Just a week after this Financial Blog highlighted a Black Monday for stocks and bonds the second largest bank in the UK has decided to join the call. The Royal Bank of Scotland has told clients to expect a global stock and credit crash within the next three months. Cash and precious metals are the place to hide.
In a Daily Telegraph scoop today the bank warns that the S&P 500 will fall by more than 300 points to around 1050 by September. This Wall Street crash will reverberate through Europe, Asia and the emerging markets, and amount to ‘one of the worst bear markets over the last century’ adds the paper.
The bank commented: ‘Cash is the key safe haven. This is about not losing your money, and not losing your job’. Effectively the central bankers of the world are paralyzed by inflation. Easy credit will further fan inflation while tighter credit will smash economies already under pressure.
The RBS team concludes: ‘The Fed is in panic mode. The massive credibility chasms down which the Fed and maybe even the ECB will plummet when they fail to hike rates in the face of higher inflation will combine to give us a big sell-off in risky assets’. Then the bank thinks the oil price will fall back as debt deflation grips the world economy.
Does this mean that the Fed will not dare cut interest rates in response to a Black Monday on Wall Street? I don’t think so. The fear of inflation will go out of the window as the greater evil of an economic depression raises its head. ‘Helicopter Ben’ Bernanke will be true to his reputation and pour money into the system.
More inflation will follow but tumbling monetary aggregates in the major global economies already suggest that the systemic risk of higher inflation will not be that great. In short the deflation of housing markets is now so strong that the money supply is static or falling.
However, newly printed dollars from the Federal Reserve will not necessarily be immediately spent on assets that are falling in value. They are more likely to be directed into the commodities complex and keep oil prices high, especially as the dollar will weaken very substantially in this scenario.
Expect precious metals to soar in value as investors channel their money into smaller and smaller rising investment classes, and the dollar tanks to $2 to the euro. Adjusted to reflect the oil price increase since the 1980 all-time high, gold should currently be $3,100 an ounce and silver $194, and a correction to these levels should be anticipated.