“40-50% Stock Market Crash Coming” – Edward Dowd @ The Real Story (Transcript)

So rents are coming down. That’s being widely reported all over the media today. So that’s already in motion.

We’re also seeing a basically dead real estate market. We’ve seen a new phenomenon we haven’t seen really since we’ve been tracking the series. It’s two series — it’s homes for sale versus homes sold. And there’s a gap of about 600,000 at the moment. And I believe I’ve provided a chart for you to put up of that spread. If you look at it, it does not look like it’s going to close unless one thing occurs, and that’s going to be price. The only thing that fixes this is price. And eventually price will come lower.

Record Gap Between Sellers and Buyers

MICHELLE MAKORI: Well, according to the data that I’ve seen — that’s according to Redfin and the National Housing Association — there were nearly 6 more sellers than buyers in the US housing market last month, making it the largest gap in records dating back to 2013. That’s according to the Redfin data. So there was an estimated 46% more sellers than buyers in the US housing market. That’s up from 29.8% a year earlier.

So these figures indicate that it is a buyer’s market because buyers have more negotiating power on the surface of it. But Americans are still struggling with these rising home prices and growing economic uncertainty. So even though it looks like a buyer’s market on the surface, it’s not. Is that correct?

EDWARD DOWD: The new pending home sales hit a record low, meaning there’s no transaction. So there is a stalemate between the sellers refusing to lower price in aggregate and those willing to buy.

So what’s going to break that log jam? Time and worsening fundamentals economically, and especially if the stock market bubble bursts. Most of the sellers tend to be older boomers who are selling second homes or Airbnb properties, and they watch their tech portfolio go down. That might make them feel less sure about keeping the price where it is. And once price decline starts in earnest, then we’ll see some transactions.

But our estimates are homes are 30% overvalued, and that’s due to incomes not growing and the rapid rise in real estate taxes and insurance costs. The total cost of ownership has risen and the prices need to come down to adjust for that in order for people to be able to afford the homes.

And mortgage rates don’t matter. They’ll only matter once they go a lot lower into the teeth of a Fed rate cut. And then eventually that’ll stimulate a recovery on the other side.

Is This a Systemic Risk Like 2008?

MICHELLE MAKORI: Well, we’ll get into the Fed and the position that it’s found itself in, particularly with the war in Iran and how that’s exacerbating matters. But why is the housing situation so problematic? Is this a systemic risk like we saw in 2008? How does it become such a problem for the US economy? Paint that picture for us — how that has its fall-on effects.

EDWARD DOWD: Well, there’s naturally an 18 year housing cycle and the last housing cycle was 18 years ago. We’re hitting it in 2026. So this is the classic normal housing cycle.

We have a demographic problem. The boomers are mostly retired and they’re starting to die off. So we’re getting homes that are coming on the market from estate sales, but there isn’t enough buyers on the other side. So this is going to be a slow demographic problem for a while.

And we overbuilt in the COVID boom and we have about 9.7 months of new home supply on the market, which is about where it was leading into the great financial crisis. And we have lots of inventory just building and no buyers now. Inventory will clear when the price adjusts.

The economy has been less than robust. The real economy and job growth has been kind of fictional the last couple of years. There was either bureaucratic incompetence, fraud, or a combination of both under Biden and it continues under the Trump administration, where the jobs numbers are not reflecting the actual jobs when we look at the benchmark report nine months later. So the non-farm payroll numbers have been revised down quite a bit over the last few years. The economy is not robust, the average consumer is struggling and they just can’t afford homes. So eventually the stalemate breaks.

And especially if we get into a kind of a twin problem of a stock market bubble deflating and home prices deflating at the same time — they’ll feed on each other.

One of the things that people need to be aware of is a lot of the last two years of loan growth from the banks has been to something called non-depository financial institutions, also known as private credit and private equity. And before the war started, that market essentially started to freeze because the bad economy started to actually manifest itself in this sector of the market, because it’s some of the worst, most opaque loans made out there.

So this market is frozen. JP Morgan threw down the gauntlet and called into question marks on the books. They marked down the loan values and they’re not extending credit to some of these private credit funds at the moment. Once JP Morgan moves, everybody else moves. So the private credit market is essentially frozen.

And I want to take you back to the great financial crisis. The subprime market really peaked in February of 2007 and that’s when it began to have its problems. And that market essentially froze. And then the contagion and credit contraction spread from there to other sectors of the economy.

Private credit is the first canary in the coal mine. It’s frozen effectively and that credit contraction will spread. Now you throw on top of that an oil price shock — that only makes this whole scenario quicker.

The Fed Is in a Difficult Position

MICHELLE MAKORI: Right. And it also puts the Fed in a difficult position.

EDWARD DOWD: Very difficult, very difficult.

MICHELLE MAKORI: Well, let’s discuss that because obviously cutting rates would have helped deal with the housing market and also the private credit market. So how does the Fed factor into all of this, given where we are now with inflation and those higher oil prices?

EDWARD DOWD: Well, before the oil price shock, we were tracking inflation and we figured the Fed was probably 100 basis points too tight. Neutral would be 100 basis points lower. So they’re already tight coming into this equation. And we figured at some point they’d figure this out and then panic cut like they always do at the end of every cycle.

