The single biggest risk to gold is the government

Well, first of all we had the gold bull market from 1999 to 2011 and we’ve been in depression since then. If I compare the credit growth, monetary growth and asset growth among central banks and the whole banking wealth accumulation that we had in the last fifteen years, I don’t think that gold is terribly expensive. I hold physical gold for the reason that one day I may not be able to remit money from one country to another. I don’t know when this final systemic collapse that I am foreseeing will occur but all I can say is that in monetary, inflationary times, when inflation is measured properly, in real terms: stocks usually don’t do particularly well but gold does.

Nobody knows how the world will look like in five years’ time. I don’t think that gold investment is the best over the long run, because it doesn’t generate cash flows and doesn’t “grow”. But I think it makes sense to hold it for diversification. My business depends on financial markets, so I own stocks, bonds etc. Most of it is in “paper” and I want to be diversified out of paper into something that is not the liability of someone else. In the bank account, I depend on the bank. If I own corporate bonds, I depend on the corporation to pay me back. In the case of physical gold, I don’t depend on anyone to pay me back, but I do rely on well-established property rights. 

All governments now largely consist of bureaucrat socialists that are anti-wealth – and this also goes for the Swiss bureaucrats. If a proposal to collect all the gold from banks and Swiss owners of gold comes up, they are likely to follow through. I think that the collection of one’s gold by the bureaucrats is the largest risk we have today.

Yellen, Greenspan, Bernanke could be judged badly by future history books

I think that future historians will have a very negative view about the great experiment to boost economic activity with monetary measures via creating asset inflation. I think this view will be very badly discredited. Now, we have to understand it will take some time for this to happen because you have the neo-Keynesians, these are the people like Martin Wolf at the Financial Times and Mr. Paul Krugman at the New York Times and Mr. Rosengren at the Boston Fed and Larry Summers, who, if there is a failure in the asset markets or in the economy and so forth, will say the reason the policies didn't work is because we didn't do enough. That may go on for quite some time but I can tell you that I see more and more people, young people, who no longer consider the Austrian economic theory to be heresy. And it isn't heresy. 

It's essentially common sense, a historical approach to economics. I think that eventually, future economic history books will condemn Mr. Greenspan, Mr. Bernanke and Ms. Yellen very badly.

And I will make sure it will happen during my lifetime. I'm not saying this because of any animosity in terms of my having suffered from their system. As I told you, I'm in the financial system. I'm an asset owner. I would never have had the assets I have today without money printing. I just look at the world as an economist and from the point of view of fairness, and I don't think the present system is in the long run desirable. We have a new aristocracy, largely a smart aristocracy – the hedge fund managers and so forth – but in terms of culture, a lot to be desired.

Parents generation richer than kids generation

When you print money it benefits few people. Those with assets such as property and stocks get richer, while the rest see their cost of living rise while their wages do not go up commensurately.

I believe we are in the midst of the generation that for the first time in Europe, US and Japan will die poorer than their parents. 

China real estate could still have hard landing

I think that there is a very high chance for a hard landing in the real estate sector, because we have a gigantic credit bubble. Usually these are created during the periods when credit expands at a faster pace than the economy and are followed by some kind of hardship. I do not rule out that government interventions can postpone the problem. They will bring about new misallocations of capital and maybe even make things worse. However, because China is so large I think that many sectors can still thrive in an environment where, for example, the real estate market collapses, so I do not think that the impact will be that strong.

We’ve seen what happened before with the bailout of Mexico in 1994 and the Asian crisis in 1997. If Mexico had failed at the time, we may have had a more significant setback in emerging economies in the mid-1990s, but we wouldn’t have had the depression that followed in 1998. So in my view, government intervention can postpone the problem but it may also make the situation actually worse by not letting the market clear as soon as some signs of problems appear. If, for example, LTCM hadn’t been bailed out, I
don’t think the whole system would have collapsed. Some people would have lost money, I guess Goldman Sachs and the counterparties of LTCM, but it would not have been a threat to the global financial system. 

But this is what’s being presented to the public by the interventionists, who argue: ‘Had we not intervened, the whole world would have collapsed’

Rich to get creamed one day and Inflation measures

What has happened this year is true, gasoline prices from their highs have come down, oil prices are down from their highs. Also corn, wheat and soybeans are down. Agricultural commodities are nearing a low. They wont stay at these levels for very long.

The fact is this simply. You take oil, its at $92 today its still up substantially from the level it was at 1999 where it was at $12. Food prices are way up. Everything is more expensive. 

Now there are different ways to measure inflation. The BLS calculates its own way and other people have different ways where they show the cost of living of average family is much higher. One thing is very clear, consumption in the US by historical standards has not recovered much. Why ?

The purchasing power of people, they get their salaries, compensation, and 
their cost of living has gone up more than their salaries. They are getting squeezed. That's why retailing is not doing particularly well.

Now I admit in the US and elsewhere we have a dual economy, we have the economy of the rich, they live in San Francisco, in New Port Beach, Aspen, Palm Beach, Mayfair in London, Chelsea and so forth, and then we have the economy of the average person, its a very different thing but the rich will get creamed one day specially in Europe with wealth taxes. 

