Are you prepared for the Old Normal?

Increased globalization after the fall of the wall in 1989 spurred low inflation growth, which in turn increased willingness to take on debt — for governments, households and companies. The rising mountains of debt made the economy increasingly sensitive. As leverage grew, politicians thus provided a safety net, a “put”, in order to avoid a bout of deflationary deleveraging. Thus recurring central bank Buy The Dip action taught ordinary investors to do the same.


-Buy The Fucking Dip

Buying every dip, ever faster and with increasing conviction of the strategy’s efficacy pushed volatility to historical lows. Stock prices simply couldn’t fall as much as in the pre-BTFD era before buy the dippers pushed the price up again.

Low volatility, zero interest rates and central bank puts encouraged even more debt on all levels and every domain of the economy. Why wouldn’t you use some leverage to increase your earnings when it seemed basically risk-free. Growth over the last 10 years was “not great, not terrible“, but most likely way higher than it would have been without rapidly growing leverage. The 2010’s are widely known as the weakest economic recovery ever after a recession. That very fact masked that the asset price boom was the greatest and most insane on record, taking the valuations of stocks and bonds to levels never seen before.

The situation with very low volatility, zero interest rates, huge debts, maximum risk-on mentality, TINA (there is no alternative to stocks), 3x historical valuation levels for stocks*, and levered risk-parity trades, was dubbed “The New Normal”. Any sane person of course understood it wouldn’t last, but most people still couldn’t resist being along for the ride, hoping to get off at the top.

* Dr Hussman’s cyclically adjusted valuation multiples demonstrate stocks in February 2020 reaching levels more than 3x their historical norm.

Unfortunately, this time’s not different from all previous asset price bubbles. The cycle turns when it hurts the largest number of people. It doesn’t matter what the trigger is, but once th cycle is ready, it turns.

The Old Normal

So, you’d better prepare for a return to sanity, to historical norms, to the old normal.

The virus was just the trigger, the pin to the bubble, the smallest and first of dominoes.

As risk-parity schemes come crumbling down, causing simultaneous sell-offs in stocks and bonds, each catalyzing more selling in the other, an all but unstoppable deleveraging process is set in motion. Selling begets selling as more and more margin calls have to be met. Rising bond prices no longer cover for falling stocks — quite the opposite.

When leveraged bets are liquidated, excessive debt melt away and disappear, taking trillions of perceived wealth with it. That wealth is not easily conjured into existence again. Hence, the artificially high valuation levels have to return to their old normal, most likely not to be seen again for a generation.

After a decade or two of free money and high valuations, real value investors are few, small and far apart. The market will have a hard time finding the real bottom, until those investors find stocks interesting from a dividend or net asset point of view. As I keep repeating, when you pay for an asset, you want to know beforehand how to get your money back, from whom end when. Those questions were ignored so far in the 21st century, but I suspect they’ll come into vogue again. 

In addition to all the negative factors above, the measures taken to stop the Covid-19 disease from spreading might even trigger a de-globalization, as supply chains are disrupted, and trade wars erupt in order to protect the local economy. Just as globalization was good for growth and low inflation, de-globalization pushes growth lower and inflation higher. The same goes for the WWII age cohort retiring. It was disinflationary as it provided a large group of workers and investors, but now turn inflationary, while at the same time liquidating their retirement nest eggs. So, more inflation, less growth and lower valuations are to be expected all else equal.


The old normal, with lower valuations, lower growth, less debt, less easy money, more risk aversion, less get rich quick schemes, more inflation, is nothing to be feared. That’s how most of history has looked. We all managed quite fine in that environment.

What’s really good about all this, is that people in their 20s get to buy assets at reasonable prices — prices that promise decent or even good returns. And they didn’t have to see a life time of savings go up in smoke. If you only had invested in stocks for 0-10 years before Covid-19 hit, it’s too bad getting this re-set, compared to. e.g., those who are closer to retirement.

Imagine being 65+ in 2020. If the virus doesn’t kill you, the stock market crash (half of the downside still to go) ate your savings — and inflation will eat your promised state pension. That’s a tough deal, compared to a healthy 20-30-year old with a life time of investing at attractive valuations ahead.