But with the oil price shock, the Fed is very ill equipped to deal with these types of situations. They can’t really do anything. Monetary policy has to kind of wait. So they decided to hold, which is actually in and of itself contractionary given what’s going on with the oil price shock.

So the Fed, by doing nothing, actually got money tighter and it’s going to exacerbate throughout the economy. If they hike rates into this, it’s only going to hasten the deflationary bust on the other side. So they’re in a very difficult situation. If they cut, they could stoke inflation. So they’re kind of doing the only thing they could do, which is nothing right now, and they have to kind of wait for the credit markets to break before they can really ease.

Fannie Mae, Freddie Mac, and Mortgage Backed Securities

MICHELLE MAKORI: Okay, I just want to focus on the housing market again because there have been some actions to try and reduce affordability given that the Fed hasn’t been doing much. And the Trump administration, as we know, has been pushing the Fed to take action, but has taken some action in its own hands with Fannie Mae and Freddie Mac and ordering them to buy mortgage backed securities.

These are government controlled entities and they’re moving now to capitalize on this sell off. And their efforts, as I mentioned, follow a directive from President Trump instructing Fannie and Freddie to buy $200 billion of MBSs — of mortgage backed securities — as part of a push to drive down mortgage rates and bolster housing affordability.

Does this have any impact, Ed? Will this help the situation?

The AI Bubble and Its Parallels to Past Tech Cycles

EDWARD DOWD: That’s a drop in the bucket. It doesn’t do anything, in my humble opinion. The Fed came in and bought $1.4 trillion of mortgage backed securities off the bank’s balance sheets during COVID, during that crisis. This is $200 billion. It’s not enough to move the needle. And it’s not that rates are unaffordable, it’s that prices need to adjust.

Prices are just 30% too high given where incomes are. And what people don’t understand is the total cost of ownership. While home prices went up quite a bit, insurance rates doubled in a lot of areas of the country, real estate taxes doubled or went up quite a bit. So there’s an affordability problem built into the equation.

The only way to make this affordable is the price needs to adjust. The median home is probably 30% overvalued at the moment, given where wages are. So one thing could change that — the housing market would be a booming jobs market and growing incomes, which we do not see at all. It’s going the other way, in fact.

MICHELLE MAKORI: Right. And housing, I believe, is about 20% of GDP, so a significant factor there. So we’ve got housing as a structural puller that’s looking very weak in this economy. You’ve also mentioned at the top that we have an AI bubble. Last year AI was the growth engine for the market. But you’re saying that that story is starting to crack. What’s going on with AI? What’s changed? What are the issues that you’re seeing there?

Cracks in the AI Financing Markets

EDWARD DOWD: Well, let’s just talk price action of the NASDAQ. The NASDAQ’s gone sideways for basically six months, five months, something like that. So the stocks are no longer accelerating up on momentum. That’s number one.

Number two, the financing markets are starting to question the whole AI ecosystem. Oracle has been a big player in AI, really increased their CapEx, borrowed a ton of money to fund their CapEx, and their CDS — their credit default swaps — are rising. So the cost of financing AI is going up. Core Weave, a hyperscaler, has seen the same issues. We’re also seeing signs from OpenAI that financing is becoming more difficult. Remember in the fall, November-December time frame of last year, Sam Altman and his CFO basically floated the idea of begging for government financing because financing was getting tight.

So what people need to understand is the same thing happened in the tech bubble. Even though equities were the focus of everyone’s attention, what funds equity growth and earnings is CapEx. And CapEx gets funded a lot by debt. In the telecom Internet bubble, we had a lot of junk bonds that were funding companies that had no business models, that eventually blew up, and then CapEx declined.

Same thing’s happening here. We have a bunch of competing AI models and companies that are competing on price. And it seems like AI is becoming increasingly a very expensive commodity that requires tremendous amounts of investment, but their revenues are not coming at the pace that the investors would like to see.

So the debt markets are the first place it gets noticed. Returns are going higher, expected returns are going higher among investors. And Sam Altman — it was reported yesterday — that he was approaching private equity companies and private credit companies to raise $4 billion at a 17.5% guaranteed return. Which is very expensive capital, very expensive.

So you have to ask the question: if it’s becoming more expensive to finance CapEx, how much longer can this CapEx build out happen? Let’s add on top of that, a lot of the projected and announced CapEx from all these big tech companies earlier this year — there’s not enough power and water to supply that infrastructure. So the gating factor is now power. A year or two ago the gating factor was Nvidia chips.

So two things: financing is becoming increasingly more difficult, and if you can’t actually build the plant and hook it into a power grid, you’re going to pause spending. So once CapEx spending pauses, this reverberates throughout the food chain and the bubble collapses.

What Happens When the Bubble Collapses

MICHELLE MAKORI: And when you say the bubble collapses, that means a sell off in the stocks. That means some of these businesses shut down. What does that mean?

EDWARD DOWD: What it means is the investors that are already on the billions of debt that’s already been invested — the equity starts to decline. So there is a pullback and people lose money. Does that mean, let’s say Core Weave goes bankrupt, does that mean Core Weave ceases as an entity? No, that just means it’s going to change hands to someone else who buys it for pennies on the dollar. Just like what happened with the dark fiber companies that went to zero on an equity basis — their assets get bought.

