Welcome to the wonderful world of illusions. This is the world where few people can see the difference between reality and fantasy. And maybe there is no difference. Just looking at the US election and the candidates, it seems like a total fantasy from this side of the Atlantic. It is difficult to take the whole election process as well as the candidates seriously. But this is the world we live in today. Having in the last week seen people in many European countries run around the countryside and cities chasing Pokémon Monsters, you wonder if the presidential candidates might also be part of the same game.
Global stock markets are out of sync
It seems like markets are also an illusion. How else can the Dow be 63% above 2000 high whilst the Euro Dow 50 stocks are down 45% in the same period and with Emerging Markets down 36%, Brazil and Hong Kong down 35%, Nikkei down 25% and Shanghai down 49% all since 2014-15. We live in a totally interconnected global economy but there just seems to be more skilled illusionists in the US who can defy reality. With corporate profits declining fast, with current account and budget deficits for half a century, with 95 million people not in the workforce, almost 50 million on food stamps, with Q2 GDP at 1.2% (if real inflation rate was applied GDP would be negative) and with exponentially growing debts of over $200 trillion (incl. unfunded liabilities), you wonder what US investors are smoking.
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The illusory Dow finished July at an all-time monthly high. Stock markets, in general, tend to totally ignore reality and US stocks, in particular, are living on a different planet. The Schiller P/E is now 27 with the average at 16, the US market is in bubble territory.
Stocks to decline by over 95% against gold
In spite of the manipulation of gold and gold stocks, gold will always over time reveal the truth. And the truth is that the massively inflated US stock market is underperforming in real terms in spite of making new highs. Because since December 2015, the Dow is down 19% in real terms which of course is against gold. This puts the Dow/Gold ratio at 13.6. The Dow is in a long term down trend against gold since 1999 and is down 70% in 17 years. But it won’t end there, this ratio will at least reach the 1980 low of 1/1 but probably overshoot to at least 0.5/1. Will this mean gold at $10,000 and the Dow at 5,000 or will it reach Martin Armstrong’s hyperinflationary level of 40,000 Dow which would make gold at least $80,000? In either case, the Dow is likely to decline at least 95% against gold.
And against gold stocks, the Dow is down a massive 58% over the last 7 months. We are likely to see this index reach the 2011 level at least. This means that the Dow will come down another 72% against the HUI gold index.
Global debt 30 x GDP
But the illusion doesn’t stop with stock markets. The global banking system is an even bigger illusion. The financial system was bankrupt in 2006 but governments and central banks around the world managed to patch it up by injecting $25 trillion and by allowing banks to value all toxic assets at maturity instead of at market. Here we are 10 years later and the financial system is now in a much worse state than it was in 2006. Global debt has grown exponentially since then by 65% from $140 trillion to $230 trillion. And this figure doesn’t even include unfunded liabilities and derivatives of another $2 quadrillion or so. We are looking at a total debt of over 30 times global GDP. But that is a false comparison. Let’s say that 5% of GDP could be saved annually to reduce debt and that would be very optimistic. Anyway, with 5% of GDP, it would take over 600 years to get rid of all debt. However you calculate it, the world is bankrupt and will never repay its debts. Nor will the debt be serviced at any rate of interest above