But first a LOT MORE of the New Crazy

We’re not done yet, though. The plague is only reaching the end of the beginning (March 25, 2020) and it’s about to get orders of magnitude worse before we see the peak crisis, including lockdowns, economic effects and crashing markets. And politicians are set to release one stimulus package crazier than the last. 1 TRILLION, 10 TRILLION, 25 TRILLION USD… who knows where the new crazy will end. One thing is for sure though, gold is the place to be through all this.

The total market value of gold should be a certain percentage of the amount of money needed for the system to run. As the amount of currency doubles, the price of gold in that currency should double. And if the price of gold had lagged for some time, as it has, it’s likely to do some catching up. How does 10 000 USD/ounce sound to you?

(Just to get a feel for where the price equlibrium for gold might be, to cover 40% of the amount of money, M2, in the US, gold has to rise to around 25 000 USD/oz)





  1. Funny you mention 20 years of folly and gold lagging. Have you looked at a 20 year chart OMXs30 vs Gold? Which one is lagging?

    • It’s lagging the amount of money. For Feds gold reserve to cover 40% of M2 in the US the price of gold would have to be 24 000 USD/oz. I’d call that lagging ;)

      • Why would the total valuation of gold bear a constant proportion to the supply of money? The amount of mined gold in the world has certainly increased much more slowly than the total capital in the world economy, and no major currency is effectively tied to gold anymore.

        Also not sure that M2 is a good measure anymore, since most consumer spending is now on credit and consumer debt has been growing.

  2. Mr Sprezza,

    You mentioned getting back in the hedgfund business

    If you can lock in generational lows as your inception, Hedge Fund of The Century should be possible – for a man of your proven talents

    Good luck trading


  3. I’m not sure who your audience is. If you are directing your comments toward Sweden I agree that currency hedging is important. It is small economy. Hyperinflation is a risk. However, if the US is your audience I do not agree.

    The trillions the fed is giving banks ends up in assets, not goods/services. It will offset market losses in those assets. *Only* 2 trillion is being spent by congress. This seems like a huge number until you realize it is only 9% of GDP. Most of that will offset losses from sudden unemployment and business closures. In other words, I am saying the stimulus is only enough to somewhat hold off deflation.

  4. Good article, thank you. Globalization was already under attack. First Trump, then conservatives gaining momentum across Europe. Brexit.

    Since the late 80s I have argued globalization would be terrible for middle class workers. How could it not be when suddenly they are competing with 5 billion Asians who will work in horrible conditions for next to nothing? The media cannot censor a US president, so now there is a popular understanding and backlash. I’ve been saying unions and socialists who “claim” to be for the working class should be supporting Trump. They don’t really care about what they claim to, so we see political opposition.

    • Quite true. The last generation has seen a shift, from the US Democratic Party nominally representing the middle class, to its complete and unconcealed control by Big Money. The Republicans are not so homogeneous or well organized, but there has been a definite trend toward working-class goals: limiting immigration, limiting imports, lower income tax cuts, etc.

      Unions are totally self serving and are among the worst enemies the workers have.

  5. Some optimistic short- and long-term predictions:

    1. Hyperinflation. Inflation is already higher than you think; the U.S. started cheating on its Consumer Price Index in 1996 in order to phase out Social Security retirement (see Boskin Commission). It’s going to get a lot worse for two reasons: “Stimulus” rubbish and Pod People.

    The current economic crisis is, for once, a supply failure. There’s plenty of demand right now, but it has shifted away from certain things for good reason. Giving money to consumers will not cause them to spend more on restaurants or cruises. I doubt many are going to gamble it on stocks right now, either. Printing money will just drive up the price of tangible goods (mostly Chinese imports) without creating a single job.

    Pod People, addicted to their smart phones, are too lazy and distracted to do useful work. As older people die off, Western productivity will plummet, causing a *permanent* decline in the domestic output of services. The only strategy the US has to support the Pod People is to print money.

    2. The breakdown of international commerce and travel will be favored both by protectionism and by fear of disease. Large countries with a variety of resources, and those with planned economies, will suffer less.

    3. Socialism and totalitarianism will prove better able to manage pandemics, giving China a further advantage and possibly reversing its transition to capitalism.

