From November 22, 2021 (YouTube Link Here)
Rough Transcript of Conversation (editing in general and deleting out some of the moderator):
David: I have been probably the biggest bull on wall street over
the past 18 months. Back in the march 2020 lows i started talking about a melt
up as where we were headed and i've stuck with that call all the way through
this last 18 months. My view is that we're going to see a final parabolic move
up as a final leg to this bull market. I call this the secular bull market that started back in August
of 1982 so we’ve been in a 39-year bull market, a secular bull market and i
think it will end in a parabolic melt up.
So i think we're in that last leg. I still think we probably could see a
pullback one more time before we really
get going into that last move. But my final target right now is 5,300 on the S&P,
42,000 on the dow and i've got an 18,000 target on the nasdaq but i'll probably
raise that.
You should you know that my expected melt up or blow off move, that once it goes vertical, really it could cover an amazing amount of ground in a short time so i think that's what's ahead in the next few months.
I don't think we'll get there by the end of the year but i think certainly first quarter we could get to the top and then what follows uh in my opinion is a bear market bigger than any we've had in the post-World War II era so bigger than anything since 1929. Essentially I'm calling for a 70 to 80% bear market drop um that will begin you know following the the blow off top um and it'll be precipitated by a global bust --- a global economic bust in the world economy.
You know, the term "bust" gets thrown around a lot and people use it with respect to the stock market and things when i say bust i'm referring to the economy and i define a bust as something bigger than a recession perhaps as bad as a depression in lots of ways but more the speed of recession so most of the damages is pretty much contained within you know 12 to 15 month time horizon.
And that's what i think we're going to see probably beginning mid-year next year for the bust itself. Then because the stock market will lead that so you'll make a top in the stock market [before the bad economic/financial news] and then followed by a few months to several months by something pretty awful in the economy.
It'll be global so it's not just the US, it's you know Europe's going to be in big trouble. Certainly China has a lot to worry about in terms of their their situation and the reason why i think it's going to be bigger than even 2008/09 is because we've ramped up leverage -- it was big leverage going into 2008.
It's far bigger leverage today. We've got you know close to 300 trillion in global debt around you know around the globe and we've got um notional value of derivatives in in the quadrillions so those two aspects you know everybody knows about debt but i don't think they considered derivatives when they speak of leverage but that's truly leverage on the system and once that starts unwinding it can unwind pretty dramatically and fast so the central bank's going to have a lot on their hands in terms of trying to prevent a total uh collapse and
As a result what you will see is massive monetary and fiscal expansion --- the monetary being the fast you know the faster way they'll get to respond to this. Fiscal will take sometimes weeks or months to deliberate, you know, get parties to agree on things. Whereas the fed and other central banks can be pumping money almost immediately so so you will see an awful lot of money created you know we've we've just gone from 3.7 trillion to eight and a half trillion during this pandemic
I think you'll see the fed's balance sheet grow to over 20 trillion in response to the bust --could even be 30 trillion, so i'm talking big numbers and that will, with a lag and it's you know going to be uh probably a six to nine month flag, but with a lag uh that will jumpstart a new recovery cycle.
That new recovery cycle though will come not not immediately but you know within a couple of years will come with hyperinflation and i think by the end of the decade, I expect that we will have retraced all of the interest rate decline from 1981, all of the inflation decline from 1982, We were at 15 percent long bond, 15% 10 year rates back in 1981 and inflation was up in the 20% range we will be back at those levels again and maybe higher by the end of this decade.
So that's not a very pretty picture and it means um the next cycle is going to look very different than what we've had in the last 40 years.
The easiest part of my forecast is how the Federal Reserve will respon, not just the fed but every central bankin the world will be printing money at a rate we have never seen before you know they will be putting more money into the system than we saw in 2008/ 2009, more than we've seen in the last 18 months and multiples of those numbers because they're going to be dealing with a system that's free-falling a financial system that's really unwinding so no doubt they're going to respond.
What i think often times investors don't recognize is that they it's not it's not so easy as to say "push a button" and here's the amount of money we need. They're going to be putting in more money than they've ever put in and then they're going to wonder is that enough or not.
There's a lag to when money actually stabilizes the system so it's during that time where the Central Banks are in this uncertain, unknown period ----where they have to just keep putting money in because nothing's turned around yet. So they'll put a couple a couple trillion in (and i'm just speaking of the fed right now) but they'll put a couple trillion in and thing's will still be free falling so they'll put a couple trillion more in and it'll still be free falling. So it's just going to take time and it doesn't mean it's a straight line either. You could have bounces in the markets and periods of respite where it looks like they've done enough and then a month later they find they haven't done enough so i think
I think in in our world of communication where everybody's a trader, they think all it's as simple as all they have to do is desire to do something and it's done. It's much more complex than that when you're sitting in in Jay Powell's seat or, you know Christine Legard's seat, and you're trying to figure out what do--- how much money do i need to put in. And of course there's offsets.
