In his farewell interview for the Financial Times, Federal Minister of Finance Wolfgang Schäuble warned of a new global financial crisis predicated upon the Quantity of Money theory that the central banks had pumped trillions of dollars into the financial system that is creating a risk of “new bubbles”.  Indeed, many just do not comprehend what is going on and are blaming the new highs in share markets on concerns about the increased risks from the accumulation of more and more liquidity and the growth of public and private debt.

The IMF CEO Christine Lagarde has also gone on record warning of a new debt crisis. The Bank for International Settlements (BIS) has also joined the crowd who see the Quantitative Easing as increasing the risk of asset bubbles. Schäuble has made it clear that he sees the risk is greater in the Eurozone because of the excessive amount of bad loans held by banks.

This is the view that has driven Schäuble calling for the continuation of austerity policy in southern Europe. Schäuble is to be elected president of the new Bundestag at the end of October. The problem with austerity is that this has been directed at the people – not government. The QE policies have brought in government debt, so the added liquidity has FAILED to stimulate the economy and capital has been driven into assets by negative interest rates. Austerity will only further punish the private sector while the public sector continues to spend and then raises taxes maintaining deflation and the negative interest rates rob people of any income from their savings

The European banking crisis is still brewing. The biggest problem rises from the rules that if a bank is in trouble, they just seize the bank and sell it for €1 and all the shareholders lose everything. This is having serious impact upon the European Banking System as a whole as I previously warned. The Italian bank Carige has had difficulty in trying to raise capital to meet requirements. If any bank cannot raise enough capital to meet the requirements, the European supervisory authorities can seize the bank in accordance with the new rules.

Once again, the government solution is to make up rules that totally disregard the private reality. Why would anyone buy bank stocks in Europe today if the government can seize everything and shareholders get zero? Spain’s Banco Santander bought rival Banco Popular for €1. This is Brussels’s new system to rescue failing banks without burdening taxpayers or stressing markets. This was cheered around the world because the shareholders lost absolutely everything. The bank which was valued in the collapse at €1.6 billion was bought for €1.

Hello! Why would anyone buy European bank stocks? I cannot recommend buying any in Europe. It’s just too risky. An Industrial corporation goes into bankruptcy and its assets are sold. The shareholders get something back. Banks are becoming more like government bonds. The normal rules just do not apply.

This current Bull Market has indeed been the most hated in history. Typically one expects complete euphoria as new highs are made. However, this bull market is really different this time. This rally is by no means the product of euphoria. While the majority of analysts have been calling for a crash since 2010 and every new high was supposed to be the last, this cannot be compared to the Roaring 20s.

If we lift the rug and look closer, you will start to put the pieces together. There has been a bond and property rally over the past seven years whereas rates were rising into the 1929 high and property burst in 1927 with the Florida Land Bubble. This is not even similar to the roaring Dotcom Mania of 2000. The PE Ratio was significantly higher in both instances.

Government bonds have moved even to negative yields at times in Germany and creditors have demanded insane levels of credit to buy housing in the States opposite of the free lending going on in Europe as banks are desperate for yield.

Rarely has high-end property prices around the world soared so high. We have seen this is London, Toronto, New York, Miami, Vancouver, Hong Kong and Sydney to mention just a few. The price of the average American house remains still 20-50% off from 2007 levels depending on where you look.

Rare coins, art, and antiques have soared around the globe. Add to all this the craze, we have  cryptocurrencies and BitCoin going nuts. Yet the entire bull market of the Roaring ’20s was 97 months. We passed that mark in April 2017. This is also the longest bullish trend suggesting there is something else afoot.

So exactly what is going on? Do we really have a bull market in EVERYTHING? Well the answer is yes and no. If we look closely at the high-end property market, much of the sales are for CASH – not leveraged. This too is highly unusual. Historically, such asset bubbles have been funded by banks. Yet the bitter experience has shown that debt-funded asset bubble implode taking the banks with them. The assets collapse in value because the banks need cash with withdrawals. The leverage magnifies the cash on the way up, and on the way down, assets crash to rebalance against the actual supply of cash.

