A Bearish Outlook For Global Equities: And Interview With Jason Hamlin

Jason Hamlin is the founder of Gold Stock Bull and publishes a highly-rated investment newsletter focused on strategies for profiting in today's turbulent markets. Mr. Hamlin has a background analyzing charts and trends for the world’s largest market research company, is versed in fundamental and technical analysis and has consulted to Fortune 500 companies around the globe. Jason is a cycles’ investor, student of Austrian economics and speaks regularly at investment conferences throughout North America. The Contrarian Report newsletter is published monthly and available at goldstockbull.com.

Gold-Eagle is proud to interview one of the world’s leading newsletter writers, Jason Hamlin.

********

Question:  Is the economic world today facing deflationary depression or a hyper-inflationary depression?  Which of the two will more likely materialize…and WHY…and what would be the catastrophic repercussions?

Jason:  I think we are in the early stages of a deflationary depression. If you look at commodity prices, including metals, energy and food, they have all collapsed substantially. The Baltic Dry Index, which tracks the cost to ship raw materials by sea, has also fallen to its lowest levels in history. Manufacturing output is contracting in several countries around the globe, with the latest ISM index reading in the United States slipping to its lowest level since the 2009 financial crisis. All of this suggests that economic activity is grinding to standstill.

The other major factor is the shift in our demographic makeup. As baby boomers transition from maximum spenders/investors to maximum savers/social burden on the economy, the deflationary impact will be pronounced.

With the FED likely to raise rates this month, we could see an acceleration of the downtrend. Eventually, I believe they will be forced to change course and lower rates again, while implementing a new form of stimulus in an attempt to slow the coming crash. The core issue is that they never addressed the debt problems, excessive leverage and the massive derivatives time bomb that continues to tick. They papered over the problem for short-term relief, but the moral hazard remains. I believe Financial Crisis 2.0 is coming.

When the next crash happens, I believe the central bankers will be forced to print massive amounts of new money, force banks to lend by ceasing to pay interest on excess reserves, monetize debt to keep governments funded and usher in unprecedented levels of easing. All of this will eventually turn the tide from deflation to inflation, with the potential for a hyper-inflationary tailspin. But I think we have a few years before this occurs.

The repercussions will be severe, as what is left of the middle class in America will be wiped out. Many claim the goal is to siphon wealth from the middle class to the ruling elite, leaving them dependent on government handouts and powerless to challenge whatever draconian power grabs are planned. Middle class wealth will be wiped out with the market crash, forcing people to turn to cash as a safe haven. Then inflation will rob them of whatever wealth they have left in cash. This is why I believe it is important to hold physical precious metals and other tangible assets in your possession and beyond the reach of the fiat paper system they control.

Question:  The Shanghai Stock Index of behemoth China has undeniably started a bear market, having recently plummeted more than 40% during the past 10 weeks. Moreover, it appears the trough still lies well below. Based on your Technical Analysis, how far might the Shanghai Stock Index fall before it stabilizes? And in what time frame?

Jason: The Shanghai Index had become grossly overvalued and the correction was long overdue. The Chinese citizenry with newfound wealth were lured into the markets and learned a hard lesson during this correction. I think the index will test the 2000 level again within the next year, and ultimately dip back towards the 2005 low of 1000 during the next financial crisis. I think 2016 will be a very painful year for equity investors globally.

Question:  Assuming the Shanghai bear market still has much lower ground to cover, how might this affect other major stock markets…i.e. USA (DOW & S&P500), NIKKEI, FTSE, DAX and Stoxx600?

Jason:  Markets are increasingly inter-connected in the new global economy and a large percentage of growth in the past decade has come from China. As their economy continues to slow from the prior explosive growth levels, it will undoubtedly have ripple effects across the rest of the globe.

Question:  Various international stock market analysts are forecasting bear markets worldwide. Do you concur…and if so why?

Jason:  Yes, the writing appears to be on the wall. Emerging markets in particular will be hit hard as the FED increases rates. That being said, I have been surprised at the ability of the central bankers to prop up the markets this long and simultaneously contain inflation. Perhaps they can keep it going a while longer, but they will eventually run out of tricks of their sleeves and there will be a great reckoning. 

Question:  How much longer do you believe Germany will support the indolent PIIGS (Portugal, Ireland, Italy, Greece and Spain)?  Will it be Germany that throws in the towel and revert back to the Deutschmark currency, or will Greece first abandon the Euro Union…and revert back to its infinitely devaluated Drachma currency?

Jason: The great experiment of the EU will eventually fall apart, but the incentives to keep in together remain strong. It would seem to make sense for Germany to jump ship first and others to quickly follow. There is a large contingent of German politicians and citizenry that believe an exit is best in the long-term interests of their country. The European nations, although close geographically, have very different cultures and different perspectives on everything from fiscal policy to foreign policy. 

Question:  In the event of the Euro Union dissolution (by whatever means), what effect will it have on the price of gold?

Jason:  In the very short-term, the dissolution of the EU would probably be bearish for gold as the dollar strengthens. After this knee-jerk reaction, I would expect gold to strengthen significantly as people rush to safe haven assets and display a growing distrust of governments, central banks and the fiat money that keeps them in power. 

Question:  It is a well-known fact less than 5% of the world’s total investments are today in some form of gold. In your considered opinion how much gold should every investor have as a percent of his/her portfolio?  And even more precisely, what is the preferred kind of gold investment:  Gold Bullion, Gold Coins, Gold Futures or Shares of Gold Mining companies?

