(Interviewed by Louis James, Editor, International Speculator)
L: So, what's on your mind this week, Doug? I understand you've had a "guru moment"…
Doug: Well, it's nothing but a gut feeling, but I think the stock market is riding for a big fall this year.
Everyone was afraid the world was going to come to an end a year ago, and it almost did. But governments all around the world stepped in and printed up trillions of their various currency units – it's not just the United States. And still, retail price inflation hasn't blossomed. It seems that governments are bent on keeping asset prices up to avert panic. They focus on controlling perception instead of fixing the problem. It stems from an economic version of the theory that all we need to fear is fear itself. As long as we have the right psychology, everything is going to be okay – total nonsense.
L: That old saw: as long as there's confidence, all is well.
Doug: Yes. It's the Wile E. Coyote theory of economics. As long as you never look down after running off a cliff chasing the roadrunner, you can keep treading air. Unfortunately, although the power of positive thinking may help in many ways, it's of zero use if you continue living above your means and making stupid decisions.
L: Insolvency doesn't seem to matter; as long as everyone has confidence that things will keep going, the experts believe they will. But in the real world, you can't remain insolvent for long, even if "you" are the United States as a whole society.
Doug: Exactly. My thinking about the stock market is this: corporations have done as "well" as they have mainly by cutting expenses. Laying people off, that sort of thing. So the bottom lines have not fallen as far as we might expect – but the top line has been hit. Revenues are falling for corporations across the board.
L: And the market has to notice this reality sooner or later.
Doug: Yes. The world's financial system has to adjust to a new reality, one with lower levels of consumption and differing types of production. The legions of unemployed are not going to go back to work anytime soon, at least not doing anything like what they were doing before the bubble burst. The economy is going to continue deleveraging. There's going to be less debt to allow the purchase of all this stuff people have been buying, resulting in lower corporate earnings. So it's hard to see revenues doing anything but continue to spiral downwards for years to come.
And then there are financial "accidents" waiting to happen.
L: Like the bank failures the government has admitted it expects this year? The FDIC says there will be more bank failures in 2010 than in 2009, with the spin being that 2010 will be the peak of the crisis.
Doug: Sure. But I also expect corporate bond failures. And there are other things out there. As Porter Stansberry (whose style as an analyst I really like) has pointed out, General Electric – which is really just a hedge fund disguised as an industrial concern at this point – is leveraged thirty to one. It's a dead man walking. It's the next AIG. When something like that happens, it really shakes Wall Street to its foundations.
So, I've been bearish on general equities for years, based on fundamentals. Whether they go up is no longer a reflection of prosperity – it's a reflection of how much money the government creates and where it goes. But I am feeling particularly strongly bearish on Wall Street right now. That's my gut. The social mood of the country is going to turn ugly and gloomy; people won't want to call their brokers and "get into the market."
The Greater Depression is going to be really serious. I can't see buying stocks until dividend yields are in the 6-12% range. And people have forgotten the market even exists. Anyway, Baby Boomers, who own most stocks directly and indirectly, are going to be selling them to support themselves in retirement.
L: Would you recommend shorting GE?
Doug: It should be an easy bet, but the government is certain to try to prop it up, as it has other dinosaurs pursuing business models that no longer work, like General Motors – although it didn't help their shareholders. "Too big to fail." That makes shorting riskier. But GE still has a $179 billion market cap, so it should fall quite a bit from here, if not all the way to zero.
L: No way out for the stock market?
Doug: Well, the government has been suppressing interest rates for a long time now, which is exactly the opposite of what they should be doing. These artificially low interest rates discourage people from saving and encourage them to gamble, hoping to outrun inflation. But eventually the market will force interest rates to go higher, and that will kill the stock market, because the stock market does tend to fluctuate inversely with interest rates. High interest rates almost always mean a low stock market, and low interest rates tend to mean a high stock market. So it seems to me that there simply is no good news on the economic front. Interest rates are headed way up, both out of a need for capital and as a reflection of the high price inflation ahead.
