16,000 points for the DAX are realistic”

In an interview with the financial journalist Bernd Heller Dr. Jens Ehrhardt confirmed his latest forecast for the DAX: 16,000 points in spring 2021 are "realistic". In fact the forecast is actually "modest", as it exceeds this year's high by only around 15% - not much considering the mass of liquidity that the central banks are pumping into the economic cycle as a decisive force and a good portion of which is likely to flow into the stock markets because of the lack of alternatives.

Many things have changed because of Corona. Where do you currently orientate yourself?

In an economic crisis bad news hails, but the stock market nevertheless finds a bottom at some point and goes up again. The stock market simply anticipates future developments and is not a mirror of daily business news. Sometimes it looks like that, but the stock market anticipates very strongly - basically half a year. Now, if you look too deep into the daily news, you can be irritated. But I can clearly see the monetary factors: The world's central banks have injected many, many trillions of new money and this money must be invested in the medium term.

Some of it will also be invested in equities, simply because alternatives such as bonds offer no yield and real estates still offers a low return only. All what remains are shares and some for example gold shares have quite good returns. The stock market has also not gone up in line. Stocks with good profits gained, like American growth values that benefited during the Corona crisis because of the Internet or gold stocks because of the rising gold price. Although the overall index is also going up one should focus on the areas where profits are rising.

Looking ahead to the stock market is one of those things. Trump wants to postpone the elections. What's the market anticipating in that case?

I believe the stock market has not yet included the election. Neither the fact was discussed that Trump was 10 to 15 percentage points behind Biden in the latest surveys, nor the fact that it looked more favorable for Trump in the times before that. Apparently the stock market is still waiting. The stock market often comments on political news only when it is certain and not much is anticipated before. If Trump should actually postpone the election, that would be rather positive news, because in the end it looked like Trump would lose the elections - and the stock market naturally prefers Trump. If Biden comes taxes will go up and there could be more unpleasant phases for the stock market. So I assume that the stock market would even reward a postponement. But that is not yet the case and it is still too early to price in possible election results.

With the conflict between China and the USA and the Brexit there are two further imponderables that could burden the stock market. How do you deal with them?

I always said that you can forget about the Brexit, it does not make a big impression on the stock markets. The UK's only about 2% of the world economy. That won't upset the world stock market. Germany, of course, has quite a lot of exports to the UK and that can of course hurt one company or another but the overall stock market trend should hardly be affected by that any more than it has been during the last two years.

The conflict between the USA and China is, of course, a different matter. In case of a proxy war the stock market would certainly react negatively. Of course as brutal as it sounds special areas would again benefit from such warlike conflicts. But the stock exchange as a whole would also come back in case of an intensified conflict. I still remember the Iraq war: the moment the war started the stock market went up and not down. So you always have to be careful about drawing conclusions that are too simple. The stock markets don't like uncertainty, that's right.

If a conflict arises now the stock markets would not appreciate it. But I find it hard to believe that Trump is pushing this thing too far. New tariffs against China would not only aggravate the situation but also put a strain on the American consumer, which would certainly have a negative impact on him with regard to the upcoming election. Therefore, I think this is unlikely. Nor will he be prepared for a military conflict. But a "half" crisi, that would certainly be something he would be capable of. Because the Americans say "Don't change horses in the river", so don't change the leaders of the country in a crisis. Trump could possibly count on that and artificially create a crisis. But he won't push that to the point of a bear market. Such a slump would only occur in the event of massive geopolitical events or if the US Federal Reserve were to change its policy, because that is the real force.

Governments spend a lot of money and that is good for the economy but when it comes to liquidity the US Federal Reserve, the ECB and also the central banks in China and Japan are the key players for the stock markets. Here the traffic light is clearly green and I therefore also believe that the stock market traffic light will remain green in the medium term. The central banks have managed to drive bonds to unreasonably high prices, even into negative interest rates and the stock markets have so far only been indirectly driven up by better interest rates on dividend-bearing titles. If the central banks continue to pump money into the markets the stock markets will also continue to rise. Either indirectly or sooner or later the central banks will buy shares directly because bonds will run out at some point and then they will have to come up with something else. They have already started with corporate bonds. The head of the US Federal Reserve, Powell, has recently made it very clear that he continues to rely heavily on liquidity and that is very important for the stock markets.

Recently Dr. Ehrhardt was featured on the cover of Focus Money with the forecast "DAX in spring 2021 at 16,000 points! What kind of euphoria inspired you?

Last year, I already predicted 16,000 points for the DAX and I maintain that forecast. Well, then came Corona, but I also talked about it at the peak of Corona and there the DAX was about half as high. 16,000 points is realistic because that would be just about 15% higher than the high of this year. When you see all the liquidity that has been pumped into the markets and the old prices would then only be outbid by 15%, my forecast is even more modest. Last autumn I also said that the price of gold would rise to USD 2,000. At that time the price was still at 1,500 but that has since been confirmed, even though everyone said at the time that it was already somewhat frivolous to make such optimistic forecasts.

