Veteran macroeconomist Alasdair Macleod recently issued a stark warning, arguing that the valuation bubble in the current US stock market has surpassed the levels seen just before the 1929 Great Depression. He predicts that as core overseas buyers like Japan accelerate their exit from the US Treasury market, Treasury yields will face an uncontrollable upward spiral, ultimately shattering the stock market bubble. When that happens, the S&P 500 could face a devastating crash of over 90%, and the only ultimate escape route for investors seeking to avoid risk will be a shift into physical gold and silver.
Macleod’s core thesis lies in dissecting the nature of the modern financial system. He points out that investors commonly confuse the concepts of “credit” and “money.” In the modern paperless trading system, whether stocks or bank deposits, they are essentially layers of packaged debt obligations. Stocks do not constitute direct ownership of a company but are indirect claims held through Central Counterparties (CCPs); bank deposits similarly bundle the solvency of commercial banks with the fiat credit of central banks. He argues that once rising systemic risk causes the credit chain to break, these financial assets will expose severe counterparty risk.
Macleod stresses that only physical assets like gold and silver, which can achieve “final settlement” without carrying any outstanding debt obligations, are real money. He notes that major central banks around the world have been persistently selling fiat currencies and heavily accumulating gold in recent years, precisely out of a consideration to liquidate credit debt in exchange for physical currency.
On the debt front, Macleod points out that the United States is deeply mired in a “debt trap.” With a massive debt base of nearly $40 trillion, rising bond yields have significantly inflated the Treasury Department’s interest costs, forcing the government into a vicious cycle of borrowing new money to repay old debts. Contrary to common market perception, the largest overseas holders of US Treasuries are not foreign governments, but Japanese commercial institutions represented by Japanese pension funds and insurance companies.
Macleod observes that these major overseas buyers are now quietly exiting the US Treasury and European bond markets. Simultaneously, the yen carry trade is also facing unwinding pressure. He estimates that the US faces a financing gap of $10 trillion to $11 trillion over the next 12 months, combining bond maturities requiring refinancing and fiscal funding shortfalls. The drying up of buyers will force US Treasury yields to continue rising, ultimately compelling the Federal Reserve to step in with massive money printing, thereby triggering inflation and a collapse in currency purchasing power.
Regarding the stock market outlook, Macleod holds an extremely pessimistic view. He believes that the business model of financial intermediaries dictates that they must constantly persuade retail investors to “buy and hold,” which has bred a blind optimism that US stocks will never crash. However, the current divergence between US Treasury yields and stock valuations has reached an unprecedented extreme in financial history, a bubble even more severe than in 1929.
He predicts that once Treasury yields break higher, it will directly shatter the valuation foundation of stocks. Considering that overseas investors hold a massive $22 trillion position in US equities, a surge in yields will trigger simultaneous large-scale liquidation and selling by both foreign investors and domestic US institutions. Amidst drying market liquidity and a valuation reset, the S&P 500 could easily wipe out more than 90% of its value.
On hedging strategies, Macleod believes that most investors allocating 1% to 5% of their portfolio to gold is merely an illusion, because 99% of their assets remain exposed to credit risk. He analyzes that at the onset of a crisis, investors may sell financial assets to seek refuge in US dollar cash. However, as the Federal Reserve embarks on a frantic money-printing spree, the market will quickly realize that the purchasing power of cash itself is also plummeting. When public confidence in the fiat currency system is completely shaken, the only way to avoid risk is a full-scale shift into physical assets such as gold and silver.
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