L: This doesn't sound like a guru moment – a flash of the famous Casey inspiration. This sounds more like a well-reasoned argument to me.
Doug: Well, when you get a really strong gut feeling, it's usually because you intuit many things that are out there, subconsciously if not analytically. Look, dividends are dropping across the board. Top line earnings are dropping. Where net earnings have been maintained, it's been by expense cutting.
L: Even if margins are maintained, the companies are getting smaller, and people are making less money, on the whole.
Doug: Right. And interest rates are at all-time lows. That's the short sale of the decade, if you want to short something. Bet against bonds.
And there's more. As the government takes over more and more of the economy, they'll mismanage that activity, as they always – necessarily – do. Why do I say necessarily? Because they do things that are politically productive for them, not economically productive for society. That's going to hurt productivity and profitability, misallocating and even destroying capital wherever they stick their noses. And, today, that's absolutely everywhere.
Taxes, of course, will go way up. That's going to give individuals less money to buy stocks. Corporations will have less money left over to reinvest or pay dividends with. All the draconian new rules they're enacting in response to the crisis will only serve to inhibit entrepreneurial activity and investment. It will encourage speculation (see our conversation on speculation).
The real estate market has not, by any means, bottomed yet. What's going to happen in the commercial and office real estate markets is just starting, and the housing market is still going to get worse.
All of this is very bearish for the stock market.
L: Not a single ray of light? No way you can be wrong?
Doug: The only bullish factor I can think of is that people might panic out of dollars and will buy anything that's real – or at least represents actual wealth, as stocks are supposed to do. That's the only reason I can think of for buying Wall Street, and it's too early for that to happen. Retail inflation hasn't reared its ugly head in a big way yet, and we'll have to have big inflation numbers before Americans start really panicking out of the dollar.
L: That seems to still be a bit down the road.
Doug: Yes, and I hate making predictions about the direction of the stock market. It's like that joke I like to tell about Einstein.
L: The one you used when we talked about interest rates.
Doug: Right. It makes no sense to be in the stock market at this point. Real estate is a terrible place to be. Bonds are a terrible place to be. Even cash, especially if you're holding euros or dollars, is surprisingly risky, for all kinds of reasons (as we just spoke of regarding currencies). That makes this a truly unique time, in which there's almost nothing that's a good place to be.
L: Nothing? What about gold?
Doug: Gold had a good day today, and it's back near its new record high again. I'm very bullish on gold, but I'm reluctant to tell people to go out and buy gold when its trading near a peak price – a price that's quadruple the price when I was telling people to buy gold a few years ago. I still think gold is going over $2,500 or even $3,000, in today's dollars, but it's risen enough that it's not going to be a one-way street straight up from here. It's not being artificially suppressed to $35 anymore…
This is a very strange time – I've never seen anything quite like it – with no good places to be, at least as far as Americans in America are concerned. Maybe Canadians are next – their real estate market hasn't really collapsed yet. If I still owned property in Canada – I used to live in Vancouver – I'd hit the bid tomorrow morning. The same in Australia, China, and the UK.
L: Okay, but back to gold – even if it is four times what it was a few years ago, with all the money creation that has gone on full throttle around the world since the crisis hit, that's really not a concern. If gold corrects in a big way, back to three digits, maybe back below $900, or even below $800, given where gold has to go once price inflation follows monetary inflation, that correction just becomes a great buying opportunity for those who didn't get in early.
Doug: I'm confident that within a couple years, gold is going to be trading at $3,000 or more per ounce. I really think that's going to happen. I'd rather buy more at cheaper prices, of course, but the simple fact that it has quadrupled doesn't prevent it from quadrupling again. And there is no gold bubble. The average guy hasn't even thought about gold, much less bought any.
L: That makes sense. But about interest rates; the government has been keeping them artificially low for years – why can't they just keep on doing that through the rest of this year and beyond?
