Egon von Greyerz
Founder and Managing Partner
Matterhorn Asset Management

Brexit, Quitaly and Grexit. Debt Defaults, Stock Shocks, Bond Bubbles, Properties Popping, Derivative Defaults and Banks Busting.

Well that is just some of the events that twill take place in the next few years.

But the world is living in ignorant bliss of what is coming next.

As the song tells us:

“In every life we have some trouble
But when you worry you make it double
Don’t worry, be happy
Don’t worry, be happy now
don’t worry”

Well this well-known song says it all. Risk in the world is growing exponentially but no one is worrying.

Global debt out of control

Global debt has trebled since 1999 from $80 trillion to $240+ trillion today. And since the Great Financial Crisis started in 2006, debts have doubled. But Don’t Worry be Happy!

Stocks only rise due to money printing

And Central banks of course won’t let us down. They have printed $16 trillion since 2006. So they must continue to make the rich richer and the poor believing that all is well. So Don’t Worry.

And world stock markets are up 4x since 2009. So Don’t Worry, this will go on for ever.

Stocks are up and debt is up what a great formula. Just print more and give more credit and all will be well. Be Happy!.

But what happens if central banks stop printing and banks stop lending. The song has a solution for that too:

Ain’t got no cash, ain’t got no style
Ain’t got no gal to make you smile
Don’t worry, be happy
‘Cause when you worry your face will frown
And that will bring everybody down
So don’t worry, be happy
Don’t worry, be happy now

What a Wonderful World as Louis Armstrong sang. All the central banks need to know is to print more money and and we can all Be Happy.

But wait, these mental central bankers are now stopping to print money and embarking on another programme with a name that no one understands – Quantitative Tightening – QT. For us normal people, it means that rather than printing more money, they will actually reduce their debt.

For some obscure reason, these central bankers seem to forget that it is only their money printing that artificially has kept the illusion up that All is Well on the Western Front, and also on the Eastern front of money printers like Japan and China.

Stock, bond and property markets are totally ignoring what the effect of QT will be. Bullish investors are totally in denial of the fact that markets have only appreciated because of the biggest money printing and credit expansion in history. Once this stops, so will the bonanza in investment markets.

Worst crash in history coming

And the ride down is likely to be the worst in history. In 1929 to 1932 the Dow lost 90%. The coming fall will most certainly exceed that, as we today have a global credit and asset bubble which is substantially bigger than in 1929. Investors will initially be in denial. Most of them don’t understand the direct relationship between credit expansion and investment asset appreciation.

But when asset prices start declining, why should it be different this time to the last decades’ experience. Investment markets have always been saved by central banks’ generous credit expansion. Well, for the simple reason that there is a limit to how much wealth can be created by writing worthless pieces of paper or just pushing a few computer buttons.

What nobody understands is that THIS TIME WILL BE DIFFERENT. Central bankers have run out of weapons to fight this phoney money war. They are not just stopping money printing but instead tightening.
Central banks clearly understand that QE is not working. But do they understand the effect the coming massive liquidity squeeze will have on credit markets? Well, that is doubtful. It just isn’t possible to have an orderly wind down of the biggest credit bubble in history.

The most likely scenario is that after a few months of tightening, asset markets will crash and credit markets will cease functioning. At that point world central banks will panic and print more money than they ever have. That will be the start of an inflationary recession which soon will lead to a hyperinflationary depression just like we are seeing in Venezuela and Argentina.

It will also be the death of the current monetary system as most currencies fall to their intrinsic value of zero.
At that point most WILL WORRY and few WILL BE HAPPY. Because we will reach the point of recognition that the 100 year old experiment of central bank manipulation of money, interest rates and markets has been a total failure from which the world will suffer for a very long time.

Swiss Vollgeld – Sovereign Money

In order to stop future bank collapses, Switzerland last weekend had a referendum on the Vollgeld or Sovereign Money Initiative. This is another example of Swiss direct democracy which means that ordinary people can launch an initiative to change the Swiss Constitution. The instigators of an initiative need to collect 100,000 valid signatures in favour, in order have a national vote. If that vote backs the initiative, it becomes part of the constitution and cannot be changed by parliament or government. This unique method of direct democracy is one important reason why Switzerland has the best political system in the world.

The Vollgeld Initiative is quite complex but in very simple terms it would stop the fractional reserve banking system in Switzerland. Today most private banks in the world can print or create money by leveraging their deposits up to 10x or more. This is not just highly inflationary but it also jeopardises depositors money by lending it out 10x over. Thus fractional banking is the perfect Ponzi scheme that eventually leads to banks failing. It almost happened in 2007-9 but central banks managed to stop a systemic failure in the last minute. When the next financial crisis starts, which is not far away, central banks are unlikely to save the system as the problem is now exponentially greater.

