International Man: Historically, financial markets have often ended in euphoric blow-offs or painful crashes. Do you think today’s environment resembles past periods like the late 1920s, the 1970s, or the dot-com bubble?
Doug Casey: There’s an old saying in the market: “Money makes the mare run.”
The markets have tended to move much more radically since the Federal Reserve, the creator of money, was itself created. For generations, we’ve had a whole class of market savants, known as Fed watchers, who try to second-guess what Fed bureaucrats are going to do with interest rates, bank reserves, and money creation, because they realize that those things translate into market action.
Because of the Fed’s increasing importance, you can expect more radical moves than ever in the markets. Compare it to an elevator going up and down with a lunatic at the controls—which impresses me as a good analogy.
International Man: Some argue we could see a final, euphoric rally—a “melt-up”—before any collapse. What would need to happen for that to play out?
Doug Casey: A melt-up is not unlikely. Trump is actively trying to control the Fed by replacing its governors with sycophants who see things the way he does. In other words, print lots of money and manipulate for low rates. Trump wants the Fed to do what he tells them, despite the Fed’s theoretical independence. Of course, Fed independence has always been a fiction. But if he succeeds in dropping the pretense, we can count on a genuinely wild and crazy monetary policy.
The odds of a melt-up are high based on that, despite some extremely shaky and unsound fundamentals. Frankly, the government almost has no choice but to keep printing and suppressing interest rates. If they don’t, the economy is likely to have a catastrophic, deflationary collapse. They want to avoid that at any cost.
International Man: If there is a melt-up, do you see it being concentrated in specific sectors like tech, AI, or commodities, or across the broader market?
Doug Casey: By every parameter, the market is more overvalued now than ever before in history. How you play it depends a lot on your view of history, your own psychology, and your own skill set. But right now, mining stocks and energy stocks are super cheap.
Mining stocks are particularly interesting. They’ve been in a quiet bull market this year, starting from extremely low levels. Many of the smaller, obscure stocks have tripled and quadrupled, completely under the radar. Who knows, or cares, what companies with market caps of, literally, a few million dollars do? Even if they go up a thousand times from here, they still only be “small caps,” too tiny for major institutions to buy. Some of the big miners have gone up 50% or even doubled. Despite that, they’re still close to the cheapest levels they’ve ever been in history.
I’ve always been friendly toward small mining stocks for reasons I’ve explained in the past. But especially now, since they’re at the beginning of a gigantic bull market. The market hates energy stocks as well right now, and they’re the other place to be. Many have dividends—depending on whether we’re talking oil, gas, coal, or uranium—of up to 10% or 15%.
The way I see it, the stock bubble is headed there. Should you stay in tech, which has been in a humongous, unparalleled bull market for what seems like forever? There’s another old market dictum: “High tech, big wreck.” It’s especially true when the whole world is concentrating on it. These stocks are, to use a patented Trumpism, “at levels you can’t believe, that nobody’s ever seen before.”
International Man: On the other hand, what do you see as the biggest triggers for a market melt-down? Debt, geopolitical risk, currency crisis?
Doug Casey: You just named the Trifecta of the next financial panic.
Debt is created directly and indirectly through the Federal Reserve, most importantly with the reserve requirements of the commercial banking system. A sound banking system would operate on 100% reserves. A dollar someone deposits for 3% might be lent for 6% for a one-year term. End of story. In today’s world, where money can be created by the banks, a dollar can be lent, redeposited, and used as a reserve to create more money ad infinitum. It’s a daisy chain based on nothing. That’s on top of the distinction between time deposits and demand deposits being totally lost.
Unlike the 1929 collapse, there’s now a huge amount of mortgage, automobile, credit card, and student loan debt. None of these things were problems back in the late 1920s. Mortgages were typically for five years. There were no student loans. Cars were bought with cash. Credit cards didn’t exist.
And on top of that, add government debt, which was trivial back then. Debt is the major risk for a deflationary credit collapse. If anybody can’t pay, neither can the next guy. Down go the dominoes…
Number two: geopolitical risk. The big current catalyst is tariffs. Bear in mind that the amount of trade in the world today—in both relative and absolute terms—is vastly greater than it was pre-1929. The Smoot-Hawley tariffs made imports too expensive for Americans. Since the Europeans couldn’t sell to us, they couldn’t afford to buy from us. The result was corporate bankruptcies and massive unemployment. That compounded the deflationary debt collapse. It’s much more serious now than it was pre-1929.
We should, rather obviously, include war as a geopolitical risk. The Ukraine war isn’t over by any means. In fact, it’s clear that Europe, idiotically, is gearing up for a major war against Russia. The Israel-Iran war isn’t over, nor is the Israel-Palestine war. That wouldn’t matter, except that the US treats Israel as the 51st state. And maybe we’ll see some problems with Qatar, whose security the US has just guaranteed—oddly, just when nuclear-armed Pakistan is guaranteeing the security of Saudi Arabia. We have lots of overlapping treaty obligations, similar to what we saw before World War I. The same thing could happen again.
In addition, Trump is looking to launch an unprovoked attack and perhaps an invasion of Venezuela. The geopolitical risk today looks extraordinarily high, as the US looks for new tar babies to punch around the world.
Number three: the currency. The whole world sees the dollar as a hot potato; it’s an unsafe, depreciating asset. As the rest of the world uses the dollar less and less, for all the reasons we’ve covered in the past, it will lose value rapidly. Remember, the dollar, not soybeans or Boeings, is by far our largest export, and greatest liability. At some point, trillions of offshore dollars will come home to buy title to American assets, and that will create a giant political problem. It’ll be bad for everything—except the price of gold.
International Man: For the everyday investor who doesn’t have access to complex strategies, what should they be doing right now to prepare?
Doug Casey: This question merits a book for an answer. But what stands out to me right now is that everybody and his dog is in the stock market. And unbelievably, over a third of the stocks traded today are ETFs. Of every description, even ETFs on just one stock, using debt or options to internally leverage the moves in that stock. While they can be convenient, ETFs amount to a scam for Wall Street to siphon an additional 1% or so of fees per year out of the markets. Their existence is further proof of how overfinancialized the US economy is.
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