What's going to be hard for them is we're going into this turmoil with inflation heating up. They're gonna be tightening that's what's gonna i think precipitate the bust. and and you can't just switch turn on a switch or turn on a dime and say okay now it's time to print money. The inflation's still gonna be lingering for the first part of the bust so they're going to be caught between a rock and a hard place in terms of what do we do now, They'll say, "Have we done too much?" or "do we need to do more?" It's just not a simple equation where you say okay we desire to stop this and we're going to print money. It sounds easy it's not easy when you're in that seat.
you know i one of the things that allows me to say things with conviction is i was investing as a pension fund manager back in the 70s and 80s so i was there to watch what happened when interest rates all of a sudden went from 7% or 8% to 15% because Paul Volcker said we're going to control money supply now because inflation is out of control. I saw how long it took to crank that down.
I think today's investors or today's pundits have never lived through that inflationary time. We've been in disinflation for about 40 years, so even the Fed is looking at the playbook from back then and trying to understand it. But they weren't there then. So you know there's just a few of us dinosaurs still around that saw that but you know it's uh, it's a different world.
Moderator: So what do you what do you think is the safest asset to be in then like because this bust is going to affect the globe. Where do you put most of your portfolio in?
David: I can't provide advice but what i can say is that what i believe we'll see in terms of asset categories obviously equities will be hit har. Corporate bonds will be hit hard; particularly lower quality bonds you know junk bonds, etc. Lower investment grade bonds will be hit hard because as the economy deteriorates so do their balance sheets and so you know they'll be default risk etc
The things that will hold up in in the bust, in the bear market, are going to be government guaranteed returns such as treasury bonds. I don't think we have sovereign risk this time around---I think we will have that after the next cycle but this time around the the central banks will have enough money. I mean because inflation will be turning into deflation they will have almost limitless ability to print money so as long as the printing press is there, they can fund the FDIC, they can fund the government.
So there won't be, at least in the US, any sovereign default risk. So treasuries will be one of the few places that i think will actually see increased value during the bust you know so if the stock market is dropping 80% and treasuries are actually positive returns that's a huge spread.
I think the us dollar will have a flight-to-safety trade i'm actually embarrassed on the dollar now i think the dollar is going down before it goes up but but when the bust hits and again it's still many months away but when the bust hitsi do think we'll see as we have in past cycles and in spite of people's skepticism about the long-term nature of the long-term prospects for the dollar i think we will see investors around the globe flee to the dollar because they still view the us as the most secure financial system. So you'll see a appreciation in the dollar during the bust. So the treasuries and the dollar are really the two things that i think buck the trend and then and then obviously the FDIC-insured bank assets like savings accounts can can be trusted to hold up as long as as long as you stay within the insurance thresholds.
As i said the FDIC will be funded to whatever is necessary if if we have bank failures etc. I think we will have bank failures probably more this time around last time is very focused on the US this time around. I think the bigger pain in the financial system is probably going to be elsewhere because we had our banks got hit so hard in 2008/09 that their balance sheets are in better shape than a lot of banks around the world. So i'd be more worried about the European banks, the Asian banks--Australian banks, Canadian banks because the leverage in the system in those places.
So it doesn't mean we won't have problems in the US banking wise but i think it'll be less so than last time.
Moderator: How about precious metals?
Right now, i'm bullish on the metals right now. I actually have a one of the more bullish calls on the street i'm looking for gold to go to $2500 probably in the next six months, that is ---before the bust. I'm looking for silver to go to $50 pre-bust. So those are pre-bust peaks that i think we'll see and then in the bust they'll pull back.
I don't think they'll get hit nearly as hard as the stock market um they might come back to these or current levels so if if gold goes to $2500 it might, come back to you know $1800 type of thing.
If silver goes to $50 and it might even go higher than $50, but if it goes to $50 I might fall back to $25 or $30. it'll be you know less of a pullback compared to the drawdown in the equity indexes.
And then in the next cycle because inflation resurgence being ominant a theme, that is with inflation going from deflation or near deflation dudring the bust, I think we'll have a fast very swift decline in prices during the bust, from from negative inflation, say in 2023, I think you can get to 20%, 20% plus inflation in, you know, seven years (say by 2030) so that will drive precious metals much higher. I'm i'm expecting gold to be who knows $10 000 maybe $20 000 i'm expecting silver to go to $400 maybe higher.
