Keith Richards:
Every once in a while I like to try something different. Many of you are aware, I’ve been bringing in guests. So today we have a pretty neat guest because this is a fellow that I’ve been in contact with for many years. We share charts back and forth, and his name is David Chapman. People who are familiar with technical analysis might be familiar with David’s name. We were just talking about this and kind of laughing that I consider myself an old dog in this business. I’m 60 years old and I got involved in the business when I was about 29 years old.
So I’ve been about 31-32 years in the business and David has been in the business for 50 years.’ experience. So he’s been an analyst, he’s literally got 50 years of experience and I’m just going to read off my cheat sheet. He has served as a Chief Economist. He has been a Research Analyst. He has been a Technical Analyst. When he started off, he worked in the money markets and capital markets very early in his career. He’s got a very deep background and he is been on the floor right up to the analyst level. His specialty is really macro work. So he’s very, very good at looking at the big picture. He brings in all kinds of interesting stuff that I never talk about so I think you guys are going to find this interesting.
So your area, the thing you like talking about, is the big picture. In case any of the viewers haven’t noticed the market has been in a bear market for the past year. I’m sure everybody’s noticed that. So the real question on a lot of people’s minds these days is where are we, where are we going, and sort of a macro picture thing. David, if you don’t mind, start off by just giving some highlights on your sort of big-picture view of things.
David Chapman:
This has been a very interesting bear market so far because it is what 10 months or so into it? Historically, that’s about the length of a bear market but there are a lot of markets that stretched on for two, or three years. This one is beginning to give off the picture of a market that is going last two, or three years. We haven’t found the bottom yet. I highly suspect by the time we’re finished, we’ll certainly be down about 50% from the highs of January 2022. There are a lot of reasons why this is happening. For years, guys like me hammered on the fact that they were keeping interest rates way too low for way too long. They were pumping far too much money into the financial system through QE and allowing the banking system to expand itself in a huge fashion and that resulted in bubbles.
There’s never been a bubble I’ve ever seen historically that has never burst. It was funny because the 1990s was the decade of the high-tech dot com bubble. The two thousands were the bubble of the housing market, particularly in the states and elsewhere. They all got burst in the subprime mortgage collapse and the financial crisis that almost brought down the entire financial system. It was called a Great Recession for good reason. It was the deepest one since the Great Depression. It didn’t turn into a great depression because they had tools that they were still utilizing, quantitative easing, and interest rates at zero, but they kept them there for way too long. The result is that now we’re entering, what I believe is, a historical bear market of greater proportion that only occurs, by calculations that I looked at and have read from some other analysts, roughly every 90 years.
And the last one, of course, was the Great Depression. That was 90 years ago now. I was able to go back to about mid 1500’s and I counted out some very big depressions roughly every 90 years. The last one was in 1932. So now we’re into the period of a potential new Great Depression. Some guys are calling it the Greater Depression already and in theory, we are not even there yet. Depressions are not only characterized by a big bear market, they’re characterized by currency wars, trade wars, and real wars. We have all three of them present today. Historically, when I looked at all of those, and even going back further although I didn’t have charts or anything to really count back further, was that whenever an empire grows it eventually gets beyond itself and it gets challengers to its top dog.
Of course, the big Kahuna on the street has been the United States of America since 1945. Some people will say it’s being challenged by Russia, which it is, but the real one is the rise of China. The previous depressions saw the end of the British Empire. Two World Wars finished the British Empire as a major entity and it was when the United States empire effectively took over. I could go back further. The challenger for the British Empire was the growing German Empire and no surprise, they eventually ended in war. But prior to all that, which most people don’t really pay attention to, there were currency wars, and trade wars, and then they intensified in the 1930s and they fought the wars all over again. So here we are.
Keith Richards:
You sound like you probably read the book The Fourth Turn then. It’s interesting because another guest and a long-time friend of mine, Brooke Thackray, introduced me to that. You probably know Brooke. He’s a seasonal guy. Brooke introduced me to that book and, yes, I understand what you are talking about. It’s basically a changing of the guard is what you’re saying.