So what’s going to happen is there’s going to be a bursting of the speculative investment. People will get hurt. It’ll cause a temporary pause in consumer spending for those who are invested in that stuff. It’ll also reverberate back to the housing market because maybe people that are invested in the AI bubble feel less wealthy and lower prices.

So it’s not the end of the world. AI will go on. It’s just like every tech hype cycle. We had it with the railroads. There was a hype cycle in the railroads — they all had speculative buildouts, but there weren’t enough revenues to support that amount of investment. That investment got wiped out. But we had railroads, and eventually that turned into a very productive thing.

The Internet bubble — we built out a bunch of dark fiber. Everybody who invested in that lost their shirt. But then eventually the economy benefited from all that cheap, available fiber. Apple built its whole smartphone model on cheap Internet access, which was predicated by the build out of the Internet. But people lost money on that.

So this is what capitalism does. It creates bubbles, it funds them, they blow up, there is a consolidation phase, and then net productivity occurs. So AI is here to stay. I’m going to do what a lot of people should have done after the Internet bubble. Most of the great companies that benefited from the Internet were IPO’d after the dot com bust. Look at Google — IPO’d in 2001, I believe, or 2002. Facebook IPO’d in 2004. Apple benefited from cheap broadband because of the smartphone invention. Amazon was one of the only survivors.

So there’s going to be a lot of opportunities to make money in AI. It’s just that the first round of this is the hype.

Identifying the Survivors of the AI Bubble

MICHELLE MAKORI: So what’s the likely Google after this AI bubble bursts? Are there any AI companies that you’ve identified that are more likely to survive?

EDWARD DOWD: Not yet, but when I do, I’m going to buy it first and then tell everybody.

MICHELLE MAKORI: You’re going to buy it first and then you’re going to tell me first, come on the show, and then tell everybody second. That’s what we’re going to do. But to your point, OpenAI said today that they’re pulling the plug on the SORA video platform because the subscription models of a community that they were trying to build there hasn’t been working. Is that the issue — that this whole subscription model for AI is not bringing in as much revenue? Why are we not seeing the revenue estimates that were expected? Is it that it just hasn’t been deployed fast and far enough, or that they just don’t have the revenue or pricing models quite right yet to justify the CapEx? What’s the issue really driving the bubble, and the expenditure not meeting where it’s supposed to be?

EDWARD DOWD: Well, first of all, this is very expensive technology that requires a tremendous amount of CapEx, the likes of which we’ve never seen before. That’s number one.

Number two, there isn’t just one AI company, there’s multiples. They’re all competing for subscribers. This is going to sound crazy, but AI large language models — I think there’s like five or six of them now — they’re commodities. They’re all competing. You can interchange one for the other. I don’t think there’s much of a difference between them.

They’re trying to propagate a retail story, getting subscribers. But the real big money would come from corporate adoption. And there’s been corporate pilots, but there’s been a famous study from MIT that the widespread rollout of AI is just not occurring yet. And that’s probably because it takes time for a company to implement AI into their operations. Look at the legal liabilities of it. There’s a process flow that doesn’t happen overnight.

So the spending that they thought was coming hasn’t showed up. There’s now a commodity pricing situation. And what OpenAI told you yesterday is that the fact that they’re cutting this tells you that they’re not getting the growth that they would like. And in a company like AI that is basically a pre-IPO company, you have to show lots of growth and continued upside to attract capital. That just tells me they’re struggling already.

And we’re just waiting for Nvidia — which is the public facing stock market poster boy of this bubble — we’re just waiting for Nvidia to miss a quarter, which they will at some point, because CapEx will be paused.

Nvidia’s Fate and the Broader Stock Market Outlook

MICHELLE MAKORI: Do you see Nvidia stock tanking then?

EDWARD DOWD: Eventually. I’m not going to put a time frame on it, but it’s going to go the way of Cisco. Cisco was a huge beneficiary of the telecom equipment CapEx boom that started in 1995 and peaked in 2001. Cisco was a 100 PE stock. They were selling routers hand over fist, and then they started missing quarters, and eventually the stock went down 80 to 90%.

Nvidia is a semiconductor company. If you strip out the AI hype, it’s a semiconductor company, and semiconductor companies are notoriously cyclical. They have booms and busts. This boom has been exacerbated by all the capital that’s been chasing this infrastructure build. But when it pauses, Nvidia will miss, expectations will go lower, and the stock will go down. That’s just simple. This is the cycle. Nvidia is not going to stay where it is indefinitely.

MICHELLE MAKORI: Right. Everything is cyclical. So what does the stock market look like in this cycle? Because it sounds to me like you’re saying we have this housing issue, we have private credit which could start to unravel things, we’ve got the AI bubble. What does that mean for the stock market at large then? What’s your outlook?

EDWARD DOWD: Well, the stock market is obviously overvalued. It’s at bubble valuations. Once the flows start going the other way and multiples start coming down — what will get that going? What usually gets that going is the beginning of an economic cycle, and we’re at the beginning of one.