The initiative required banks to back all on demand deposits with central bank reserves. All new money creation would be done by the Swiss National Bank (SNB).

I was involved with the Gold Initiative a few years ago in Switzerland. This was to make gold a more important part of the Swiss monetary system. It made more sense than the Vollgeld initiative but was still voted down. The whole establishment was against it, government, Swiss National Bank as well as the media.

Same with Vollgeld. It had no chance due to the the same parties opposing it. Thus, it was voted down by a strong majority.

Beware of the Swiss banking system

Of course private banks shouldn’t be allowed to print money which they are doing through the fractional banking system. But so do credit card companies and a lot of other finance companies. All that debases the currency.

The problem with giving the SNB even more powers to print money, which the Initiative would have done, is in my view unwise. They have already printed more money relative to GDP than any Western Central bank. Their balance sheet is over 110% of GDP. The Fed’s is 20% and that is too big.

So the fact that the SNB is the biggest hedge fund in the world, with massive holdings in currencies and US stocks, is very negative for the Swiss franc long term.

Also, the Swiss banking system is more than 5 times GDP which is bigger than any major economy. This means that if we have another financial crisis, which is likely, the SNB will need to print enormous amounts of money.

So I would not have major amounts of money in Swiss banks, or any other country’s banks for that matter.

Global stocks making secular high

In spite of central bank tightening, many stock markets are going to new highs. This will be the final high in this secular bull market. It can end any time or it can go on until late autumn. But when it ends, it will be the start of a very long secular bear market which will be devastating.

As fear takes hold on markets and the global financial system, the flight to safety will start. The problem is that there will be few safe assets. Stocks and bonds will crash and so will property, as interest rates surge and lenders tighten. And paper money will decline rapidly in value as central banks print unlimited amounts.

Swiss state pension fund buys physical gold.

The only money which has survived in history – Gold – will reflect the fear in markets and be in great demand. Also the other precious metals. Not only will individuals acquire gold (and silver) but also institutions and pension funds in order to inflation hedge their portfolios. The major Swiss state pension fund has for example decided to increase gold holdings from 1-2% and to hold it in physical. This is a very significant move and likely beginning of a trend. In the next few years, all pension funds will all need to buy gold to inflation hedge their portfolios.

There is still time to buy gold and some silver before the price of these metals explode. The coming demand, combined with the failure of the paper gold market cannot be met by more supply since we have already seen peak gold production. The only way to satisfy a higher demand is through a much, much higher price. A pension fund that intends to spend say $100 million to buy gold would today, at $1,300, get 2.5 tonnes. As gold supply dries up and the price surges, the fund will still spend $100 million but instead of getting 2.5 tonnes, it will buy much less, say 0.25 tonnes, as gold climbs to $13,000 an ounce.

Now is the time to preserve wealth against a rotten financial system by buying the best insurance possible in the form of physical gold and silver. With the Fed decision out of the way, the $1,300 resistance is likely to soon give way and lead to much higher gold price.

So protect yourself when there is still time and then “Don’t worry, be happy!

Donald Trump’s trade tirades show his mastery of the message

With the economy growing, talking tough on tariffs is paying off with his base

Rana Foroohar.

Critics of Donald Trump (me included) need to spend more time watching the US president and perhaps relatively less parsing the details of his policies. I did this last week while he was sounding off for 20 minutes in an impromptu press conference with reporters that covered everything from North Korea (“there is no longer a nuclear threat”) to his legal issues (“there was no obstruction, there was no collusion”) to tariffs on China. And when you do, you see him as much of middle America does — strong, concise and cogent.

Let me head off those readers who are already starting to draft their complaint letters; I didn’t say Mr Trump was truthful or correct in regards to any of these issues. And yes, I get upset as any thinking person does watching him salute a North Korean general as he insults America’s historic allies, while his border patrols remove children from immigrant parents.

But sadly, public opinion is usually formed more on the basis of feelings than facts.

On television, Mr Trump comes across as clear and authentic, at least to himself. And that, as any psychologist will tell you, is what really matters when projecting the characteristic to others. He remains cool and secure in his own views. Reporters trying desperately to clarify facts as they press him on the issues come across as harried and desperate. This is Television 101: soundbites work better than complex data points.

It is tough to overestimate how much optics matter — half of Americans still glean the majority of their news from television, according to the Pew Research Center. Most of the rest rely on social media.