David Chapman:
It never goes easy and it takes years.
Keith Richards:
Yeah, the big picture
David Chapman:
Maybe a couple of decades. The only problem is that this time everybody’s facing each other with nuclear weapons. We don’t want to know how that one ends.
Keith Richards:
It’s interesting you said you think the market can be cut in half, and I sent it to you, David, but I posted a blog called “The Worst Case Scenario”. It’s got a line that’s very similar to the work you’ve looked at. It’s a big long trend line going back a gazillion years. Basically, the intersection of most large long-term support and that trend line comes in around 2400-2500 for the S&P and that lines up with what your comment is about a 50% haircut from the 48-something that we hit.
David Chapman:
I was looking at 18 to 20,000 for the Dow.
Which would effectively cut it in half.
Keith Richards:
I quoted in that particular blog Jeremy Grantham who has been in that camp. So a 50% haircut is on the market is actually not, when we talk, unusual.
David Chapman:
We actually saw it in both 08-09 and 01-02.
Yes, 01-02, we saw it in 73-74.
Keith Richards:
The Nixon thing and the Cuban thing.
So it happens. In fact, I’ve been spelling out to my readers of the blog and whatnot that there are different levels of support, but the ultimate level would be around 2,500.
David Chapman:
Well, even we’re guessing. We’d hate to think that it would be a Great Depression-type collapse. That was 90%.
We don’t want to go there.
Keith Richards:
We won’t bank on that but anything is possible.
David Chapman:
As I even point out, there are a lot of numbers coming out. The last job numbers weren’t horrible or anything like that. We don’t have huge lineups at soup kitchens, although I’ve picked up figures for food banks, and apparently, they’re up sharply in the States and in Canada. We don’t see people riding on the rails. We don’t see tin shack camps, but we have tent camps in our parks. Homelessness has risen despite the fact that markets went to an all-time high because the divergence between, let’s call it those that have it and those that don’t, has just gotten wider over the years. The policies of the central banks and the governments, they’re all at fault, everybody’s to blame. Favored more people to get rich as opposed to raise poverty levels and massive inequality always ends badly.
The worst case is, Keith, we don’t want to know about it because they commonly chop our heads.
Keith Richards:
Maybe there’s going to be benefits to being poor. Just for the audience, FYI, David is one of these people that has his formal training is in economics, but he’s got such a broad understanding of so many different topics and analysis. One of them is, he doesn’t claim to be an Elliot Wave expert, but he has a pretty decent handle on it, probably a better handle on Elliot Wave analysis than I do. I noticed on the Dow chart you sent me, there were some Elliot notations. If you don’t mind, I want you to walk us through this.
David Chapman:
Well, this one obviously starts from the period of the Great Depression and this is a labeling of another Elliott Wave analyst by the name of Ron Rosen. I’ve seen other people label it slightly differently, but the end result is largely the same. Out of the Great Depression, there was a big monstrous wave down and then followed eventually by a big monstrous wave up, which topped ultimately in 2000 with the dot com bubble. The intermediate waves were at the top in 1937, the bottom in 1942, and then the third wave up took us to 1966. That whole period of 66 to 82, which was that rough little period there, is our fourth wave and the fifth wave up. Elliot Wave theory in some ways is quite simple.
They rise in five and fall in three but getting there sometimes can be extremely complex. What’s easy about looking at a big monthly one is the waves just leap out at you as it did on this one. They just kind of leap out at you. Whereas if you try to do it on a day-to-day basis or a short-term basis, you get buried and I don’t even try. Nonetheless, it was a very important top in 2000 and that created what we called wave four of this wave up which was made up of a very nice ABC, the ’02 bottom, the ’07 top, the ’09 bottom. What we’ve been in since then is wave five and wave five is a very speculative wave to the upside and ends in a bubble as well. That bubble has probably now burst, but it isn’t finished by any stretch of the imagination. This is my third major bear market since I came into this business in the late sixties. Of course, the first one was the era of 66 to 82. The second one was 2000 to 2009. But this is a big one because it looks like a fifth wave is topped and if a fifth wave has topped, we’re in for more of a correction on the scale of the Great Depression.