Doug: They might be able to. After all, interest rates are like any other market; they are prices set by buyers and sellers. More buyers of bonds (bills, whatever) drive down interest rates. So, if the Federal Reserve comes in and buys bunches more of this stuff, yes, the immediate and direct consequence will be lower interest rates. But the indirect and delayed consequence will be vast quantities of new dollars, which is the actual cause and definition of inflation, and as a result, the market is going to demand higher interest rates in the U.S., just as it did in Zimbabwe.
Don't forget that the U.S. government is going to run another trillion-dollar-plus deficit this year, plus they have to roll over another trillion of maturing paper. Who's going to buy all that? Nobody – unless rates go much higher. Or the Fed buys it with newly created dollars.
L: No way out?
Doug: I hate to sound so definitive – it makes it easier to be wrong. I realize that in the art of predicting, you're supposed to use lots of hedge clauses and never give both a price and a date in the same sentence. You're supposed to be cryptic, like an oracle, or speak in meaningless generalities like a Fed chairman. I certainly don't want to sound dogmatic, because almost anything is theoretically possible, but at this point, if the U.S. and the world avoid a financial catastrophe, it's really, really going to surprise me.
I just don't see any way around it, and most people simply do not think in these terms, so they are going to be blindsided. They listen to what they hear in the news, read in the papers, get from government pronouncements… Green shoots, things are getting better… To me it's so wrong-headed what the governments are doing, it's not just ignorance, it's deliberate…
Doug: Malice. That gets back to the confidence con. A lot of these morons think that's really what it's all about. Confidence and consumption – just the opposite of what's needed right now.
L: When what's needed is caution and saving. And at some level they must know that discouraging people from doing these things is wrong.
Doug: It depends on the degree to which you think these people are knaves or fools. I think they are both, but some are just stupid. Some are actually stupid in the sense of "unintelligent." But more are stupid in the sense of evidencing an unwitting tendency to self-destruction.
L: Both evil and stupid? Great!
Doug: Yes, it's a very dangerous combination for the world at large. But it characterizes exactly the type of person that gravitates into government.
L: So, it goes into a death spiral. They have to sweeten the pot more and more, or foreigners won't accept increasingly worthless paper. Result: even a guy as smart as Bernanke is supposed to be could take the U.S. down the path of Mugabe.
Doug: No question. He's warming up those helicopters as we speak. And unfortunately, it's not just the U.S. at this point. China, which everyone seems to be thinking will save the world's bacon, is in an unbelievable real estate bubble now. Prices have doubled and doubled again in the last five years. As you know from our conversation on real estate, I've had dealings in the Hong Kong market for a while now, and prices that apartments are going for in Hong Kong now are literally off the scale. Totally over the top. When that Chinese bubble bursts, you're going to have scores of millions of Chinese – and the banks that lent them money – lose everything, just like Americans. It's going to burst, and it's going to be a disaster.
L: So, it's truly a worldwide problem – no surprise there.
Doug: Yes. The bottom line is that all of this is bad for the stock market. The only good news is that those of us who are long gold are going to continue to do well. There's also an excellent possibility that a bubble will be ignited in gold stocks.
L: But won't gold stocks get whacked in a major market meltdown, if only temporarily, as they did in the crash of 2008?
Doug: That's very possible, which is why you only want to own the best of the best gold stocks, with great people, projects of real merit, and enough cash to advance them for two years or more – the kind that you focus on in the International Speculator and the kind of profitable producers Jeff Clark focuses on in the Gold and Resource Report. Such companies can weather the storm – just as they did the crash of 2008.
Also remember that gold and gold stocks are different, almost opposite things; gold you own for security, gold stocks are for high-stakes speculation.
L: Got it. And now, so do our readers: hot off the presses, Doug Casey's guru-sense is tingling, and it's telling us another major stock market crash is likely this year. Hopefully, they will listen to you and be prepared.
Doug: Most won't, but I'll be glad for the ones who do.
L: A sobering conversation, but an important one. Thanks, Doug.
Doug: My pleasure.
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