So there’ll be some companies that start missing earnings. Expectations will go down, there’ll be layoffs. We’re already seeing layoffs at the big tech companies because AI CapEx is crowding out a lot of those other budgets. So they’re already laying off people. They claim they’re replacing these people with AI. I just think that’s an excuse. They were bloated from the COVID days. They overhired and now they’re cutting back, and that’s going to affect the rest of the economy.

The job growth in this economy has been pretty bad the last two years and we’ve got problems. The average consumer is struggling. Most people that aren’t in corporate America have three gigs. It’s called the gig economy for a reason. You have three jobs trying to pay bills.

Recession, Stagflation, and the Road Ahead

MICHELLE MAKORI: So from a technical perspective, are we headed for what you would call a recession, stagflation, a deflationary environment? How does this play out on the big macro side?

EDWARD DOWD: Well, first everyone’s going to be talking inflation because of the oil price shock. And yes, prices will rise, but because incomes aren’t rising, it’s basically going to be a demand destruction phenomenon. Like another oil price shock from the 70s — inflation would go up, then we would get a recession, and then inflation would go down because of the recession. That’s what happened. Inflation goes down when you have a recession and people lose jobs — they just don’t spend.

So we’re going to get a price shock, inflation will go up, then the next thing people will be talking about is deflation and aggregate income going the wrong way and more layoffs. Margins are going to get squeezed at the corporate level. When you get a cost push inflation like this, their costs are going to go up, but they can’t pass it along to the consumer. So they’re going to start getting margins squeezed and they’re going to lay off people. It’s a feedback loop. This oil price shock will actually accelerate layoffs.

MICHELLE MAKORI: So you’re saying that a recession — and by recession I mean two quarters of negative GDP growth — is baked in. That that’s inevitable at this point.

EDWARD DOWD: It was baked in before the oil price shock. The longer this hangs in here, that’s only going to make it faster, in my humble opinion.

MICHELLE MAKORI: And what about the stock market? Because last time we spoke, you said you saw a 40 to 50% drawdown.

Investment Math and Market Drawdowns

EDWARD DOWD: Yeah, I still think that. And investment math is brutal. The last time we were calling for a recession at the beginning of last year, we didn’t get it. The stock market went up 17%. Okay, so if we go down 40 to 50% this year, I was a year late. But if I’m right and you’re not prepared, remember, investment math is brutal. The bigger the drawdowns — if you go down 50%, it takes 100% to get back to break even. So that 17% you made last year, well, great. If you didn’t raise cash, you look smart. But if we get the 40 to 50% correction, you’re going to be wishing you’d raised cash.

MICHELLE MAKORI: Well, that’s more than a correction at 40 to 50%. Over what time frame? So you’re saying the S&P 500 drops 40 to 50% — from where? From current levels, from previous highs? And over what timeframe do you anticipate this?

EDWARD DOWD: Well, timing is difficult, but in the 2000 analog, the stock market went down 50% over two years. And that was not a systemic problem. It was just an overvalued stock market that finally the bubble burst and we came down 50%. We had a mild recession, but the Fed overreacted and pumped money. And then we had a real estate bubble.

So this time we have a stock market bubble and a housing problem. I can’t see how or why it wouldn’t go down at least 40 to 50% this time, like it did in the great financial crisis and the dot com bubble. So if my forecasts are right, a minimum of 40 to 50. If it’s more than 50, we got problems, because the investment math gets even more scary the lower you go.

I don’t think the Fed will let it get that bad. The Fed traditionally steps in when it gets this bad and they’ll print like crazy. But that’s my expectation — 40 to 50%. And again, if this war doesn’t end soon, I suspect it’ll happen sooner rather than later.

Best Case Scenario: A Peaceful Resolution and Its Market Impact

MICHELLE MAKORI: And if this war does end soon, and does end favorably — in terms of it gets the Trump administration the results that it wanted, as well as opening up the Straits of Hormuz, oil is flowing again, potentially the US even has some kind of control over the energy flows from that area, similar to the Venezuela model — perhaps that could happen in the best case scenario of an outcome for the US. What does that mean for the market?

We’ll start off with the best case scenario. This wraps up quickly, oil is flowing, there’s even potentially some kind of, as I mentioned, oversight of the Strait of Hormuz and the energy flows there — something that President Trump has said he wanted. The latest headline is that we do have some negotiations, but we know how fast-changing the story is. But in the best case scenario, what does that mean for the markets if there is a peaceful resolution here?

EDWARD DOWD: Well, short term we would get a massive relief rally. Oil would drop and then stocks would rally. So we may go to new all-time highs very briefly, but structurally what I outlined, nothing has changed. Private credit isn’t fixed magically, the housing market isn’t fixed, and what’s going on in China isn’t fixed.

So nothing’s changed other than you don’t have to worry about this accelerating even faster than I already outlined. So my expectation would be for a nice relief rally and I would raise cash into that. And I’ve talked to individual people on the buy side that manage large sums of money. If we get a rally, they plan on fading that because they see the same structural issues that I do. This is not just what I’m saying — enough people on Wall Street are seeing these structural issues and they know it’s coming.

MICHELLE MAKORI: So if we do get an upside rally on positive news out of Iran, you’re saying that that’s a selling opportunity.

EDWARD DOWD: That’s a big fade.

MICHELLE MAKORI: Yep, a big fade.