Timing matters, too. That is another area where the US president has succeeded. While there is no good time for a trade war, this is about as good a moment as any. The US economy grew 2.3 per cent in the first quarter of 2018, and some analysts are predicting 3 per cent, or even higher, for the second quarter, which ends this month.

The majority of the gains in wealth from the growth have flowed to the top 10 per cent of the US population. That is because they own 80 per cent of stock and US companies are mainly channelling the money they have saved from lower corporate taxes into share buybacks (or in the case of Google and some other tech companies, prime real estate in coastal markets).

But in the short term, that wealth effect, which according to Goldman Sachs may be responsible for as much as a third of US growth today, will help offset the negative effects of trade battles.

On that score, there have been panicked headlines about the $50bn in US tariffs against Chinese goods that the president imposed last week, as well as retaliatory measures from Beijing. But many economists say that the near-term effects are likely to be minor, perhaps as little as one-tenth of a percentage point drag on growth per year for each country over a five-year period.

Of course, those projections depend on models that cannot tabulate all the potential knock-on effects of tariffs.

As we have already seen with Chinese telecoms equipment maker ZTE, the supply chain connections between China and the US are deep and complex. The company was nearly driven out of business after the US banned it from buying crucial American components. Mr Trump rescinded the action after Chinese premier Xi Jinping personally asked the US to reconsider.

Over the long term, China and the US are headed towards regional supply chains for high-growth technologies of the future. But in the short term, the interdependencies will be difficult to untangle. Several executives who supply Fortune 500 companies have told me it would take months if not years for the biggest US companies to break completely free of Chinese components.

Meanwhile, it is impossible to say how tariffs against the EU, Canada, Mexico and Japan will play into all this. It is not a great idea to fight both allies and adversaries at once.

President Trump could have found ways to combine looking tough for his political base with smart trade and foreign policy.

Rather than carry out his campaign promise to renegotiate the North American Free Trade Agreement, he could have worked with the EU to challenge China’s trade policies at the World Trade Organization. He also could have worked privately with US allies, while still posturing publicly about getting tough on China.

All this would have made much more sense to the global elite. But the American president really does not give a hoot about what the Davos crowd thinks.

Mr Trump has done exactly what he said he would do while running for president. He has got tough on China. He has got tough on immigrants. Multinational companies, coastal Democrats and free-trade Republicans will complain.

But labour groups like the American Federation of Labor and Congress of Industrial Organizations, many small and mid-sized manufacturers, voters in farm states and his core voters will not.

The economic and political devil may be in the detail, but public opinion is not shaped by details, it is shaped by optics. Mr Trump remains a master of those.

The Bitcoin Valuation Delusion

by: Hans Hauge

- Some people seem to believe that Bitcoin might be worthless, we discuss their arguments.

- If there was value in Bitcoin, how would we know?

- Shared delusions, are they useful?

The case for Bitcoin having no value at all
If you've read anything I've written so far, you know that I'm long Bitcoin (BTC-USD).
However, that doesn't mean I've turned a blind eye to the crowd that says it's all an illusion, that Bitcoin is intrinsically worthless.
Let's take a look at who is making these arguments, and what they're saying.
Jamie Dimon - J.P. Morgan Chase CEO
In September of 2017, Jamie Dimon said:
It's worse than tulips bulbs, it won't end well.
There will be no real non controlled currency in the world. There's no government that's going to put up with it for long.
So, if I understand correctly, Mr. Dimon's argument is that every government in the world will soon block all cryptocurrencies. Therefore, Bitcoin is doomed.
Warren Buffet and Charlie Munger of Berkshire Hathaway
In May, 2018, Warren Buffet said that Bitcoin was:
probably rat poison squared.
And Charlie Munger said:
To me, it's just dementia. It's like somebody else is trading turds and you decide you can't be left out.
If I understand correctly, Mr. Buffet believes that Bitcoin is super tasty but very poisonous, like a Big Mac times itself, and Charlie Munger is trying to say that the Bitcoin market is pure FOMO, or the Fear of Missing Out. Therefore, Bitcoin is doomed.
Putting these ideas to the test
I hope you are a data driven person like me. I believe there's no better way to have a clear understanding when people's tempers are raging than to just look at data and slowly and carefully think about what makes sense.
Let's start with Jamie Dimon's argument that all governments in the world will ban Bitcoin.
How does this argument stack up? Let's look at what's going on in the three largest economies in the world.