I'm expecting a lot of other commodities and this is after the bust (and the printing), ie., this is next cycle, you could see oil at $400 a barrel. You could see copper you know which is currently you know in the $4 range, could be $20 plus, so so a lot of big run-ups in commodities next cycle. So commodities and precious metals will be the leaders of the next cycle like the like the social media stocks and technology were the leaders of this cycle.
Healthcare was a leader in this cycle. They won't do so well in inflation they do much better when interest rates are low and inflation is relatively low so.
What we see, and i've done this for almost five decades. I've seen many cycles. What you see is every cycle has new leadership. So leadership of this cycle will be laggards next cycle and you'll have new leadership so the leadership next cycle i expect to be you know commodities, precious metals and industrial stocks industrial stocks,
Moderator: Ok, uh how about real estate how will real estate fare during the bust and the hyper inflation?
David: Yeah i think we're in the last stages of a run-up in real estate you can get you know it could probably be a little stronger here for a little bit longer maybe into the spring but following that i think it'll get beat up in the bust.
I don't know how badly it's going to be, but probably not as bad in the US as it was in 2008/2009 but you know you can come down because, you know, we've had pretty healthy run-ups in housing prices. So I expected housing to get hit pretty hard in the bust.
Then but you know and then the recovery after the bust um for a year or two you could see a bounce but ultimately you can have a very stiff headwind if interest rates go up. I actually think the 10-year Treasury bond can get down to zero percent in the bust from as high as 2 1/2% pre-bust.
I'm calling for tightening here that will drive the 10 year Treasury up to 2 1/2% in the next few months, In the next three to six months from there i think it can go down to zero so you'll start from a zero base on Fed funds. Mortgage rates probably be down at two percent or lower.
But you'll start there in say, late 2023--- but you'll see rates move towards double digits and i think by 2026 to 2027 they could be at double digits and by 2029 you know you could be looking at 15% mortgage rates so that's going to be a very stiff headwind for real estate.
So everybody thinks real estate is an inflation hedge. Certain real estate will be i think farmland might might do well because i expect ag commodities to do well next cycle.
But for housing, if you've got mortgage rates going from you know two or three percent up to 15%, you know what that does to people that are buying houses on a monthly payment basis, and that's gonna you know drive the monthly payment up through the roof so something has to give and i think it's going to be housing prices.
Moderator: what what do you think uh will cause the big run up um and i guess what's the trigger uh for and also what's the trigger for the bust you know because i think for such a big bust there needs to be a trigger, right?
David: I think the trigger could come from overseas but i think more likely the trigger will be fed tightening. And as i said before it's not so easy to say "we have to tighten" and then we'll do a little bit of tightening but hope we won't break the system.
The problem is inflation doesn't come down easily so they're going to tighten but there's monetary leads/lags to that, so that tightening may go on longer than they would like or what the economy can stand. Because we have so much fragility in the system due to the pandemic (and leverage), I don't think it's going to take much to tip things over so I think it's basically the trigger is likely to be fed tightening.
meaning not just raising interest rates but pulling a good amount of money out of the system and I just think that we've seen it every cycle that i've been doing this is that's usually what tips the economy the the fed overly tightens because the response comes many months later and they always tend to overdo it. They tend to overdo it because they think they haven't done enough yet. so as as careful as they are as much as people want to believe in yield curve control and mmt , i think they're going to find out that once inflation kind of gets out of the bag it's it's hard to put it back in you know so, I think the Fed's going to have their hands full and I would say probably second quarter of next year is probably the the time when you're going to see some of the you know the issues really crop up.
Moderator: do you see hyper inflation um the next few months?
David: i see inflation accelerating you know I don't call this hyperinflation because i lived through the hyperinflation of the early 80s hyperinflation will be what we see second half of this decade. but yeah I think we are going to see inflation accelerate from here.
I look at commodity prices for one thing and you know my read is that copper right now is about $4.20. I expect copper to go up to $6 dollars in the next six months. I think lumber's probably heading back to a $1000 dollars. You know it came came off a peak of $1700 last year and then it fell to you know below $500. I think it's starting to turn up again. I wouldn't be surprised to see lumber above a thousand dollars in the next six months so.
Those are just two indicators that I look at. There's lots of other commodities and you look at the charts, it tends to project for higher prices, so I think we are going to see higher inflation. I don't know what that will translate into in terms of PPI or CPI, but i think it's certainly going to be up a percent or more from here.
Moderator: you mentioned on twitter something in regards to China, that China is gonna be a trigger that'll affect other countries. Do you mind explaining more about that way more into detail?