Keith Richards:
That is scary every time you talk.
David Chapman:
But it doesn’t necessarily mean stock markets are going to fall 90%, which they did. Actually, it’s not drawn on there, but that whole period from 1929 to 1949, if you look at it carefully you would notice that if you drew lines through there, that it formed a very lovely symmetrical triangle, which had burst out in the early 1950s.
Keith Richards:
Yeah, I actually can see that.
David Chapman:
If you were to draw lines from that bottom in 1932 and draw them along the bottom of that 1974 bottom, it actually comes in somewhere around 8,000 today. So you’d have to go to the steeper one starting from that 1982 low and draw it up connecting the 2009 low and you would find that today it comes in around 18,000 on the Dow Jones. That’s why I figure if things return to the mean, 18,000 would be about a 50% correction in the Dow Jones and would not be out of the question because historically, all through those earlier periods, every time things did get out of line, they have all returned to the mean or went below it or they spent a period below the mean in order to keep the average going up. Yes, stocks only go up over a long period of time, but there can be very long periods where it takes you years to get back to break even. From 1929, I think it took to about 1954-55. The 1970s one, I think it took to about 85 or 86 before that.
Keith Richards:
That was a 17-year period where the Dow couldn’t crack a thousand.
David Chapman:
Yeah. The 2000-2009 period it took to around 2013-2015.
Keith Richards:
It was August 2013 before it broke out.
David Chapman:
It’s kind of simplistic because we know darn well this is a buy-and-hold guy that just buys and then just rides through the whole thing. Speaking of riding through the whole thing, something I’ve always told my clients when I was a stockbroker and you probably do the same thing, is you never sell into panics because you’re usually selling at the bottom.
Keith Richards:
That’s right. Actually, my audience knows this, but my specialty is in sentiment trading. So you can use tools to actually help you find out when money is panicking and when money is exuberant. Most certainly, we got all those exuberant signals at the end of last year where I was selling out, and I’m sure you were too.
David Chapman:
Different portfolios though.
Keith Richards:
That brings up another subject of the portfolios though. I notice you’ve overlaid gold here, but we’re talking Elliot Wave, so would you mind if we discussed this because gold is one of the things you like talking about lately. Just as an aside, I have avoided gold for many years, for good reason. It hasn’t gone anywhere, but we just started buying at ValueTrend, and we have never been gold bugs or anything, but we have been buying gold this year because probably some of the reasons that you’re going to talk about more inflation and currency overvaluation. So let’s talk about that.
David Chapman:
Quick background on my interest in gold was that on my resume I spent a number of years running the International Money Desk at the Canadian Imperial Bank of Commerce. And while running it, a steady buyer and seller of our Euro loans was our precious metals desk, which kind of tweaked me. Why do these guys always do this? So I wound up spending a week or so sitting with the precious metals desk learning all about their business and eventually it translated into an interest in the history of gold as money because. The history of gold as money goes back 3000 years. There have been periods of experimentation with what we call fiat currencies in the past and every experiment with fiat currency in the past has failed. As with most things, they don’t fail overnight.
Our current experimentation dates from August 1971 when the United States of America took the world off of the gold standard when the US dollar had been convertible as a result of Bretton Woods at the rate of $35 an ounce. A curiosity that most people probably are not aware of was Bretton Woods was 1944 and by 1950, the United States had the world’s largest gold reserves. They had over 20,000 tons of gold. By 1970-71, they were down to 8,000 tons of gold and the reason was quite simple. As the US dollar sloshed around the world for two prime reasons, one the Marshall Plan and two the Vietnam war, central banks of the world kept running to the Federal Reserve and saying, “Here’s my dollars, give me the gold.” There was a large claim at $35 an ounce in the early seventies and the United States of America effectively defaulted.
Keith Richards:
Very cool.
David Chapman:
How do they do that? They closed the gold window. That was the end of the gold standard and our latest experiment in fiat currencies. Fiat currency is basically the issuance of currency that the government says “this is the currency and it is worth what I say it’s worth”.