EDWARD DOWD: Yeah. We would call it “fade the rally.” So you sell into it.

MICHELLE MAKORI: And then your thesis continues into that 40 to 50% sell off.

EDWARD DOWD: Now, we’re not calling for a systemic issue. Systemic would be something like the great financial crisis where we almost had lights out. We think this time the consumer, while over-levered, isn’t as leveraged as they were going into the 2008 crisis. Corporations aren’t as over-levered. So we think it can be manageable. There might be some bank consolidation, some regionals might go the way of the dodo bird, but we don’t think this could ultimately go systemic.

If it does, I’ll get back on your show and tell you why we think that’s happening. So we think it’s manageable. We’ve had 50% drawdowns in the stock market like we did in 2000 and it’s not systemic — it’s just a resetting and recleansing. I think there are a lot of opportunities coming, but I’m not gloom and doom. I don’t think the world’s going to end. I just think this is well beyond necessary at this point, given what happened under the Biden administration — the illegal immigration and the excesses in the private credit market — it all needs to get rung out.

MICHELLE MAKORI: And economic cycles are cycles for a reason. You have recession, trough, and a booming economy — that’s sort of how the cycle plays out. So one could say we’re long overdue for that. But let’s focus on China here, because you said that China is another thing that is being overlooked as a major structural issue. What are the indicators that you’re watching that makes you think that China’s economy is weaker than the market thinks?

China’s Economic Weakness: The Overlooked Structural Crisis

EDWARD DOWD: So let’s start big picture. Prior to 2020, priced in dollars, China’s GDP was 80% that of the US. And there was a lot of talk back then that they were going to overtake the US, priced in dollars, eventually.

Well, what happened since 2020? In 2020, they hit a demographic wall. Their demographics plateaued in 2015 and then really started falling off a cliff in 2020. And that started to manifest into their economic problems and their real estate market, which began its decline in 2021 in earnest. So housing starts in China are down 70%. That’s an amazingly bad number.

The good news for them, up until this year, is that construction has only dropped 20% — and that’s because of long-lived projects. Even though their economy internally is rolling over and has been for a while, they picked up exports and they still had some projects in the pipeline. That is now coming to an end. We’re seeing new construction contracts, which we track, falling off a cliff. And so now they are seeing that rebound into net fixed investment, which for the first time ever in China’s history, year-over-year growth has fallen below zero as of November and December of last year.

So their internal net fixed investment year-over-year growth is below zero. The only other time that happened was a brief blip during COVID. But if you look over the last 30 to 40 years, that’s never happened.

Let’s also look at their GDP priced in dollars. Since COVID, their GDP priced in dollars is now 60% that of the US. So they’ve gone the wrong way, priced in US dollars. And their GDP growth priced in US dollars has effectively been zero. So they report — the last quarter’s report was 4.5% priced in yuan — but priced in US dollars, it’s zero growth.

So China is entering a very acute phase of its real estate crisis. We’re also tracking utility power consumption and growth, and that’s now rolling over. And if it goes below zero, that will be the first time it’s ever gone below zero. We’re tracking that. If it does, I’ll tell you about it. But it’s looking grim right now.

Is the West Overestimating China’s Threat?

MICHELLE MAKORI: Let me zoom out here. If China, Ed, is not as strong as it’s believed to be, what does that mean for the narrative that China is the biggest economic foe to the US — that it is vying for superpower status, that it’s trying to dethrone the dollar and challenge the Western and US hegemony over the financial and monetary system? What does that mean for that narrative? Are we overestimating the risk of China?

EDWARD DOWD: No. China is a global power. You have to pay attention to them. But the narrative that they are overtaking the US and winning is just not true. They are in deep, deep trouble. Their demographic decline is pretty stark and amazing.

Entering 2020, they had 900 million working-age individuals, which is the prime lifeblood of spending in their economy. That’s going to be 750 million by 2032. So they’re losing 1% a year, and they have 20 years’ worth of housing. So they have really no more construction industry internally.

So what are they doing? What have they been doing since this demographic decline? They’ve been ramping up their exports considerably to bail them out of trouble. And they’re turning into an export economy, less focused internally. So obviously, what has that done? That’s resulted in trade wars.

Yes, China has already been dumping their deflationary pressures into the rest of the world. That’s been going on for years. And that’s why when Trump got elected, he targeted China and the trade tariffs. This is a way to prevent China from blowing up everybody’s domestic operations by dumping cheap goods into them — which is happening because that’s the only way they’re keeping the lights on.

MICHELLE MAKORI: And the whole de-dollarization narrative — that we see China wanting to shift out of US dollar-denominated assets, potentially bring in gold as a mutual reserve settlement asset — there are even recent comments from President Xi that he would like to see the yuan as a global reserve currency, or taking a seat at that table at some point. What does that mean for the whole challenging of the global monetary system, or the bifurcation of the global monetary system, with China taking a bigger role there?

EDWARD DOWD: Well, the problem with China’s economy is it’s so bad they have to constantly print more money to keep it going. So they’re depreciating their own currency to the tune of 10% a year. That’s why a lot of people internally in China and the central bank keep buying gold.