But: Where should the money be placed? When so much new money comes into the markets you simply have to see that shares are not a reflection of profits, but of supply and demand. Now it is like this: many investors have become even more cautious instead of being more optimistic with rising prices. Especially in America, private investors are currently almost as cautious as they were at the low point in March. That is unusual, because normally the mood fluctuates with the prices. But investors probably believe that this upward movement is just a bear market rally, that is, an upward movement in a downward trend. If they were optimistic and convinced that the DAX would rise investors would already be invested. But there are still doubts and that is actually a very healthy sign. Of course, you always have to be careful because nobody knows where the stock market is actually going. If the Corona situation deteriorates significantly, I would have to revise the forecast. But in the end you have to be careful: what's driving stock prices is the liquidity of central banks. It continues to be extraordinarily good, even historically. That is why I am cautious about forecasts that are too negative.

The negative forecasts assume that everything is so indebted that there must be a financial crash. The indebtedness - it's just being done today, I don't want to evaluate it. But the central banks simply print the money that the governments need and can get into debt indefinitely. They buy bonds and maybe someday stocks and pay them with newly printed money. Fresh out of the vault, directly into the economic cycle. As long as the central banks control this mechanism in this way there is no need to worry about debt, at least not today. Many people are thinking even further: there will soon be inflation in the money supply. This was already said during the financial crisis of 2008: "Here comes Weimar, galloping inflation" I frequently read. And what happened? The inflation targets of the world's central banks, whether it was America, Europe, Japan, they all aimed for 2%, and none of them achieved it. So there has not been inflation because of all the money printing and there will not be any in the near future.

On the contrary all the zombie companies that would have been unable to produce anymore because of higher interest rates and would have dropped out of the market will remain in business thanks to all the money. Since you feed them all they continue to produce goods and thus keep prices down. Inflation tends to be pushed down perhaps even to the point of deflation. In Asia they have deflation in many countries such as Taiwan now. Even in Australia prices are going down for the first time in 22 years. So inflation is not an issue for the time being in the 1 to 2 year horizon - and nobody on the stock market thinks about it much longer anyway.

If inflation were to occur, let's say in 3 years for example because the states would continue to get insanely into debt, then we should be careful, because then the central banks would have to raise interest rates to contain inflation. Then the economy would look very bad, many jobs would be at stake and social unrest would be likely. That would not help the stock markets either. But I think that scenario is years away.

Of course, you have to pay attention to how inflation develops. You can see that very clearly from the speed at which money circulates and it is even falling further at the moment. It's perhaps not a normal scenario or a normal forecast. But I refuse to go along with this pessimism that is so often encountered. I rather think that you should be well off with good tangible assets, i.e. solid stocks, for example with a high dividend yield. Gold, gold stocks and defensive stocks are probably the best way to get through the crisis because the freshly printed money has to go somewhere

Incidentally you refute all the theses of the Crash Prophets. Do you still argue against their prognosis?

Already 50 years ago I heard people saying that everything was falling apart. The only way to survive was to buy gold and put banknotes in the vault. I'm not going to make fun of that. There are a lot of people who have a solid view of the economy, who say that you shouldn't get into debt, that the central banks should make sure that the situation is solid and that they don't make so much money available all the time, because that encourages these zombie companies. There are certainly negative developments when zombie companies produce and keep prices low, because in the long run that damages healthy companies. They cannot increase their prices and will therefore not invest.

In the past people used to say first save money and then invest the money saved, that this was healthy economic development. But today if we stop lending and just save, i.e. the whole banking industry will collapse, then we will have a complete economic disaster. We have already crossed the Rubicon. Such normal, solid conditions are no longer possible. The central banks are probably only postponing the day of awakening, when the whole thing will have a negative impact. But I am convinced that this is still years away. And as long as the investors are not all heavily invested in the stock market - that would be dangerous, because they would all be potential sellers - it is too early to be negative. We are likely to live in this limbo for a few more years and the day X when the whole thing ends badly is still a long way off. Quite simply because central banks can get infinitely indebted. As long as there is no inflation, they can plug the holes with liquidity.

All these crash gurus are, after all, some much respected people who have studied economics and who put forward sound theses and say that the central banks should not take these unsound measures. These people do have their arguments. But what would their investment policy look like? They would not buy stocks, they would buy gold. And so do I. But only gold? You shouldn't just bet on one asset class. You should diversify. What would happen if, for example, Putin came up with the idea of throwing all the Russian gold that the Russian central bank has bought in recent years onto the market? Or the International Monetary Fund? The IMF has done this before. They have quite a lot that would cut the price of gold considerably.

There is no one-way street, no single solution. But in today's difficult scenario, I believe that my approach is probably the right one - and I have been doing it for over 50 years. Of course, no one can give you a guarantee and politics, Corona or something even worse may step in. But in the stock market we live and work with probabilities and I am convinced that my scenario has a high probability for itself.

 

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