Keith Richards:
During the American Revolution, it happened.
David Chapman:
Absolutely. It happened during the US Civil War and there had even been periods before that. Historically, people would be curious to know that China was one of the first countries in the world to issue paper money. And that was way back, my memory slipped me here, like 12th, 13th, 14th century, somewhere in there. Yeah. Of course, it failed miserably because they printed too many and it eventually collapsed upon itself.
Keith Richards:
That doesn’t sound familiar today at all.
David Chapman:
Well, curiously, and it’s not surprising, if one looks at the growth of money since 1971, the growth of money has gone parabolic.
.
David Chapman:
I’ve never seen a parabolic move not collapse. They all seem to collapse historically. So are we going to collapse? Is this the time that we’re going to collapse? I don’t know. I can’t answer that. Very simply, the labels were very obvious again. For years the gold was fixed at $20.69, I believe it was. Revalued up during the Great Depression under the Roosevelt administration, which was really just a devaluation of the US dollar, which had gotten very expensive at the time because of people rushing to the US dollar out of World War I and various other things. So that peaked and gold went into a nice flat period, basically the $35. Of course, that began to change in the very late sixties when the London Gold Exchange failed.
Then there were also other problems and it resulted in the 1971 removal of the gold standard completely. Remember after Bretton Woods, currencies were fixed to the US dollars within trading bands. A few years after 1971, currencies were set to float against each other. The 1970s was a huge non-confidence in the US dollar as a result of things like the Vietnam War, Watergate, et cetera. The US dollar went steadily down but what did gold do? It exploded to the upside now that it was free to trade rather than being fixed to the US dollar. That peaked in 1980, which is wave five there, and then followed a rather grinding, steep, frustrating for the gold busts, 20-plus year correction that bottomed in 2001, and then gold started to rise again.
The primary reason gold started to rise again was actually, again, currency problems with the US dollar. Again US invasions out of 911, Afghanistan, Iraq, I could go on and there was confidence being lost in the US dollar. Eventually, that peaked in 2011 and then we went into a correction. But if the major correction was that big ABC from 1980 to, I think, the final bottom was 2001, what we’ve been going through over the past little while actually was the wave two of a new five wave up. So we’re actually, I think, still in the early stages of wave three up which, if you’ll notice that from wave two at the bottom in 1970-71 to wave three in 1974, was quite a sharp move. So while we’re going through a correction right now, I don’t think it’s going to be a devastating correction, and it should eventually result in a new big up move.
Keith Richards:
Similar to the move that took us into the early seventies.
David Chapman:
Exactly. And it is a result of current currency wars that have been ongoing probably really since the last decade. It’s quite fascinating that the US dollar has been very, very strong, and for good reason. You have got a war over in Europe and countries like Japan have got low inflation, so they don’t raise their interest rates. There’s been some shakedowns and lockdowns and all sorts of problems in China, and the result has been that there’s been a lot of capital flow out of those countries. Where do they go? They don’t go to gold. They go to the US dollar.
Keith Richards:
Flight to safety.
David Chapman:
The US dollar is viewed as the flight to safety and the result is the US dollar keeps going up. But that in itself is causing a problem in that you’ve got all these currencies now falling, and we’ve been reading constant stories lately of central bank interventions. The worst one being over in the United Kingdom where the Bank of England has been on intervention almost on a daily basis in order to save the pound from collapsing into, I don’t know what, oblivion I guess.
On the subject of currencies, you’ve given me a couple of charts. I know one is a currency chart.
Yeah, that’s a really big picture. The other chart is of the other currencies. The more current one is the current situation.
I can’t show everybody’s currency, but if I could the picture would be the same. Gold in other currencies has broken out, and has been up at or near all-time highs. The two best ones there are the Japanese Yen, which is the fourth one down, and the British pound. They are not far off their all-time highs. In fact, the pound, who knows, it might even be making new highs. But if you look at the bottom, I got gold in US dollars, and it’s just been in a steady downtrend. It hasn’t even broken out. When the gold in US dollars breaks out and starts rising in all currencies, then we’re going to have a big move. I’m not quite sure what’s going to trigger it, because the US dollar is causing a problem. Too many sovereign countries and corporations have borrowed their home currency. The result is they have to pay back increasingly expensive US dollars, but their earnings are in their home currency. So let’s use the Japanese Yen as an example. If they borrowed in US dollars, they’re constantly now having to pay back more and more US dollars and depleting Yen.
