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After years of almost unlimited credit growth, we are now heading for a severe recession and possibly even a depression. That's according to historian and analyst Eric Mecking of Geotrendlines in a interview at Holland Gold. Rising interest rates are bursting the bubbles in stocks, bonds and real estate, with the latter in particular hurting a lot. He foresees a 'perfect storm'. What do we need to take into account?
Mecking expects the turnaround in the housing market to have far-reaching consequences. Not only in the Netherlands, but also in many other countries where house prices have risen sharply in recent years. In the upward trend, people took up extra credit and equity, which boosted spending and investment.
But now that house prices are falling, that trend will completely reverse. According to Mecking, more households will now keep their hands on the purse strings and become cautious about large spending. Moreover, they already have less to spend due to high inflation. According to him, we are only at the beginning of this downward trend, which will lead us into a recession.
Last summer, Mecking used technical analysis to signal that house prices had peaked. He is referring to the fifth wave of the Elliott Wave Principle, the last phase of an uptrend in which prices rise the fastest. The sentiment is then very positive and we saw that reflected in the extreme overbidding on the housing market until the beginning of last year.
We are now on the verge of a long downward trend, as prices have to find a new equilibrium. The excesses of too much credit must first be eliminated. It's nice for people who want to buy a house that the housing market cools you down a bit, but at the beginning of a long downward trend you shouldn't buy. That's why Mecking advises against buying a house now.
According to Mecking, the money supply has risen spectacularly in recent years as a result of low interest rates. This has pushed up the prices of shares, bonds and real estate considerably in recent years. "We've created an of guilt." This is very different from the inflation that we have seen reflected in the prices of goods for just over a year. According to Mecking, this is mainly the result of supply shocks in the economy, such as the lockdowns and the war in Ukraine.
Central banks have played a very bad role in recent years, according to the historian. "They've let themselves be pushed all the way into a corner. They've been asleep and manipulating things for ten years." According to Mecking, they should have raised interest rates much earlier. Now, some central banks are in dire straits, as they are starting to make losses on the bond portfolio. Several central banks foresee that their equity will become negative.
According to Mecking, this is one of the signs that the debt bubble has reached its limits. That gigantic credit bubble can no longer be inflated any further. Indicatively, bond prices have fallen and the traditional 60/40 investment portfolio has shown significant losses last year. "That's a bad sign that the system is no longer functioning as it should."
According to Mecking, the past three decades have been dominated by globalization. We benefited from cheap stuff from China and cheap energy from Russia. Now two power blocs have emerged, the West on the one hand and the Asian countries on the other. This is historic, because we are now moving towards de-globalization. That means more inflation and more geopolitical tensions. And that will turn the economic balance of power in the world upside down.
According to Mecking, the euro could also succumb to this scenario. If we are facing a time of (economic) warfare, this will put pressure on solidarity within currency unions. Proportions are already very skewed in the eurozone, with large differences between countries such as Germany and Italy. If the pressure increases, the euro could also fall apart, Mecking fears.
According to the analyst of Geotrendlines, nowadays you should not look at how much return you can get, but make sure you get your investment back. He expects more ponzi schemes to surface worldwide in the near future, as recently happened with the crypto exchange FTX.
According to Mecking, it's now more important to get your money back than to make a return. He sees gold as a valuable asset within the investment portfolio, because it has no counterparty risk. This allows you to take your assets entirely under your own management. "With a government bond, you are dependent on the government."
According to Mecking, those who are willing to speculate can make a lot of money by going short in these turbulent times. However, he does not recommend this for everyone, because it is also very risky. "But that's also the nice thing about investing, you can make money in both directions."
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