12.11.2019 – Special Report. Celebrating the abyss: Greece is pleased with increased demand for its government bonds. Wall Street is holding its own at a record high. The warnings of crash prophets like Robert Shiller can no longer be ignored – he sees no escape from the financial Armageddon. Especially in the bond market a huge bubble is inflating.
Hellas is hip again
Hooray: As the Financial Times has just reported, for the first time since the 2008 financial crisis Athens has given up its status as the most risky sovereign borrower in the eurozone. To Italy. The yield on five-year Greek bonds was therefore over 60 percent at the beginning of 2012, most recently at less than 0.5 percent. So much optimism is surprising – what has actually changed in the Greek business model? In fact, the new hunger for risky government bonds is only the result of zero interest rates – investors are desperately looking for investment opportunities. Is the next bond bubble building up again in Europe? It looks that way.
Bubbles everywhere – no place to go
It’s no different in the United States. Nobel laureate Robert Shiller recently spoke with a drastic warning. At the end of October, the Yale professor told investors in Los Angeles: “There’s no place to go. You just have to ride it out.” And further he sees “bubbles everywhere”. The economist advised waiting, consuming savings and sitting out the crisis – flight and hiding pointless. And Shiller is not just anyone: the economist predicted the stock market crashes in 2000 (dot-com bubble) and 2007 (subprime crisis in the real estate market). His book “Narrative Economics” has just been published.
Grace period for US equities
After all, an economic crash on the stock market could still take a while, as Shiller expects an annual return of 4.4 percent over the next thirty years. Shortly before the apocalypse date in L.A., Shiller said in an interview with CNBC that a recession is still years away, which is due to the bullish trump effect in the market. And “Barrons” reported in August that Shiller sees no bubble in the US stock market – but certainly elsewhere. Like Bitcoin, Canadian real estate market, marijuana stocks.
It’s going to end badly
And the US real estate market is also in a bubble, added Shiller in LA. The whole thing is reminiscent of 2005, when San Francisco and Los Angeles were already showing signs of weakening. On the bond issue, he said, “this can’t keep going and it’s going to end badly.” So the thing would end badly.
Gigantic national debt
In fact, public debt in the US is heading towards the enormous $23 trillion mark by the beginning of the year (23 trillion in US English). As the blog Economica reported, 17 trillion are publicly traded treasuries and 6 trillion are loans within the state, i.e. for social security, pension funds or between central government, municipalities or states. Below in the chart the Federal Funds Rate (FFR), that is the interest rate for short-term debt.
Withdrawal of private investors
According to Economica, the enormous rise in public debt is an act of desperation. In a demographic sweep, the blog concludes that the poor population is growing worldwide in the wake of unrestrained overpopulation; and that even in the US, the only class that is also growing is that of owning pensioners – but that is traditionally risk-averse. This means that the Fed has no choice but to provide people with cheap loans for cars, houses and universities.
In line with this, UBS Global Wealth Management has just announced that the world’s rich are preparing for a turbulent year in 2020 and want to withdraw from the market. The reasons are the unresolved trade conflict between China and the US and the presidential election in the US. Already, 25 percent of the assets are in cash. More than 3,400 investors with at least 1 million dollars of free capital were surveyed. Four fifths of them believe in an increase in volatility and 55 percent think there will be a significant sell-off on the stock market before the end of 2020. 60 percent want to increase their cash holdings further.
Steroids from the Fed
Another crisis signal: the banks in America are still reluctant to lend money to each other in the short term. The New York Fed is continuing its infusion of dollars, once launched as an emergency operation in the Repurchasing (Repo) Market. Since the campaign began at the end of September, the Federal Reserve’s balance sheet has inflated by 200 billion dollars. The investment consultant Michael Pento of Pento Portfolio Strategies aptly called this Quantitative Easing (QE) “on steroids”.
How to protect yourself from a crash
We think The Shiller warning sounds very much like a total deflationary crash like in 1929. In fact, the question is how the US and Europe will ever pay off their mountain of debt. Especially if investors don’t pump money into the real economy, which is actually the point behind the low interest rates. But when money houses instead gamble away, for example in the market for collateralised loan obligations or risky bonds issued by debt states. Panic on the stock market would be the logical consequence.
If you trade CFD or online stocks and follow Shiller in the doomsday scenario, then a short position on Wall Street indices and the DAX could be an option. Furthermore, in such a scenario it would be conceivable that gold and silver could benefit from this.
Small denominations of gold and silver would also be helpful – while people have lost faith in paper money several times in history, this has never been the case with precious metals. Then we have to sit out the reset of the hour zero. We are curious to see whether the doomsday scenario will occur and keep an eye on things for you.
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