It is a problem for them, and it’s going to be a problem for the earning season because the multinational corporations of the United States, the bulk of their earnings are in foreign countries. So they’re going to be in foreign currencies, which they have to translate back to US dollars, and they’re going get a lot fewer US dollars than they used to get. So we got two potential explosions coming here. Lower earnings, which is going to lower the stock market probably further and we got sharply rising currencies. The currency war is effectively going on because it almost becomes like a race to the bottom. It helps their exports, but, boy, does it make those imports more expensive, especially oil.
Keith Richards:
I should just mention that these charts are not actually the currency. This is gold versus the currency.
David Chapman:
Yeah, all I’ve done is I expressed the gold in Canadian dollars, I expressed gold in Euros, expressed in Pounds, expressed it in Yen and of course, the one at the bottom. The US dollar is the world’s reserve currency so everybody thinks of all commodities in US dollars. That’s the way they quote it. If I put up a chart of the S&P 500 in one of these foreign currencies, it would look a lot better than it does in US dollars. They would still be losing money, but not at the same rate. In other words, in its fall because their currency has devalued. So the fact that the S&P 500 is in US dollars means that in their own currency it is more valuable.
This chart is a really long-term one, and one I used in a money show here a few years back when I was trying to trace that a reserve currency does not last forever. I always like to think of the first reserve currencies that were noticeable and were really going back to ancient history for a couple of centuries or so. The Greeks issued a beautiful silver coin with an owl on it. It was known as the Athena Owl, and it was the currency of choice for trade back in the Greek Empire somewhere around 400, 300, 200 BC, somewhere in there. Eventually, they were replaced by the Roman Empire, and their currency, one that was widely used in trade was the Roman denarii. Well, like all currencies even back then, those currencies eventually collapsed.
The Roman Empire, in particular, almost sounds just one of those repeating things that just goes on and on, foreign wars. Eventually, they started devaluing the denarii by cutting the amount of silver in it. It had the same effect as printing a lot more money until eventually, it came to the point in the late fifth century, I guess it was, that whatever the government of the day in the Roman Empire was issuing, nobody even wanted it. It was just junk. Out of that rose, at the time, the currency at the time was the gold denar or the gold solidus it was called in the late fourth and fifth century, and into what was known as the Byzantine period after the Roman Empire broke up which was basically Eastern Rome and then that saw the rise of the Arab states.
If people don’t remember their history, they ruled all of Southern Europe from about 700 AD to about 1400 AD. But eventually those saw the rise of other powers.
One of the first ones actually was a Venetian denar but eventually, it became replaced by the Portuguese one. The Portuguese were huge traders. Their currency became widely recognized and was used extensively around the world for about a century or so. As all of these show, there was a huge lead in the period where the currency is there, but it’s not the dominant currency. Eventually, they become the dominant currency, but eventually, they get challenged.
Their empire gets defeated in a war and another guy rises. Of course, the next one was Spain, who ruled roughly until almost the 17th century till they were defeated initially by, well it was a combination of the British and the French, but the one that really rose to prominence was the Dutch Gilder. They had their period that lasted well into the 18th century. Again, wars broke the Gilder. They lost the wars. They lost it against France. They lost it against Britain and the Dutch Gilder disappeared into the sunset to be replaced by the French Frank, which lasted, basically as a global currency until 1815, which actually, if people know their history, was a rather deadly day for France when they lost the Battle of Waterloo and the prominence rose to the British Empire. The British Empire Pound Sterling dominated for the next hundred years.
There’s always a challenger to every one of these. Portugal was defeated by Spain. Spain by the Dutch. Dutch by the British and the French. The French by the British. It wasn’t the Americans who defeated the British. Their challenger at the time was the growing German empire, which I say is China today. Some may disagree, but today it’s China that is challenging the dominance of the US currency has the global hegemony. While the US Reserve currency remains probably at least 60% in central banks portfolios, say they do have other currency, the Yen has been growing, but it is still not dominant.
