The Coming Economic Crisis
Excerpts from a Speech at the California Club on 10 December 2003
by Kenneth J. Gerbino
The following fundamental facts will have, I believe, a strong impact on markets and interest rates in the coming year.
  1. Expected budget deficits.
  2. Weak dollar.
  3. $450 billion trade deficit.
  4. Stock Market (S&P400) at 24x earnings.
  5. Expensive war on terrorism.
  6. Artificially low interest rates.
  7. Unprecedented debt levels.
  8. Huge money supply increases (wealth from thin air)

I'm now going to list for you various areas that concern me:

  1. The Japanese Banking System.
  2. $170 trillion Global Derivative Market (Bank of Int’l Settlements) Unregulated, no standards, not listed on exchanges, not clearinghouse funded, counter-party defaults very possible.
  3. U.S. Government unfunded liability $44 trillion.
  4. U.S. Debt – All households, governments, business
    1980       $ 4  trillion
    2002       $ 31 trillion
  5. Economic expansion of 80’s and 90’s questionable.
    Dow  + 1,000%             Debt  +  700%
    Energy Consumption (barrels of oil consumed) only +34% in 20 years.
    New Cars sold annually only +38% from 20 years ago
    Conclusion:  The Stock Market and Debt grew 20-28 times more than energy usage and auto sales which are actual “real” goods and a better measurement of “real economic growth” not distorted by “paper money prices.” 
  6. U.S. money supply:
    1787 – 1970              2 centuries          $600 billion 
    1971 – 2003              32 years               $  6 trillion 
  7. Globally, money being printed at alarming rates. (In last 3 years:
    Japan +50% (M1);  U.S. +25% (M2)

My conclusions are as follows:

  1. Another 1966 – 1982 type stock market and economy (15 years) all over again for all the same reasons.  1966 Dow 1,000 – 1982 Dow 1,000.  Inference: stock market goes sideways at best.
  2. Increasing inflation, interest rates to rise substantially, stock market weak. Dollar much lower long term. Bonds much lower.
  3. Banking and debt defaults possible.
The U.S. is still the greatest country in the world and it will survive.  Financial assets in the next 2-5 years will be impacted because of severe monetary and economic distortions.  Currently preservation of wealth is senior to all other considerations.

Kenneth J. Gerbino



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