All governments to ban Bitcoin?
  • While China has placed a temporary ban on Bitcoin exchanges and ICOs, China's state TV recently said that blockchain could be ten times more valuable that the internet. While it may seem that China is falling in line with Mr. Dimon's prediction, it's worth noting that when the latest ban went into effect, business didn't stop, it just moved to places with a more friendly regulatory environment, such as Switzerland, Japan and South Korea.
When governments move too quickly to ban new technology, the country they represent ends up getting left behind. Coinbase for example, has 20 million users and has traded over 150 billion dollars of cryptocurrencies to date. This kind of economic activity is creating jobs and driving innovation.
Will governments regulate cryptocurrency exchanges? Of course, and they already are.
Will every government in the world ban cryptocurrency outright? I'm not convinced it's going to happen, especially with what we're seeing in the US and Japan so far.

Final thoughts on J.P. Morgan
Mr. Dimon's comments would make more sense if they were, I don't know, maybe trying to patent Bitcoin's technology and make their own version. But, that would be kind of unethical, don't you think? I guess it's not really surprising since J.P. Morgan (JPM) has been fined more than 29 billion dollars for abusing the market since the year 2000. But, Bitcoin is the fraud?

Bitcoin value is based on nothing but FOMO?
I think people forget that Bitcoin is not some magical beast that lives in isolation. It's a network with many stakeholders and it represents something different to each group. Bitcoin has created an ecosystem that includes Bitcoin Miners, Software Engineers, Exchanges, Cloud infrastructure like Blockchian as a Service, Merchants, Users, and of course, the speculators and the scammers.
Let's look at some data.

FOMO or subject of scholarly research?
If Bitcoin was just FOMO, then surely academic interest in the subject would be small, and certainly not growing over time. What's the big deal after all?
YearNumber of Scholarly Articles Mentioning "Bitcoin"

Data Source: Google Scholar
FOMO or a life raft for those living in oppressive regimes?
If Bitcoin was just speculation, surely the countries with the highest search volume for the term "Bitcoin" would be wealthy countries where people are throwing money around, rather than in troubled places where a censorship resistant currency might be of use. As you can see, with the exception Finland in 2012, the interest is overwhelming coming from troubled geographic areas.
YearNumber one Country by Search Volume for the term "Bitcoin"
South Africa

Data Source: Google Trends

FOMO or a source of jobs and innovation?
If Bitcoin was just FOMO, surely it wouldn't be creating jobs, and certainly it wouldn't be one of the fastest growing fields in technology.
blockchain jobs Image Source: Burning Glass
FOMO or the new obsession of Venture Capitalists?
If Bitcoin was just FOMO, then why are VC firms investing more in blockchain startups each year?
Maybe some of them are caught up in the craze, but just look at the chart below.
blockchain vc Image Source: Statista
A shared delusion?
To say that Bitcoin has no value is to say that academics (students and professors), governments, venture capitalists, software engineers, hiring managers, and people living in the most troubled areas of the world are completely off their rockers because they dare to challenge our assumptions about what value is and the ways in which it might be transferred.
Is Bitcoin a shared delusion? Sure, but so are lines of latitude and longitude, global time standards, our existing money system, right and wrong, cultural norms, beauty, art and hope.
The more important question is, does this shared delusion give us something back? Do we gain something by believing in it?
For me, the answer is clear. I think Bitcoin is one of the most powerful forces for the rights of the individual. I think Bitcoin can at once weaken the oppressors of the downtrodden and create opportunity for the bold.
It may challenge our assumptions that money might come from the crowd, rather than from on high.
But, maybe this time it's up to us to save ourselves? Ask yourself what it might mean to live in a world where currencies exist that reach the entire globe and yet don't require the backing of a military. I don't know for sure what it means, but I've decided to follow this path and find out for myself, rather than relying on the old guard to hand down truth to me.

 Oil, The Petrodollar, And The Next Emerging  Market Crisis  

Oil prices are up over the past year, which is bad if you’re, say, a developing country that imports a lot of the stuff. But the US dollar (aka the petrodollar) is also up, which compounds the problem because oil is priced in dollars. So Brazil, for instance, finds itself buying an appreciating necessity that’s priced in an appreciating currency. The result is serious trouble for at least some countries in that position. From Saturday’s Wall Street Journal:

