What’s Starting Now Will Be Much More Terrifying Than 2008

Below is the powerful interview with Egon von Greyerz, who is founder of Matterhorn Asset Management out of Switzerland.

Greyerz: “Eric, in my last few interviews I spoke about the risks I see worldwide.  I have also said that each one of these risks is serious to start a cascading series of events which would bring the entire financial system down.

But another area which we haven’t discussed is the danger that is present in the emerging markets.  There is a major crisis in a number of emerging markets right now.  Let me just mention a few:  In Argentina, they are in an absolute mess, and the peso fell 10% on Thursday — to it’s lowest level in 12 years.

If you take the Turkish lira, that plunged to new lows this week, and the Russian ruble is at the lowest level in 5 years.  In South Africa, the rand is at the weakest since 2008.  The currencies are also weak in Brazil and Mexico.  But there are many other countries whose situation is extremely dire, like India, Indonesia, Hungary, Poland, the Ukraine, and Venezuela.

I’m mentioning these countries individually just to stress that this situation is extremely serious.  It is also on a massive scale.  In virtually all of these countries currencies are plunging and so are bonds, which is leading to much higher interest rates.  And the cost of credit-default swaps in these countries is surging due to the increased credit risks.

So why are we seeing this major pressure in emerging markets?  People are worried about these countries’ ability to repay.  This fear was triggered by the Fed’s tapering announcement.  Most of these nations have very low reserves in relation to external debt, and they are totally dependent on rolling over the loans.

So what’s happening in the emerging markets is exactly what’s going to happen to all the major economies in the world.  Will we see contagion now?  Yes, it’s possible.  But the Western central banks will probably try to defer this by doing what Lagarde of the IMF just suggested.  She said that ‘deflation is disastrous for a global recovery.’  Of course the heads of central banks know this.  This is why they will increase QE worldwide.

It’s only a matter of time before the Fed reverses tapering and increases QE.  They will obviously blame emerging markets for this.  This may lead to a joint package between the Fed, the ECB, the Bank of England, and the IMF.

But the effective increase of QE worldwide will not result in any improvement for the world economy.  Instead, the global economy will continue to decline at a faster pace, as falling currencies create inflation, and, soon, hyperinflation in the West.

In the mainstream media we hear about how the US economy is improving.  Since the US economy is totally dependent on consumption, how can the US prosper when major retailers like JC Penny and Sears are closing a massive number of stores and firing workers?  We already know that 23% is the real unemployment in the US, and there are over 100 million in the US who receive some kind of government financial benefit.

If we look at bank profits, they are now coming under pressure in the US and in Europe.  Citi, JP Morgan, Deutsche Bank, are all seeing profits hurt due to tens of billions of dollars of litigation costs, bad debts, and falling trading profits.  So the fight for the survival of these banks will be fierce in the next few years.  In my view these banks won’t survive without enormous amounts of QE.

But since QE will have very little effect, central banks will eventually lose control.  There was a recent EU stress test study of the European banks.  This study came to the conclusion that European banks need $1 trillion just to withstand the pressure of the next crisis that is rapidly approaching.

This brings me to the gold market.  It’s important to understand that the move in gold is a consequence of what I’ve just outlined.  The decline in the US dollar was also the impetus for the move in gold.  It is the continued fall of the dollar which will make gold go to new highs in 2014.  Silver will also hit new highs this year.  This week was largely a dollar move in the price of gold, and silver has not yet followed gold’s breakout.  But silver’s move will come very soon.

People should not wait to buy gold at $1,100 or even lower.  It could happen, but it’s very unlikely.  Your gold must be held without counterparty risk and outside of the banking system, and with direct control for the investor.

So, Eric, remember that 2008 was just a light rehearsal.  What’s starting now will be much worse.  Anyone who isn’t fully protected by getting out of the system must do it now.  There will be exchange controls and bank bail-ins.  Sadly, this will be a year of disaster for people who are not prepared.”