So they’re not ready to take over the world as the reserve currency. They have demographic issues that are going to prevent that for years to come. So I’m not worried about China and the BRICS. There will be a new monetary system at some point — we’ve talked about that before. I don’t know what it looks like, but what we do know is gold will be a part of it. Because the signaling came from the US banks this year when they turned gold back into tier one capital. And so you can now loan against gold, physical gold, at banks. So we do know that gold is going to play a part of a new monetary system, but the dollar will be a part of that. And if China’s a part of it, it’ll be a small part.

But China is not taking over the world. They have a demographic disaster, much like Japan did in the late 1990s going into the 2000s. What did Japan do? They did a lot of internal restructuring with projects to nowhere. China’s trying to do that — like infrastructure projects. And they also exported to the world to pick up their exports. And they had 10 years of zombie companies walking around. China’s in that phase.

The problem with China is it’s 10 times the size of Japan. So the implications of them exporting all their deflation are not good for the rest of the world. That’s why you’re seeing trade wars right now.

Gold’s Recent Decline: A Buying Opportunity?

MICHELLE MAKORI: Let’s focus on gold. Because gold has been down during this war — initially spiked, but it’s down around 17% since the start of the war, which many people find interesting considering it’s supposed to be a safe haven during times of geopolitical stress. Why is gold down right now?

EDWARD DOWD: Well, look, gold had a tremendous run going into the end of last year, and so did silver. So there was a lot of speculation and froth, new buyers, weak hands. And then we had a little bit of a liquidity problem going on in the Middle East right now. So people in liquidity crunches sell what they can, not what they want.

So long term, if I look at the charts and know what is going on behind the scenes with gold and central bank buying, I view this as a buying opportunity and I wouldn’t get scared out of my gold position. I think long term, gold looks like it wants to hit $10,000 by 2030.

MICHELLE MAKORI: So you think gold is down now because of a general sell off in assets and people —

Gold’s Role in a Liquidity Crisis

EDWARD DOWD: No, no. Gold was very frothy coming into this. Everybody and their brother was starting to talk about the debasement trade, if you remember. So gold was going up on that. There are a lot of weak hands that got into it, and gold is having a shakeout. And then you add the war and liquidity concerns. I suspect on the margin there are some sellers of gold out there because they need liquidity. It’s not the end of gold. This happened in the great financial crisis as well. Gold went down 50% during the great financial crisis, then went to new all-time highs rather quickly.

Remember, gold is a commodity and it’s also speculated with leverage in the futures market, so it can get hit. I’ve warned of that, but I said not to get shaken out. I don’t think gold goes down 50%. I don’t think we’re going back to $2,500 gold anytime soon. I think gold down, worst case, is down 25 to 30%. And I would be a buyer all day long. In fact, I know people are buying gold today right now after this pullback. I think it’s done.

MICHELLE MAKORI: How much of this, of course, is because of the dollar strength? Because gold is ultimately priced in dollars, and the dollar has rallied during this war. The DXY, I believe, was up 2% since the war began. So how much of this is about the dollar and people moving to the dollar rather than gold as the safe haven here?

EDWARD DOWD: Yeah, look, the dollar got oversold going into the beginning of this year. I believe it’s put in what’s called the four-year cycle low, and the dollar is going to go into a rally as we go into a liquidity crunch globally. That doesn’t mean gold is necessarily going to go down. If the dollar goes up, gold could consolidate sideways for a year or two, or six months.

But long term, we know that the global sovereign debt bubble is continuing to grow, and the only way to ever take care of this is some sort of new monetary system, and gold is going to be a part of that. I try not to trade gold. Gold should only be 5 to 10% of your long-term assets anyway. I tell people, don’t trade it, just own it.

Is Gold Being Suppressed?

MICHELLE MAKORI: Ed, there is a theory out there that there is something called MOPE — Managed Optics Perceptions of the Economy — that gold is intentionally being suppressed at a time of war because gold is a barometer of faith in the dollar, and that there is intentional manipulation to keep the gold price down in order to not lose faith in the dollar, particularly at this time of heightened geopolitical tensions. What are your thoughts on that?

EDWARD DOWD: Well, we’re already hearing of interventions in the oil market by the U.S. Treasury. There are rumors of that going around. There are also rumors that during the silver price spike, they were intentionally slamming it to protect the exchanges. I have no doubt that there’s manipulation going on, but can they manipulate forever? No.

And the other thing you have to remember — gold, if you’re in a liquidity crisis, is a physical asset and it’s hard to sell. Unless you have it in a bullion bank, it requires movement and title. So in financial crises, the dollar usually always wins. It’s the most liquid thing, along with T-bills.

Long term, if the U.S. dollar has a problem, gold is going to continue to go up, because other currencies are having issues across the globe and there is a distrust of the current monetary system. We know that central banks are accumulating gold, commercial banks are accumulating gold, and Chinese citizens are accumulating gold — there is demand. But in the short term, in a very short liquidity crisis, gold may get sold and people go for dollars. Long term, gold is fine. I just don’t get hung up on these short-term moves.

War as a Mechanism for Credit Creation

MICHELLE MAKORI: I will say this. When you and I last spoke, you said that the U.S. is not going to give up dollar dominance without a fight, that they’re not going to go quietly into the night. Is this Iran conflict that fight?

