Bubbles Abound Globally: An Interview With Graham Summers

December 19, 2015

bubble economyGraham Summers is Chief Market Strategist for Phoenix Capital Research, an independent financial research firm based in Washington DC with clients in 56 countries around the world.  His insights have been featured in Rolling Stone Magazine, Crain’s New York Business, Thomson-Reuters, The Huffington Post, CNN Money, FOX business, and the National Business Review. Indeed…Graham Summers is an outstanding icon in the international investment Industry. His website is http://gainspainscapital.com .   

In deserved recognition Gold-Eagle is proud to interview the venerable Graham Summers:


Question:  What asset classes are grossly over-valued today? And which are historically under-valued?

Graham: We are currently in a bond bubble. In of itself, this bubble is massive: over $100 trillion with an additional $555 trillion in derivatives trading based on interest rates or bond yields. To put this into perspective, the Credit Default Swap market which nearly took down the financial system in 2008 was just $50-$60 trillion in size. So the bond bubble is exponentially larger than that.

However there are deeper implications. Bonds, particularly sovereign bonds, are the bedrock of the financial system. All other assets trade according to their risk relative to sovereign bonds, particularly US Treasuries. Because Treasuries and other sovereign bonds are in a bubble, everything is in a bubble. And these smaller respective bubbles are already bursting as we have seen with economically sensitive commodities such as oil, coal and the like, which have collapsed by as much as 60% in a matter of months.

We believe the first wave of the bond bubble bursting has already hit in Emerging Market Bonds and High Yield Bonds or Junk Bonds. Both of those areas have ended their bull markets. This is the beginning of a chain reaction that will ultimately lead to defaults by sovereign nations including the US, though that is down the road.

Question:  What assets classes are considered today very inexpensive relative to historical standards and current global economic conditions?  And Why?

Graham: I have my eye on the precious metals, though I don’t know if they’re truly undervalued to the point that I’d buy them at current levels. What I mean by this is that as deflation grips the markets, Gold and Silver will likely sell off. So while they appear cheap, we’re not in a rush to buy them today.

It is only after the next real scare triggers another round of stimulus from the Central Banks that the next leg up will hit for precious metals. We believe the next round of stimulus from Central Banks will be even more aggressive than the first round (2008-2014) was. It will involve very aggressive policies including NIRP and enormous QE programs well beyond what we’ve experienced thus far. That’s when Gold and Silver will begin their ascent.

Question:  In light of the US Fed fueling US stocks via the levitating action of Quantitative Easing (QE),  do you foresee an imminent crash in the DOW and S&P500 Indices during 2016?  And If so, what percent do you expect US equities to crash?  And in this event, how will this effect stocks in the Euro Union? Indeed, can the Euro Union even survive?

Graham: We do believe that stocks have entered a bear market, but how long it lasts really depends on how Central Banks react. Put another way, how far will Central Banks permit stocks to fall before they hit their respective “panic” buttons. Thus far, the Fed is the only Central Bank engaged in any kind of tightening. However, our view is that the Fed will be forced to ease again sometime within the next 12 to 18 months.

From a purely technical standpoint, stocks could fall 20% from current levels. If we have a full-scale Crisis similar to what hit in 2008, they could fall 50%. But again, all of this depends on how and when the Fed and other Central Banks react. For now, we believe that the August-September drop was just the first leg down for a bear market.

Question:   To date the only member of the Euro Union that has been living high on the hog (i.e. referring to the PIIGS) has been Germany.  What might Germany do to salvage what it can?

Graham: Europe as a whole is in major trouble. The EU banking system is leveraged at 26 to 1. Lehman Brothers was leveraged at 30 to 1. Worse, the ECB has done virtually nothing to reform the structural issues in the EU banking system. Instead, it has launched NIRP and QE, which is only further skewing the risk profile for Europe.

Both German members of the ECB board were against the ECB’s decision to cut rates further into NIRP and to extend its QE program in early December 2015. This represents a fracturing of the relationship between the two key players in Europe: Germany and the ECB.

Currently this conflict is more philosophical than anything else. The question is whether the fissure between Germany and the ECB widens or not during the next Crisis in the EU. If it does, then we get to the ultimate question, which is: How much is Germany really willing to pay to keep the EU together?

That remains to be seen. But back in 2012, Germany had a Plan B in place to leave the EU if things became bad enough. This is generally unknown in the US, but the plan was in place.

Question:  And if indeed US stocks commence a new secular Bear Market, where might prudent investors seek safe haven?

Graham: We believe the US Dollar is in a bull market. The US Dollar returned the same amount as stocks in 2014 and is currently outperforming stocks in 2015. We are long US Dollars and Treasuries, as we believe deflation is the primary threat today. This will change down the road as we mentioned before regarding the next round of Central Bank stimulus. However for now, this is an area of focus for us as well as a variety of individual plays both in the US and abroad both to the short and long-side.

Question:  What is your 2016 forecast for gold and silver during these troubling and volatile times?

Graham: Both Gold and Silver will struggle as deflation returns. China is actively exporting deflation into the West. This, combined with the Fed’s rate hike is collapsing inflation expectations in the US and Europe. It will be difficult for Gold and Silver prices to move sharply higher while this is the case. It is when the nuclear rounds of QE hit that Gold and Silver will skyrocket. Whether that happens in 2016 or not remains to be seen.

Question:  What do you see for the US Dollar and the Euro during the next 12 months?

Graham: With the ECB cutting rates to NIRP and the Federal Reserve raising rates, money will be move from the Euro into the US Dollar. This in turn will pressure the $9 trillion US Dollar carry trade, which will lead to defaults in the Emerging Market space. This in turn will drive even more money into the US Dollar.

The Euro comprises 56% of the currency basket against which the US Dollar trades. So as the US Dollar rises, the Euro will fall. This will continue until the Fed panics and moves to arrest the US Dollar rally as it evaporates corporate profits and triggers debt deflation: the very thing the Fed is trying to avoid.

Question:  As you well know, The Peoples Bank of China and Japan’s Central Bank are the world’s largest holder of US Treasuries. They own $1.3 TRILLION and $1.2 TRILLION, respectively. In your estimation do you feel the Peoples Bank of China and Japan’s Central Bank will soon awaken to the imminent FOREX danger this represents…and will subsequently dump Uncle Sam’s fiat paper to diversity their dire FOREX risks?

And in the event The Peoples Bank of China and Japan’s Central Bank divest themselves of US Treasuries, might that cause a crash in the US Bond market…and a related crash in the value of the US greenback?  

Graham: This may happen but it’s much further down the road than most realize.

China and Japan area in major trouble. Their selling of Treasuries has less to do with dumping the US Dollar and more to do with desperately trying to free up capital to prop up their bursting credit, real estate, and stock bubbles.

Japan is completely bankrupt and Bank of Japan will be forced to monetize everything (stocks, bonds etc.) as not doing so will mean systemic failure. They have no choice as no one in the Japanese Government or at the Bank of Japan wants to be the person under whose watch the system collapses.

As for China, it is the single largest credit bubble relative to GDP in the world. There is a reason wealthy Chinese are fleeing the country and buying property in the US and London in cash at above market prices: they want to get their money out before the whole mess comes crashing down. China is an absolute train wreck. We don’t believe in the China miracle. We see it as more akin to the Soviet system prior to its collapse.

So no, I don’t see China or Japan dumping Treasuries as a divestment. I think the political class in both countries will be doing everything they can to stop their financial systems from imploding.


Gold-Eagle is very grateful to Graham Summers for taking the time to do this interview…and we look forward to enhancing his growing international image via Internet:  http://gainspainscapital.com.   

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