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On the heels of Germany looking to repatriate their gold, today King World News spoke with top UBS analyst Peter Lee about his rather frightening forecasts for the US dollar and equities. Interestingly, his call for the dollar to plunge comes right after Germany expressed that it wants its gold out of the Fed and back inside German vaults. If Lee is right in his outlook, this will have massive global ramifications. Lee also provided KWN with some incredible charts to back up his rather ominous predictions for both the dollar and equities.
Here is what top UBS analyst Peter Lee had to say, along with powerful charts: “We are nearing a couple of inflection points coming up in the markets. There is a distinct possibility that all of this converges in the upcoming two-year window between 2013 and 2014. This will be greatly impacting equities, bonds, and currency markets.
We are about to enter this convergence period, and we suspect in the second half of this year and into 2014 we will see a great deal of major movements in these financial markets. The charts below go back to the Great Depression when we had an 85% drop in the S&P.
What is very interesting about these particular charts is the debate between the bulls and the bears as to where the market gets ‘cheap.’ So the question is, at what level will the market have to fall in order to create a buying opportunity?
The bears are claiming the market has to go down to the green line, which is the 1932 trendline (this would represent a catastrophic 72% decline). We believe the market doesn’t have to go that low. Currently the 1932 trend line is at 414 on the S&P. Two years from now that number will be higher, somewhere between 450 and 500 on the S&P because it is a rising trendline.
We believe the right call is, we are going to do a ‘mean reversion’ towards the red line. The red line represents the trendline back to 1942. The reason we believe this is the correct call is because you can see a series of successful tests of that red trendline at various points covering the 85-year charts.
The most recent test was the March 2009 low at 666 on the S&P. At that time the trendline was up into the low 600s, at 620, 630. So we were within striking distance during that panic. This 1942 trendline should be somewhere in the 850 area or above by 2014 (this would represent a horrendous drop of roughly 42% on the S&P).
Eric King: “Either way we are in for one hell of a rough ride for equities.”
Lee: “We’re not done yet. Everyone thinks that we’re nearing the end of the bear market, or structural sideways trading market. We suspect we probably have another 5 to 8 years of this. No one wants to hear this call because investors have already been frustrated by the last 13 years.
We have run a number of internal studies dating back to 1800, and the track record has been 100% accurate. Every single time we have overextended market to the upside, we see a ‘mean reversion’ back to normal levels. Again, this is 100% accurate going back to the 1800s.”
Lee also issued this ominous warning regarding a 20-year head and shoulders pattern which has developed on the US dollar: “Head and shoulders patterns are significant. The tremendous amount of time, in terms of developing this head and shoulders pattern on the US dollar, means the drop will be quite significant.
When you look at the roughly 25-year chart on the dollar below, you can see the head forming in 2001. The left shoulder formed in the early and late 1990s. In the last five years we have seen the right shoulder form. Again, because of the duration of this top, it suggests to us that any collapse below the neckline in the low 70s would indicate a very serious drop on the US dollar.
Eric King: “It looks like you are targeting 50 on the dollar index (which would equal a nearly 40% plunge).”
Lee: “That would represent extreme conditions as to the completion of this head and shoulders top on the dollar. This drop in the dollar would have massive ramifications for the bond market and commodities prices.”
King World News note: For readers around the world, this type of plunge in the US dollar will light the gold and silver markets on fire. The belief that the dollar was headed into oblivion in the 1970s helped launch gold into a mania which culminated in gold rising 25-fold. Silver was up 38-fold during that time frame as well.
A similar loss of confidence in the dollar would surely create a launching pad for stage III of the next mania in gold and silver. The corresponding decline in equities Lee forecasts could also move the Dow/Gold ratio back to 1:1.
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