EDWARD DOWD: Okay, let’s talk for a second. The credit creation system needs constant growth and flow and bigger injection amounts, and the crises are coming sooner and sooner. So we’re getting to the end of this multi-generational Ponzi scheme, and you need to constantly feed the credit creation growth.

Coming into 2019, we had problems in the plumbing. We were heading toward a global slowdown. But then magically, COVID appeared, and we had warlike spending that floated the credit system along for another several years. And here we are, only six years later, and it’s wobbling again. So we need even more credit creation. One way to do that is to have a war.

I’m not in the room, but is the timing of this suspicious? I think a little bit. The powers that be — the actual people running the show, the deep state, the administrative state — if they want war, war is what we’re going to get. And it’s going to require a tremendous amount of spending, and it will give good cover for a financial collapse. But do I know that for sure? No. But the timing of the war is awfully suspicious. Private credit started to have serious problems, and then boom, we’re in a war.

MICHELLE MAKORI: So you mean an excuse to just create more liquidity, because it’s gone the opposite way right now?

EDWARD DOWD: But so you will get a financial reset. Down the road, if this turns into World War Three or an extended war, the amount of debt required to fund that war is going to be in the trillions. And that’ll keep the system alive. After a brief pause in financial assets, stock markets will go down 40 to 50%. So it saves the system. It doesn’t prevent the system from resetting a little bit, but it saves the system. You need constant credit creation.

Does the War Delay or Accelerate De-Dollarization?

MICHELLE MAKORI: So kicking the can down the road, and this is yet another mechanism to do that. Look, Ed, I know you’re not a geopolitical strategist. You’re an analyst. You base your research on meticulous data gathered from a variety of sources. But if you were to speculate on which way this war goes — does it wrap up relatively quickly, or do you see it extending, expanding, and escalating, perhaps bringing in other players and that World War Three scenario we just discussed?

EDWARD DOWD: Well, there’s what I want and what I think. I’d love to see it end. There were headlines hitting the tape right before you and I started this interview saying that there’s a peace plan and they’re talking to Iran. What I do know is that there are ground troops being moved into the war scenario. I would love to see this thing end, but my spidey senses say it won’t be. And even if Trump says it’s over, it won’t be over. We’re going to have problems for a while, unfortunately. That’s my spidey senses. But I’d love to be wrong on this, to be honest.

MICHELLE MAKORI: Right. Well, if there’s a declared victory — if certain goals are met — I mean, there’s always going to be problems in the Middle East. We’ve seen that every time there’s a conflict there; it’s not like anything is ever actually resolved favorably or peacefully. But if there is a declared victory, the first thing you said we’re going to see is some kind of relief rally in the markets, and you said that is the opportunity to get out. But does it delay de-dollarization if there is a perceived win for the Trump administration here? Or does it accelerate de-dollarization because of a lack of trust in the U.S.?

EDWARD DOWD: If there’s a perceived victory, that only increases the value of the U.S. dollar. Look, the dollar is ultimately backed by our nuclear weapons and our ability to keep the sea lanes open and protect our allies. So if we have a successful outcome here, the dollar narrative only gets stronger, not weaker.

MICHELLE MAKORI: And what does that mean for gold and its role as a mutual reserve asset to replace the dollar in an era of declining trust?

EDWARD DOWD: I think gold is in a long-term bull market because the rest of the world — we’re the cleanest shirt in a dirty laundry. You have to understand: China has demographic problems and tremendous amounts of debt. Japan has demographic problems and tremendous amounts of debt. South Korea, Europe — same. So we have a debt problem globally, even if the U.S. is going to be fine. So gold will be in the background even if the dollar is strong.

MICHELLE MAKORI: All right, so even if we get a rally in the near term based on a victory, you’re saying that that’s not confirmation of strength, but potentially the last opportunity to de-risk before the cycle exactly plays out.

EDWARD DOWD: Because my call wasn’t predicated on a geopolitical conflict. These cycles are going to manifest regardless, and we were already in motion before the war. So if you get a relief rally and you believe what I’m saying, I’d use it as an opportunity to raise cash.

What Could Derail the Thesis?

MICHELLE MAKORI: Is there anything that derails your thesis?

EDWARD DOWD: Well, if the Fed decided to lower interest rates 250 basis points and print $5 trillion out of thin air and hand it to people, that would kick the can down the road. But absent that—

MICHELLE MAKORI: No, that would derail the potential recession thesis and the stock market sell-off thesis. But it certainly doesn’t do much for the bigger debasement and devaluation thesis, the sovereign debt crisis thesis that we’ve discussed previously.

EDWARD DOWD: I would suspect it would also cause a mini revolution, because people would see it for what it is.

How Edward Dowd Is Positioned Right Now

MICHELLE MAKORI: So given how you’re seeing things, how are you positioned right now? Do you have any equity exposure?

EDWARD DOWD: No. Cash, gold, and long bonds.

MICHELLE MAKORI: You have zero equity exposure at the moment?

EDWARD DOWD: Correct. But that’s — I’m extreme, so.

MICHELLE MAKORI: Well, sometimes you need to take extreme risks to make extreme amounts of money. That’s what several people have told me — that if you’re hedging, you never actually take a big win. But that’s not necessarily what we’re advocating for. Definitely not financial advice.