David: Sure the big the big reason why I think we're gonna have this bust, which again it'll be the worst downturn in the post-World War II era, that is, worst downturn since the great depression.
The reason for my forecast is the leverage in the system we are we're in uncharted territory in terms of how much leverage is in the system. You know I quoted the numbers before: $300 trillions of debt and and quadrillions and notional value derivatives. The most leveraged economy in the world is China, You know they went crazy this last cycle from from the bottom in 2008 to where we are now. They just leveraged everybody leveraged on steroids. You're starting to see the unwind now with Evergreen. Simply put, their property market is up on stilts and very leveraged.
Their whole economy is very leveraged. their whole financial system is leveragedso even though they're a more closed economy than than we are here in the states, they're going to find at some point that you know they can't control it all ---that it's not that easy. So I think the odds are that they are going to play a big role in the bust. I you know the conversation you're alluding to was somebody that was getting into an argument with me because I said they probably won't be the trigger but they will certainly play a big role. They may not trigger the bust, but once the bust gets started their leverage is going to play a big role as is the leverage everywhere in the world. So with China just being the most leveraged, it's likely to be a significant part of the bust.
You'll see it in real estate. you probably see it with their consumers. I would think you'll see it in their financial system.
Moderator: do you do you see a china economy going down here from here on or or um you know they will be the next superpower?
David: yeah that's a good question. I have drawn the analogy it's a hard question to answer because a lot depends on how badly the bust and deleveraging hurts them.
I think we are where Japan was in the late 80s coming out of the 1987 crash they went up to even higher highs in their market and they peaked in 1989 and their stock market's far below that peak today----you know even 30 years later.
And so we are Japan and i think China is is where the US was in 1989 which or the late 80s which means we went obviously our markets went way beyond those highs then. The us has been a very strong leader in the last 30 years.
Like Japan in 1989, I'm making the call that the secular peak of our Stock Markets, saying within a few months of now, that secular peak highs will probably not be seen for decades again and and maybe not even close so. Let's say I have to further raise targets again and we get to you know 5,500 or 6,000 on the S&P.
So, then let's say we drop 80 percent you can climb all the way out of that drop and go from you know 80 percent of let's say 6,000 um is you know 4,800 points so you could go all the way down to 1200 on the S&P.
Even in a bear market, you could then you could quadruple that 1200 and it would take you back to 4,800 or nowhere near the 6 000 top. So you can have a big cyclical bull market (within a secular bear mkt) next cycle after the bust and still be far below the old highs and then work your way lower from there. So I think there's a good chance that the US is going to be kind of in there twilight for a while (like Japan).
the fed is kind of the monetary leader but believe me every central bank is going to be printing at the same rate as the Fed
I'm predicting but i'm not endorsing this. I'm only saying this is pretty much predictable that the only response that they can pursue that's quick and that will meet the monetary need. The huge monetary response will be needed because of the leverage unwind is so huge so the response has to be huge.
Moderator: Do you foresee maybe a reset or of some kind currency reset?
David: I think basically the dollar will remain the reserve currency for at least the next five years. That doesn't mean you're not going to see digital currencies out there you are. It doesn't mean that central banks won't adopt some sort of digital currencies of course, but i think the dollar will remain reserve currency for the next five years beyond that my you know my ability to to see gets really pretty cloudy
[Doug here: Note, that I have not yet edited the remaining transcript....You can still read it, but it's less clear]
so i think certainly second half of this decade you know later in the decade anything's possible um the dollars the dollar by the time we get there is going to be in trouble because of inflation um and other and other reasons so i you know it's not that i have a long-term bullish view on the dollar but i i just i think there's a lot there's a narrative out there that's very popular that you know reset is right around the corner and unfortunately i think people think reset is also we're going to clean the slate and just start over nice and easy the that doesn't work there's there's two you know there's offsets for all that you can't just wipe out the debt there's people on the other side of that yeah um so reset is not how this is going to happen in my opinion um we get this recovery following the bust it won't be you know for for some if you're in the commodity arena or if you're you know in the areas that are beneficiaries of inflation it'll be okay times pretty good times but if you're in other areas that get hurt by inflation like housing like like consumer it's not going to be so easy and so it's not going to be a a roaring 20s type economy it's going to be you know selectively some areas can be good and some not so good and just new newer you know areas that haven't been good for the last 40 years commodities have had a long time of not doing great you know the last year's been good but
um
so we'll have some you know some areas picked up that haven't for a long time but generally it's going to be an uneven recovery and then unfortunately because of that inflation because of all the debt how do you how do you fund that that how do you finance how do you service your debt when rates go from zero or from you know current levels to double digits and high double digits you know the the equation doesn't add up so unfortunately i think we get to a place late this decade early next decade and this is again the us's you know my focus but this will happen around the world i think we we basically see a global collapse of the financial system
