In this section we examine where are the best places to invest your money for the next crash.
Here is what I currently think will go down.
US stocks are extremely high with very high P/E ratios that are unjustified. The bond market has ballooned on very low yield long term bonds. The US debt is at a level such that it cannot withstand high interest rates. The FED keeps adding liquidity to the market, but the market is not responding. The FED will eventually move to negative interest rates and QE4 driving the debt up further and they will be and are currently trapped because the US cannot afford to raise interest rates. The current bond market in the US is around $60 TRILLION. When interest rates go up and companies have to write down the value of these assets it will hit everyone’s balance sheets hard forcing the FED to come to the rescue with more money. US Dollar will to down, prices will go up on imported goods and it may lead to an uncontrollable inflation that will debase the currency.
Now the US has many strings it can pull to help stop this, but they have been pulling on all of the strings and they are still losing the battle. OPEC now has output at an all time high to keep oil down (http://www.reuters.com/article/us-opec-oil-survey-idUSKCN1091SN). CPI numbers are not reflective of true inflation. Meanwhile China is buying up gold and lowering its exposure to USD and many central banks are buying up gold.
At some point as the US debt to GDP keeps rising (it is now around 105.5% – compare to Greece at 135% at collapse), investors will lose confidence in the dollar. Because of the worldwide investment in the USD, if there is a big run to the exits it will crash hard. But of course there will be countries acting as puppets for the US showing confidence in the dollar, but it will go down substantially and then the cycle of higher prices combined with an endless need for the US to print money that will cause inflation and destroy the value of these trillions of bonds.
In this scenario of extreme stagflation, you will be killed if you are invested in stocks, bonds, fixed assets such as GICs, etc. You will want to be in gold and silver… MAYBE oil and some other commodities – need to investigate. It will be much worse than the crash in 2008. This will not be just a US problem, it will be a severe global crash.
I do need to look into this much further.
There is another side to this coin that many economists are predicting – deflation. For this scenario which can be a product of the same policies, credit shrinks and spending shrinks, the velocity of money slows and people save. We must look into Japan for this. The reality is depending on policy, the FED could make this happen too. In a deflation scenario, history has still shown that gold is a good investment.
The US does not want a deflationary situation because it will make its current debt much more expensive as GDP drops. Given their massive debt and unfunded liabilities the best option for the US is to inflate their way out of debt.