Doug Casey on Whether the “Everything Bubble” Has Finally Found Its Pin

Via International Man

International Man: Recently, large tech stocks lost over $1 trillion in value in just a few days. Many of these companies have been trading at insane earnings multiples for a long time.

Has the bubble finally popped?

Doug Casey: It actually started popping about a year ago—but now people are starting to notice that lots of these stocks are down not just down 50%, but 75%, and 90%.

Several classes of stocks are getting hurt particularly badly. One is the zombie companies that took advantage of low-interest rates and overleveraged. They borrowed a lot of money in order to pay dividends and buy back shares. The borrowing had little to do with growing the actual business. Now they can’t pay back the debt they’ve taken on since interest rates have gone up.

As the economy gets much weaker over the next few years, we’re going to see lots of corporate bankruptcies, with massive layoffs of workers. That’s one thing happening due to ultra low-interest rates and the money printing. It’s 100% due to the government and the Fed.

Another thing it’s done is create massive stock market bubbles. People have been convinced that the government would always “step in” to throw more money at the situation and keep the bull market roaring.

As a result, a speculative psychology has been fully ingrained in society. Everybody who’s even remotely capable of opening a financial account now has one, in hopes of instant wealth. Scores of millions of people have been living way above their means. Those days are over. We’re now in a massive bear market. Soon the public will realize that the Greater Depression is here as well.

The COVID nonsense caused trillions of dollars to be tossed into the economy. That made everyone think they were richer than they really were. It encouraged lots of excess consumption. That boosted the earnings of some corporations as well as the bank accounts of people who were bored and laying around.

Millions of people started speculating in stocks they knew nothing about—especially tech stocks since they promised instant riches. And options trading, a form of gambling that promises instant riches on leverage. All this has come to an end. It started coming to an end a year ago.

The phony good times lasted much longer than I thought they would, but now genuine bad times are underway. I think we’ve entered a grinding bear market. It’s going to take things much lower and for a long time to come.

International Man: We’ve seen the longest bull market in history. Given what’s happened in the stock market over the last few weeks, where are things headed?

Doug Casey: Stocks have gone up up up, and interest rates have gone down down down for about 40 years. The public has made immense paper gains in the markets.

Meanwhile, the economy really hasn’t produced much of anything besides digits. I question whether it’s produced much in the way of real wealth. Evidence of that is the noticeable deterioration of infrastructure in the US. A great deal of economic activity is directed towards building consumer goods—cars, houses, electronic toys—as opposed to capital goods, which create more wealth.

Insofar as it’s been producing at all, it’s produced mostly digits and consumables, not capital that will produce more things. This is, to use the hackneyed phrase, “unsustainable.” So the good times are over. And not just because the long bull market in stocks, bonds, and real estate has come to an end. But for much more serious and fundamental reasons.

The country has become financially over-leveraged, economically unproductive, politically unstable, and socially explosive. And, of course, we have the military problems too.

There’s no reason to play in the stock market for some time to come unless you know what you’re doing and/or you’re a bear.

International Man: The Federal Reserve recently raised interest rates by a token amount. But if we zoom out, the big picture seems clear.

The last time the Fed tried to raise rates in 2019, they only made it to 2.5% before they had to reverse course quickly.

Further, as we can see in the chart below, the overall debt level is now much higher than in 2019. That means it will be much more painful to raise interest rates because of the higher interest cost of servicing the much larger debt pile.

Will the Fed be able to continue raising rates, or will it capitulate?

Doug Casey: One major reason they can’t raise rates is because by far the largest debtor is the US government, $30+ trillion and growing rapidly—most of it short term. They’re paying about 2% right now, say $600 billion in annual interest. If interest rates go up to 4% or 6%—forget about 15% or more to offer a genuine positive yield—just printing the money to pay the debt will become overwhelming.

They’ve truly painted themselves into a corner. There’s no way out of it. They can’t raise interest rates because it will collapse both the economy and perhaps the State itself. But if they don’t raise rates, there will be no savings and no capital formation. Ultimately that’s a civilization-scale disaster, but the ultimate can be delayed—at a cost.

Therefore, what they’re going to do is just keep printing money and hope that magic happens. Even if friendly aliens landed on the roof of the White House and presented us with a magic technology, however, we’re still looking at a gigantic Greater Depression. That’s because the distortions that have been cranked into the economy over decades must be liquidated. And capital must be rebuilt with increased savings and decreased consumption.

International Man: Right now, we’re seeing sky-high inflation and a crashing stock market at the same time. Could we be headed for a prolonged period of stagflation?

Doug Casey: We definitely are. At a minimum.

The US dollar will continue losing value dramatically because of the huge amount of money creation not just in the last couple of years but in the last 20. Because inflation is running 10 to 15% while bonds are only yielding two, three, four, or 5% at most, there’s going to be a waterfall of selling in bonds.

The dollar will collapse as well. Of course, everybody’s hiding in the US dollar right now because it’s still the healthiest horse on the way to the glue factory. There is a real possibility of a deflationary credit collapse as well. If so, dollars would be the best holdings, at least for a while. Assuming the bank or broker, you have them with doesn’t fail.

With the dollar losing value at 10% per year, people aren’t going to want to save dollars anymore—which means capital can’t be created because you can only create capital by producing more than you are consuming and saving the difference. But, perversely, if you save in dollars, you’ll inevitably lose ground in real terms. That’s one reason why Richard Russell shrewdly observed that in a depression, everybody loses. The winner is just the person that loses the least.

Any way you look at it, there will be some very serious adjustments.

This is why I’ve been buying gold and silver for many years. I think the one last place where a bubble might be created—and it could be huge—is in gold. And gold mining stocks, which are still very underpriced relative to everything else. That same thing goes for oil.

It’s not that gold is particularly cheap at $1800-$2000. It’s in line with general prices. But under chaotic conditions, the market will likely panic into it because it’s the only financial asset that’s not simultaneously someone else’s liability. And producing gold stocks, which are very cheap even though they’re making huge profits, could explode upwards in price.