EDWARD DOWD: I’m not advocating for people to short the stock market. That’s notoriously hard. That’s not what I’m telling people to do. The average person I’m talking to — if they were 20% cash and they believe what I say, I say go to 40 or 50% and leave it at that, and then roll back in at the bottom. I’m not telling people to be as extreme as me. But having cash for dry powder — don’t try to short the market. That’s for professionals. And a lot of professionals have been early and wrong on shorting the stock market.

MICHELLE MAKORI: And I believe Warren Buffett is still sitting on a record amount of cash, waiting to get back in.

EDWARD DOWD: Yeah. And that’s the long way to do it and the safest way to do it. You’ve missed some upside, but you don’t lose money trying to short the market. So Warren is going to be on a buying spree, I think, soon.

MICHELLE MAKORI: But a lot of people say, “I don’t want to sit in cash because I feel like my money is losing purchasing power by the day.” So what is the alternative?

EDWARD DOWD: People said the same thing in 2006 and 2007. And then when you have these deflationary scares and you’re down 50%, you wish you had cash. This is how the cycle works. Cash is trash — until it isn’t. When it isn’t, you want to be there.

Opportunities on the Other Side of the Sell-Off

MICHELLE MAKORI: Okay, so you’re in cash, gold, and bonds, waiting for the sell-off. And what do you think the opportunities would be on the other side of that? Or is that something you only determine when it happens?

EDWARD DOWD: You have to see where the asset prices wash out. But there’ll be opportunities galore. There’ll be blue-chip companies with nice dividend yields in a panic. There’ll be companies that will be around long after I’m gone, trading at very cheap valuations. There’ll be opportunities everywhere. The problem is most people don’t have the liquidity when that occurs.

MICHELLE MAKORI: Okay, so you’re positioned for the sale, as they say. As we wrap up here, what is your point of highest conviction right now in terms of asset classes that outperform?

EDWARD DOWD: By the end of 2026, it’ll be cash and the 30-year bond.

Gold’s Long-Term Outlook and Final Thoughts

MICHELLE MAKORI: The 30 year bond, yep. And you did say that your long term outlook for gold was $10,000 by 2030.

EDWARD DOWD: Correct.

MICHELLE MAKORI: Many people would think that’s not really that dramatic. That’s just a double from where we are, that it would probably get there sooner. You don’t see that?

EDWARD DOWD: Well, look, I think you know, a double is not bad. You don’t know what the rest of the asset classes are going to do — a double by 2030. And I could be wrong. Could be $20,000. But the charts say $10,000 and I don’t have a problem with that.

We are in a period where you want a return of your capital, not a return on your capital. Look at what’s going on in private credit. That junk was sold as giving you 10% yield with low volatility. What they didn’t tell you was the low volatility was because they didn’t mark to market their books correctly, and now they’re getting a liquidity run and you can’t get your money back.

Can you imagine having $1 million in one of these funds, you want $500,000 back and they only give you $250,000, and then you know you’re going to get marked down. That’s where we are in this period. Return of your cash rather than return on your cash.

MICHELLE MAKORI: Right. And preserving capital. And ultimately gold is a store of wealth. It’s not there for exorbitant giant returns, even though it has been performing like that, at least last year. But it is ultimately a store of wealth asset.

Well, we thank you for your wealth of insight as always. Ed Dowd, where can people learn more about you, more about your work? What’s the best way that people can reach out? Perhaps get access to your reports?

EDWARD DOWD: Yeah, you can purchase our reports at financetechnologies.com. We have a China report, two China reports. We have a US economic report. We have real estate reports from last year. It’s financetechnologies.com with a “ph.” I’m on X @owdedward, and I have a personal website where you can sign up and follow me — ewd.com.

MICHELLE MAKORI: Always interesting chatting with you, Ed. I look forward to having you back on soon. Thank you so much for your time today. Appreciate it.

Thanks Michelle, and as always, thank you for watching. Thank you for spending your time with us. If you enjoy our content, find it informative, interesting, educational, perhaps even entertaining, or all of the above, which we sincerely hope you do, please make sure to share it with your friends, colleagues and family. And please do subscribe.

Also, if you would like to learn more about building a Precious Metal strategy, you can reach out to [email protected]. We have a team of specialized advisors and brokers that can guide you, and if you mention my name they will give you an extra special deal. Also check out our website milesfranklin.com, and we have a weekly newsletter that you don’t want to miss. It has previews, specials, and some exclusive macro insights. There’s a link in the description. It’s also on our website milesfranklin.com.

So as always, leave us your comments. Feel free to praise, whine, or just opine. We do read them and we also get some valuable question and topic ideas from that feedback. So please keep it coming. Until next time, we’ll see you soon. And stay sovereign.

Related Posts

• Transcript of Mohandas Pai Interview: Raj Shamani FO539 – Truth About India’s Tax System
• Transcript of Alex Hormozi Interview: The Diary Of A CEO – Jul 20, 2026
• Transcript of Scott Bessent Interview: The Way I Heard It with Mike Rowe
• How To Buy A Used Luxury Car Safely
• Only In America Interview: w/ Indra Nooyi (Transcript)