Steep Oil and Strong Dollar Make Toxic Brew for Global Economies 
‘Brutal’ rally in dollar-priced crude hammers governments, strains consumers from U.K. to Brazil. 
For Americans, rising oil prices are threatening $3-a-gallon gasoline and pushing up prices for plane tickets. In many other parts of the world, today’s crude rally is more painful—sparking protests, gas lines and emergency subsidies to quell unrest. 
That is because many consumers outside the U.S. face a double whammy when—like now—the dollar gets stronger at the same time that oil prices rise. While petroleum is produced all over the globe, when it is sold to refiners and other buyers it is almost always priced in dollars. 
It is, in the words of Brazilian Finance Minister Eduardo Guardia, “a challenging external scenario.” 
After Brazil’s military brought an end to a crippling strike by truck drivers over high fuel prices, Mr. Guardia called the oil rally “brutal” for his country. 
Brazil is among the handful of oil-dependent countries in Latin America and Southeast Asia that have turned to costly fuel subsidies. Across swaths of Africa, higher fuel costs and weakening local currencies have hit prices for food and electronics. 
Fast-rising crude, on its own, has been pressuring global growth for months. Swiss bank UBS figures that today’s international crude price, around $75 a barrel, would boost global inflation by more than half a percentage point, compared with the $50 barrels the world enjoyed as recently as last year. 
Brent crude, the international benchmark, has eased off a recent 3½-year high of around $80, on expectations that the Organization of the Petroleum Exporting Countries will boost output when it meets this week. Before that retreat, oil was up more than 20% this year. 
There are global winners, along with losers. The U.S., squeezed over the decades in past oil rallies, is looking pretty comfortable this time. In recent years, America has boosted production significantly, making it much less dependent on imports. 
oil prices in emerging markets petrodollar
Fuel prices can be particularly painful for specific swaths of any economy. This month, Chinese truckers refused to move goods and blocked roads in a handful of cities, protesting higher fuel costs. 
Exacerbating the pain in many countries is a strengthening dollar. The WSJ Dollar Index, a measure of the dollar compared with a basket of 16 major currencies, has strengthened 6% since February. 

In Europe, dollar strength against the euro has helped make crude today about 30% more expensive than when oil was at a low in February. 
For European consumers, gasoline-price shocks are often dampened by the continent’s generally steep taxes on the fuel. That makes the cost of oil a smaller percentage of the overall price of a liter of gas. 
This year’s price increase, though, has been so steep that many drivers are feeling the squeeze. Gasoline prices in Britain rose faster in May than in any month on record, according to RAC, a drivers’ lobby group, which called it a “hellish month.” A lower pound against the dollar and higher oil prices were a “toxic combination,” an RAC spokesman said. 
Brent crude is still well below the $100-plus a barrel it fetched from 2011 through 2014, and prices probably aren’t high enough to knock the European economy from its recent upward trajectory. 
Still, the oil and dollar rally act like a tax, limiting consumers’ discretionary spending. That threatens a pullback in consumption that can eventually hit growth. It can also feed into inflation and pressure central banks to boost borrowing rates. Inflation in Spain jumped to an annualized 2.2% last year from minus 0.2% in 2016, largely due to higher energy prices. 
The pain has been greatest in economies where dollar strength has been even more pronounced. In Brazil, gasoline is up 28% and diesel fuel for trucks more than 27% over the past year. The Brazilian real has fallen 11% this year against the dollar. 
The two-week strike by Brazilian truckers stranded goods across the country, triggering warnings about possible shortages from grocery stores, hospitals and McDonald’s outlets. To end the walkout, President Michel Temer rolled out the military and promised truckers $3 billion in diesel-fuel subsides and tax cuts. 
Brazil’s government has restricted how often fuel suppliers can raise prices, at once a month. As energy prices rose, economists polled by the central bank slashed a full percentage point of growth off Brazil’s forecast output this year, to 2%. 
In Indonesia, where the rupiah has fallen to its weakest level against the dollar in more than two years, fuel prices are an election issue. President Joko Widodo has promised not to raise prices of subsidized fuels and electricity through 2019, when he is expected to run for a second term. In April, he required fuel retailers, including foreign firms Royal Dutch Shell PLC and Total SA, to seek government approval before raising prices they charge at the pump. 
Jakarta also said it would dramatically increase diesel subsidies. Thailand and Malaysia—where newly elected Prime Minister Mahathir Mohamed made it a campaign pledge—have both ramped up spending to stabilize pump prices.

To sum up the dynamic: Rising oil prices lead to disruptions which force the local government to increase fuel subsidies, which weakens the local currency versus the dollar, which raises oil prices further, which causes disruptions, and so on, until the country turns into Argentina.

So if you’re tracking the “crises move from the periphery to the core” thesis, one good guide is the flow of oil. If a country is a big net importer of oil and both the price of oil and the petrodollar exchange rate are rising, it might be the next domino to fall.