernrn Europe. Germany’s demographic trends are the worst in the next several years… nobody sees this coming.
In short, I’m optimistic that there will be plenty of opportunities for investors and businessmen and women to increase their wealth once we’ve had our day of reckoning. The next global boom will not be like the boom of past years. It’ll will be far more muted. But it’ll be there, and we’ll be there to help guide subscribers to the pots of gold.
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