    4. A lasting tendency to remote working, combined with an increasing number of worthless employees, could cause many salaried jobs to be replaced with task-by-task, no-benefits subcontracting. This work would migrate to Asia. Few Westerners will have a dependable income.

    5. Basic products will assume more economic importance for now. Healthcare and biotech will continue to expand. The market for luxury goods and services will become more erratic. Instabilities in supply and demand, caused (like the toilet paper crisis) by the Internet, will become common, creating opportunities for those with the ability to manipulate them. The (sort of) non-Socialist countries may have to resort to permanent rationing.

    6. Electricity will become much more expensive, and less reliable, as more “renewable” energy is introduced, driving up costs and shifting industry to countries using more fossil/nuclear power. Back-up generators will become a major consumer of petroleum – maybe even more than automobiles, as driving diminishes.

    7. High exposure to disease in large cities, combined with more remote work, will cause a mass migration to suburbs and semi-rural areas, with land prices changing accordingly.

    8. Confidence in both fiat money and the perpetual motion machine of the stock market will decrease. Investment will be driven to protected businesses, real estate, commodities… gold? The US$ will cease to be of key importance. But I doubt Bitcoin, not even legal tender anywhere, will replace it. There may be an increase in barter until China creates an acceptable money for the world.

    9. The forms of education could change dramatically. Remote work reduces the need for babysitting, and even in America some people will eventually realize (as China comes to dominate the world) that “education” ought to do some actual educating. The traditional model of packed classrooms and campuses also promotes the spread of disease, which will be a greater concern going forward (if we go forward).

    10. Retirement will disappear. Even now, most Americans keep working for some time after “retirement” to make ends meet, although the age of “retirement” has been raised faster than life expectancy (which may be decreasing soon). Elderly people will fill menial jobs that Pod People are too lazy for, and pay crushing taxes to support the young and able. When people realize that “retirement” is a mere fantasy, they will stop “investing” (speculating) to pay for it.

    • Wow that’s a great list of predictions. Why do you think the spread of disease will become a big factor in influencing US policies? Shouldn’t the advancement of biotech and healthcare reduce the spread of diseases?

      • It already has.

        If Covid-19 had appeared twenty years ago, as it certainly could have, it would have ended civilization. We can now identify new pathogens and develop vaccines more quickly, but not nearly fast enough. There’s a possible vaccine for Coronavirus that’s not supposed to be ready for /testing/ until *September*.

        Conceivably there will be some radical breakthrough in the future that will make viral infections as treatable as bacterial – but unless that happens, we are only going to see incremental progress.

        New pandemics are also going to be appearing at an accelerating rate as the human population grows exponentially. I do not foresee a time when the danger will recede appreciably. After a year or two, if things go well this time, caution will subside, but after the next bad outbreak, disease control will become a permanent central concern.

        And things may not go well this time.

  6. I like the latest podcast section. I see no problems whatsoever with what is said and I took all the information with me. The only question I have is why you complicate what cannot already be explained?

  7. Stupid question, but i read some articles that say that gold is not an hedge against inflation, its a hedge against deflation. Most say the best hedge against inflation is inflation bonds (TIPS).

    Can you just explain so i have a comeback to give when talking to people who say that?

    • Yep, that’s a stupid question and it should be obvious. A few things that might not be obvious:

      From Investopedia: “The semiannual inflation adjustments of a TIPS bond are considered taxable income by the IRS even though investors won’t see that money until they sell the bond or it reaches maturity.” Ooooops!

      The U.S. government does not report accurate inflation figures. The higher inflation is, the larger the discrepancy will be, partly due to the lag in collecting data and partly due to conflict of interest. Would you buy a car from a dealer that raised the payment every six months based on what they thought inflation had been?

      All bonds have a risk of default, including U.S. Treasuries.

      The price of bonds falls when the nominal interest rate rises. If inflation is 50%, 40% nominal interest would be a negative /real/ rate but bonds will plummet. TIPS bonds “should” go up in market price but probably more slowly than inflation. Moreover, since no one knows what the future rate of inflation will be, they could fluctuate wildly.

      In any case, as long as government keeps issuing more of these bonds, it will be unlikely for them to resell at higher than their nominal current face value, so their price growth potential would never be realized in a negative real interest rate environment.

      If I’m wrong, I’m sure someone will let me know…

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