i don't i don't have a very optimistic picture uh you know view of what the 2030s and beyond look like because i'm you know the bust is going to be really painful but the collapse that i think comes next decade
you know you're going to have unemployment through the roof you know maybe higher than 50 in this country you can have a government that's bankrupt that can't finance uh welfare can't finance medicare can't finance social security can't you know can't people don't understand that once you once you collapse a system you know this is this is what i call a giant ponzi scheme
you know it's been building for five decades or more and has accelerated in the last two decades and really will accelerate and you know has in the last two years and will right up through this decade that you can't sustain this you you know you can't take on the debt we're taking on and then have inflation and interest rates go through the roof and finance it it's impossible so they can kind of play musical chairs for a while and take you know steal from peter to pay paul but ultimately within a you know very short time of a few years it all comes it comes to an end because there's not enough money you can and if you say well let's inflate it away or let's print more money to pay the service to service of debt you create more inflation which creates a bigger problem you get yourself deeper in the hole and you know it becomes you can't keep up with it so ultimately it collapses unto itself and that's that's what i think the 2030s are about so
i tell people focus on the here and now because that's a long-term forecast that can be wrong but that's how i see things at least how how this thing ultimately comes to to a close
Moderator: wow, it's it's gonna be really bad for for the millennials right?
yeah i would say to everybody unfortunately you've kind of lived in a cult where for today borrow from tomorrow today uh you've been lulled to sleep with the idea that something called modern um monetary theory means you can have your cake and eat it too you can you can just print money and and spend and spend and spend which is what our current administration is doing. that is a formula for disaster and that is you know millennials baby boomers everybody should understand that right now get your house in order that means don't take on more debt that means reduce debt to the extent you can as fast as you can and and realize that you you know you should be paying cash for things because debt in in the kind of environment we're going into debt will be a punisher not a beneficiary not a benefit
um so
yeah everybody should learn to live within their means and and be as self-sustaining as they can be
Moderator: okay thank you so much for for your outlook and advice. With all this doom and gloom do you have anything positive to say for the future?
David: well sure. for people i mean that's why i go through the talk about the new leadership for the next cycle if people understand the dynamics of what i just said it won't be good for index funds because index funds basically benefited from pe multiples expanding as interest rates declined because that's a reciprocal they're kind of inverse to each other the reverse will happen in the post-bust period where inflation and interest rates are rising p e multiples price earnings multiples will be shrinking that punishes poor portfolios overall because you know if you're in an index generally your beneficia your benefit is pretty much it's some of its earnings but a lot of it's pe multiple expansion you're going gonna have pe multiple contraction so what that argues is the mantra that we've had for the last 25 years of
buy and hold indexes because they do better than active managers etc in the cycle that follows the bust it will be the reverse of that multiple multiples will be contracting index funds will struggle and the places to be will be commodities, industrial stocks, precious metals so what that argues is as long as you're in the right places there's a lot of ability to you know grow your wealth but if you're in the wrong places you may not as i said you won't
if you're an index if you're in an index fund and it drops 80 percent then only comes back part way you're never going to see the high water mark you see in the next few months again.
so you know it just the real message is understand that markets change and that mantras that are based on the past can can come to an end and and it's time to change your your approach and i think knowing that now before it happens can be a real benefit to investors if they understand what what the next cycle is going to look like and they readjust their portfolios they can have a good time through the decade but if they stick with what they've done here and they're basically been buying
old index investors the next decade's not going to be kind to them
Moderator: so i yeah sort of that's sort of a positive. Can you foresee huge growth in the technology sector i mean in terms of like maybe uh metaverse um that it's that might be probably good for the economy you know like robots this kind of thing unity yeah
yeah they will there will be technological advancements and niches that they you know the growth areas will do fine because they're so growthy that they can outdo the inflation problem um but for a lot of the big growth area that gets its benefit from interest rate reduction and and capitalizing that growth at you know ever lower interest rates those are going to struggle because it's going to be diverse again interest rates are going to be going up but
but in new areas where there's you know technological advancement some of it in the ev area etc sure there's there's going to be places there that you know won't necessarily that can do well in spite of not being a commodity or an industrial so so sure there'll be always those niches
but you know in a bigger picture way technology is going to struggle a lot more than it did in this past cycle where it's been really the leader just because inflation is it makes it tough on growth
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