For this reason, banks must be able to withstand such a contraction and the theory is to raise bank capital. That means raising bank capital to meet “stress tests” imposed by the various government authorities. The European Banking Authority (EBA) published the list of public sector entities (PSEs) that may be treated as regional governments, local authorities or central governments in the area of credit risk, in accordance with the Capital Requirements Regulation (CRR). This list will assist EU institutions in determining their capital requirements for credit risk. The problem with all of this “stress test” criteria is the fundamental assumption that government debt is risk free. In particular, the EBA includes those PSEs that are treated as regional governments, local authorities or central governments due to their reduced risk level. As a result of this treatment, exposures to the PSEs included in the list will qualify for the same risk weight as for the respective regional government, local authority or central government. The assumption that government debt is superior to private debt backed by assets underscores the real risk on the horizon.

The bull market in everything is really a global realization that government is in trouble. We are looking at money getting out of banks and government to REDUCE the risk of government as we move forward.  So this time it is different. Normally, we have one sector at a time in a bubble, commodities, stocks, real estate, tangible assets. We normally do not see a bull market in everything unless there is a wave of movement away from government.

The European Union has ordered AMAZON to pay about 250 million euros ($294 million) in taxes to Luxembourg, saying it was given an unfair tax advantage from 2003 because it paid less than they would have paid in France or Germany. The EU is retroactively changing taxes. This is a sure fire way of telling companies to get out of Europe. If no matter where you build your plant, if you would have been paying a higher tax in France or Germany, the EU says that is not fair and you have to pay more in BACK TAXES.

In restructuring companies, taxes were always NUMBER ONE after Country Risk. The EU has just made Country Risk paramount. Honestly, I would have to advise companies NOT to set up shop inside the EU. Best to go to the UK and pay any tariff than to be retroactively taxes because the EU is broke. This is introducing a whole new risk into the mix. The EU is becoming a no-go-zone for business.

It is now too risky to business in Europe for they are changing the rules retroactively.

COMMENT: Marty; I get these emails about gold and have to wonder how people can keep preaching the same thing for decades and never be correct once. Not they say in a very simplistic manner that  Politicians argued that endless trade deficits were immaterial because U.S. exceptionalism allowed America to do what it wanted. If foreign leaders refused to accept dollars for commerce as Saddam and Gaddafi did, the U.S. used its military might and CIA for regime changes. Even the strongest adversaries like China and Russia cannot compete against U.S. weapons of mass destruction, so they are increasingly engaging in currency wars of their own to protect their national sovereignty. Is the dollar in trouble as a result?

They seem to advocate the collapse of the USA is necessary so they can make money on gold. Like you said on Global Warming, they want to reduce the population so a good thing would be to stop having children without thinking the birth rate is down so pension are collapsing.

What you have shown is none of this nonsense is necessary for gold to rise and that trade is a tiny fraction of capital flows. Are these people just mindless? The dollar is the lynch pin holding everything together. Here in Europe we have a lot more problems than the USA. BitCoin crashed because the Chinese were fleeing to dollars trying to get their money out of China.

REPLY: This is the classic problem in analysis. You fit the fact to your predetermined conclusion. They keep praying for the collapse of the dollar to make gold go up. The problem is then, if everything collapses, what good is gold if you cannot spend it because nothing has survived?

Very strange theory. BTW, Saddam and Gaddafi did not reject dollars. I even managed money for Muammar Gaddafi TWICE. He had no problem pouring millions of dollars into accounts to trade. I also knew Milton Friedman who advised that a floating exchange rate would provide a check and balance on the system where fixed exchange rates . The trade deficit is offset by the capital account reflecting investment. In fact, if a foreign entity BUYS American debt, that inflow goes into the capital account – not trade account. However, the interest payments go out in the Current Account commonly called the Trade Account. There do not even understand the accounting.

The more foreign investors come into America and the repatriate their profits, the “trade deficit” will appear to get worse and it has NOTHING to do with trade.