The Illusory Stock Market

By Egon von Greyerz, Founder of Matterhorn Asset Management AG

May 31 (King World News) - Stock market investors have since 1999 been under the illusion that their stock portfolio has maintained its value or even gone up slightly.  Since September 1999 the Dow is up around 7%.  So investors are lulled into a false sense of security that although they haven’t achieved the profits they made in the 1990s, their stock portfolio has maintained its value.

Very few investors actually understand that they have lost over 80% of their money in real terms in the last 13 years.  As the graph below shows, the Dow is down 82% against gold since 1999.  So the illusory gain of 7% actually translates to a total destruction of capital in real terms. 

To keep the crumbling US economy afloat, the US government has flooded the country with worthless pieces of paper that they call money.  In 1999 the US Federal debt was $ 5 trillion and today it is over $15 trillion.  So in order to buy votes and keep investors happy, $10 trillion have been printed.  Non-government US debt went up by another $30 trillion during the same period, creating a total of $40 trillion of liquidity..... 

Of course, this addition of paper money does nothing for real growth or real GDP, but it gives perceived wealth to the people.  The long term effect of this deluge of fiat money is not to make individuals richer but to lumber them with debt that they can never repay.  Thus more money has to be printed to service and refinance old debt and to finance the ever growing deficits. 

And the problem is worldwide with the European economies also running major deficits plus a banking system which approaches collapse.  Therefore there is likely to be a concerted money printing action by the Fed, the ECB, the IMF and other central banks which will be of gigantic proportions.  And the inevitable consequence of this will be a hyperinflationary depression. 

Governments do not like gold going up since this reflects their deceitful actions in destroying the value of paper money.  In spite of this gold has gone up over 6 times since 1999. So whilst the stock market has been artificially supported due to massive money printing, in real terms i.e. in gold, stocks have been a very poor investment with a more than 80% fall.

Stock market investors continue to hold on to their stocks in the hope that we will again see bull markets like in the 1980s and 1990s. But looking at the very long term Dow/Gold ratio chart this optimism seems unfounded.  The chart shows a major “megaphone” pattern that has a target of 1.  This would mean that gold and the Dow would be equal in value.  It would also mean another 90% fall of the Dow against gold.  In my view the pattern will probably overshoot and we will go well below a one to one ratio. 


Even if we “only” go to a Dow/Gold one for one ratio, at what level would that be?  For many years I have forecast gold at $10,000 dollars, and that would mean the Dow would be at the same level.  But remember this means that gold would go up 6 times from here and the Dow would be down 16%.  With hyperinflation gold could go considerably higher.  So investors who want to preserve their wealth in the next few years are likely to do much better by owning physical gold than stocks.

Egon von Greyerz

Matterhorn Asset Management AG


May 31, 2012

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