That’s actually an amazing chart. I’m actually probably going to put that on my blog at some point if you don’t mind. I’ll credit you with it.
I guess it was probably a better lead-in when I did that thing for the Money Show a couple of years ago called “A Reserve Currency Does Not Last Forever.” So that kind of leads us into the period of the dominance of the US dollar, which has been the dominant currency since 1944, and Bretton Woods but it was also rising out of World War I because the British took a beating. They won the war but took a beating. By the end of World War II, they were beaten and by the 1950s and sixties, the old British Empire is falling apart at a rapid pace. So today we have the American Empire. Although many people claim that oh, how can it be the American empire?
I always say, well, they have 800 military bases all around the world and if you go and check with China and Russia having military basis around the world is puny, it’s nothing. The United States of America is the global hegemon. The major world institutions, IMF, World Bank, SWIFT are all dominated by the United States of America. And that’s why led by China, again, in combination with Russia, they have been trying to build their own IMF build their own World Bank, and build their own SWIFT system to get out from under the dominance of the US dollar. In all previous cases, the dominant economic power, in this case the US, had to somehow destroy the challenger.
Keith Richards:
There you go.
David Chapman:
So today America faces China and Russia, and how do they destroy them without destroying us all?
Keith Richards:
Because they have those nuclear things, don’t they?
David Chapman:
Yeah, those little nukes that both China and Russia have.
Keith Richards:
Putin has even talked about using smaller nuclear weapons, not the real ones.
David Chapman:
Something people never pay attention to, but there were other reasons behind the American invasions of Iraq and Libya that were lost in the dust of bombs dropping. When Iraq had made it crystal clear, which was they were being challenged by the United States at the time, made it was crystal clear that they would no longer accept US dollars. They would only accept Euros or other currencies for payment for their oil. The US slapped them down with an invasion. Libya was the same thing. Mr. Gadaffi was trying to form a Pan-African group of countries that were going to use the gold denar as the dominant currency. Again, a challenge to the dominance of the US dollar at that time, take out Gadaffi. I’m not saying Gadaffi and Sudan are good people, don’t get me wrong. I’m merely pointing out the fact that currency wars were actually behind the invasions. But that’s not what the public was told of course. How do they say we’re going invade Iraq because they’re going use the Euro instead of the US dollar. I don’t think that would go over very well.
Keith Richards:
No.
David Chapman:
The challenge today is the growing use of the Yen, particularly throughout Asia and trade wars. It’s amazing that trade wars are at the center of this because leading up to World War I, there were trade wars and currency wars. Leading up to World War II, there were trade wars and currency wars, and here we are again. We’ve had trade wars under the administration of Trump they put all sorts of tariffs on China, and there was retaliation. Even tariffs were put on Canada and Canada had to retaliate for Pete’s sake. The other side of it was that sanctions are really just another form of a trade war. The country that is being sanctioned will find all sorts of ways to get around them.
Keith Richards:
It is amazing stuff, David. What I’m going to do is get you to maybe shoot me a list of recommended reading material for readers that are interested in the subject of the history of currencies and we could talk about the Fourth Turn, we already mentioned, but those kinds of reading materials that you might recommend people read to sort of expand their knowledge.
David Chapman:
Well, it’s basically reading about history.
Keith Richards:
Yeah. Amazing stuff. My dad was a historian.
David Chapman:
I always say, history doesn’t repeat itself, but it does rhyme.
Keith Richards:
It rhymes. That’s right. Well, David, this has been a very fascinating interview and it’s been very different from many of the other interviews I’ve done. I think our readers are really going to enjoy.
David is on the board of directors for Enriched Investing. As I said, just shoot me a list of reading material and whatnot, and I’ll put a link to you. www.enrichedinvesting.com
Thank you, David and we’ll keep on communicating. Every once in a while I quote your work so it’s been amazing to have you on.