Jason:  While it is a tough number to pinpoint, I believe it is likely less than 2%. A small increase to just 4% would double gold demand. I don't think people realize just how small the gold market is relative to the stock market or bond market. It will not take much money rushing into the gold market to overwhelm the supply levels and push prices skyward.

I think an allocation somewhere between 10% on the low end to 50% on the high end makes sense. Of course, it depends on a variety of factors from individual wealth levels, financial objectives, risk tolerance, to the state of the world.

I think investors should have physical gold and silver bullion in their possession first and foremost. I hold a mix of different coins, ounces and fractional, official mint coins and generic rounds, gold and silver. Gold futures are for short-term speculators or hedging. I don't think those markets are appropriate for the majority of people looking for exposure to gold. Mining stocks are significantly undervalued relative to the price of the metals and are likely to offer leverage of 2X to 5X the increase in the gold price. During the previous bull-run in gold, I took advantage of this leverage, occasionally booking paper profits and converting the cash into physical gold. This strategy resulted in a much higher return on investment and more physical gold than I could have otherwise accumulated.

Question:  What asset classes are grossly over-valued today?  Among the over-valued stocks, are there any sectors you would aggressively SHORT?

Jason: It is my view that most asset classes are overvalued at the current time. This is the result of easy money policies and artificially-low interest rates from our central planners. Investors have been forced into risky assets to find a decent return. Stocks, bonds and real estate are all over-valued by any number of historical measures. This could all change as interest rates start moving higher. I would look to short emerging markets and commercial real estate. I also believe there is more downside ahead for oil prices and a huge wave of bankruptcy in non-conventional oil-producers.

Question:  What asset classes are considered today very UNDER-VALUED relative to historical standards and current global economic conditions?

Jason:  There aren't many undervalued asset classes at the current time, other than precious metals and mining stocks. There are a number of energy stocks whose profits are not very sensitive to oil prices, yet have been dragged down with the sector. And while I know many gold investors shun digital currencies, I also view bitcoin as undervalued at current levels. I believe we will see another move above $1,000 in the next year or two. Similar to gold, bitcoin functions as a safe-have asset. When there are capital controls like we witnessed in Greece recently, there is loss of faith in government and their currencies. People flock to bitcoin as a way to get their wealth outside of the banking system and outside of the reach of corrupt governments.  I think we will see this trend accelerate in the coming years, yet there is a finite supply of bitcoin with a slow and predictable growth curve. It can be transferred across borders much easier than gold and I believe it is wise to have a small amount of exposure.

Question:  What is your near-term price forecast for gold and silver during these troubling and volatile times? And your 5-Year Gold Price and Silver Price Forecasts for 2020?  In this regard, what global conditions and/or technical indicators support your projections?

Jason:  I try to avoid short-term price forecasts. With the degree of central bank intervention and price manipulation possible in the highly-leveraged paper markets, anything can happen in the short-term. But ultimately, I don't think the gold price can remain below $1,000 (rough all-in cost of production) for too long. By 2020, I expect the deflationary wave to be over and the money printing spigots to be wide open. We are likely to be experiencing high inflation by then and I think gold will be well above its inflation-adjusted all-time high of $2,300. If we use ShadowStats.com inflation numbers, that high is closer to $9,000. While this may seem like a stretch, we have to remember that it is only in relation to the number of dollars in circulation. Since this number can explode quickly, so can the gold price. I believe the silver price per ounce will be well above $100 by 2020 and possibly as high as $500. While I think both metals have a place in any investor's portfolio, I expect silver to greatly outperform gold going forward.

Question:  What do you see for the US Dollar and the Euro during the next 12 months? And in this regard, would the implosion of the hapless Euro Union and its tottering currency panic investors to flee to the safer US Dollar or to the traditional store of value gold?

Jason:  The Euro's immediate challenges are even greater than those in the United States. Therefore, I expect that the USD will probably increase in value relative to the Euro or other currencies in the next 12 months. This is especially true as the ECB ramps up their stimulus program, while the FED starts to increase interest rates. If the European Union starts to fall apart and lose members, the dollar is sure to spike higher in the short term, but gold should also benefit in most currency terms.

I also think gold is likely to benefit from increased geopolitical tensions in the world. The United States, Russia and China are all engaged in serious conflicts that could turn deadly at any moment. It only takes one misunderstanding, miscalculation or mistake for a serious escalation in the skies over Syria or in the waters of the Black Sea or South China Sea.

In such an environment, I think it is wise to have a decent percentage of your wealth outside of the stock market and parked in physical, tangible assets that can't lose their value overnight. Precious metals are on sale at the current moment and while I don't advocate going 'all in' at one time, I think it makes sense to accumulate in tranches. I also think it is wise to have at least 3-months’ worth of spending money in cash in your possession.

We are certainly living in interesting and complex times. It is more important than ever to make sure that your hard-earned wealth is protected, diversified (eggs in several baskets) and will be accessible when you need it most. For our ongoing assessment of the markets and access to the GSB model portfolio and contrarian newsletter, consider becoming a premium member for just $95.

Gold-Eagle’s staff and its global readership are very grateful to Jason Hamlin for taking the time to share his insightful and timely wisdom with us.  Visit his website at goldstockbull.com .