High inflation in Asian countries

Inflation comes in many different varieties. For example, I was attending a CSLA conference and CSLA compiled in the year 2009 a basket of different goods and services in Singapore. And as of today that basket is 85 percent more expensive than in 2009. 
So the money printing in Europe and in the US does not necessarily have to lead to inflation in US and Europe for the time being, but it has led to huge price increases here in Asia in countries like India, China, Vietnam, Singapore, Hong Kong where we have record prices for properties and as property prices have gone up a lot, the shops have to demand higher prices in order to maintain their margin and make profit and so consumer goods have also gone up a lot in price.

So there is inflation in the system. 

In the US I just read, that in Chicago the city retirees next year will pay 40 percent more in health care premiums. So these are all symptoms of underlying inflation. 

Marc Faber predicts rising rates to hit asset prices

I think the beauty of today unlike 1999 until March 2000 when we had the tech bubble; at that time the majority of old economy stocks were cheap, commodities were in-expensive, today the good news is we have a bubble in everything everywhere and with very few exceptions. And eventually there will be a problem when these asset markets begin to perform poorly. 

The question is what will be the catalyst, it could be a rising interest rates not engineered by the Fed, because I think they will keep the interest rates at Zero on the Fed funds rate for a very long time. 

Bond markets, something very unusual, French government bonds were yielding last week 1.3 percent. Spanish, Italian bonds as much as US 10 year treasuries. We could essentially have a break in bond markets at some point. We also could have a strong dollar. A strong dollar has already happened in the last two months signifies that international liquidity is tightening and when that happens its usually not good for asset markets.

Dont follow the herd if you want to buy low and sell high

My regular readers must have realized by now that I am not a great protagonist of “Big Government” with all its agencies (including the Fed) since it is thwarting economic growth. One of the reasons is that once government becomes excessively large, its laws and regulations also become extremely complex and hence cumbersome. 

With few exceptions hedge funds have under-performed most indices including gold and longer-term Treasury notes in 2014. Particularly disappointing was the performance of “Global Macro Hedge Funds” and “Equity Long/Short Hedge Funds.” 

Finally, veteran investor Kahn observed that, “I would recommend that private investors tune out the prevailing views they hear on the radio, television and the internet. They are not helpful. People say 'buy low, sell high’, but you cannot do this if you are following the herd. You must have the discipline and temperament to resist your impulses.”

I think most investors tend to forget these very simple principles, which will over time lead to a satisfactory performance.



via gloomboomdoom.com

Geopolitical issues will affect global trade negatively

I think that geopolitical issues will become more important. At the present time what is dominating the geopolitical discussions is what is happening in the North of Iraq, in the Gaza Strip and in Syria but it will spread out to Saudi Arabia, because don't forget Saudi Arabia has a huge border with Iraq. 

Also it will spread out into Turkey and then it will obviously not be favorable for global trade. 

The other issue not frequently discussed is the increase in tensions in South East Asia. China is a huge power, it needs resources, it will have to make sure resources will always flow to China - Iron, Ore, Copper. And the US has had this pivot to Asia which they declared two years ago. Now they have a closer defence agreement with Philipines and Australia, which if you are Chinese is a hostile move. 

Evidence of monetary policies failing

I think we are in a late stage rally and we are probably not going to get a correction but a bear market that will be 20 to 30 percent at some point.

Nobody knows for sure [when the stock market decline will start] but I suppose the credit market will weaken. The high yield market, the junk bond market which has already weakened, the earnings may disappoint. We had essentially, very poor sales from McDonald's. 

Now, McDonald's is a very good indicator of the global economy. If McDonald's doesn't increase its sales, it tells you that the monetary policies have largely failed in the sense that prices are going up more than disposable income, and so people have less purchasing power. So I think we are going to go down in October, November and there will be a rebound and there will be no new highs . It would be my view.

In the end we will have a collapse in markets

Eventually we’ll have a collapse or deflationary bust in asset markets. That’s inevitable. Printing money can postpone such a collapse but eventually the bust will occur. Every inflation, whether consumer price inflation or asset inflation, eventually comes to an end. 

Marc Faber would rather buy Gold vs Bitcoin

I know people who are very positive about Bitcoin, and I think its a currency that has a lot of future. But there will be competing bitcoins. 

And I personally when it comes to having some money into an asset or into cash that cannot be multiplied, I prefer a precious metal such as gold, silver, platinum, palladium. 

But ofcourse you have to store it in the right place, not in the US. The best is probably a safe deposit box in Singapore or Hong Kong or in your safe in Asia.

Asian economies to grow at slower pace compared to past

China is unlike any other country. It is twice the size of Europe and the US combined in terms of population. So it is a huge empire and giant economy. 

My view is that the economy is not growing at the rate the government claims it is. The economy is growing at maximum 4% per annum, because when you look at export and import statistics of countries like South Korea, Taiwan, Hong Kong, Singapore, Thailand, Malaysia, and their trade figures with China, you will find it is not growing or is hardly growing. 

Under the interventionists in China there will obviously be monetary easing, fiscal spending and so forth, like anywhere else. And so, they can maybe postpone the problems but in general, I would say the remarkable thing about the last twelve, fifteen years is that in the case of metals, Chinese consumption has grown from 12% of world consumption in year 2000 to now 47% and this Chinese consumption of industrial commodities was just 2 or 3% in 1990. So we’ve had this huge expansion in Chinese appetite for resources. 

My view is that China’s demand for raw materials will not collapse, but it will not grow at the same rate anymore or hardly grow at all, except for oil. Their demand for oil will obviously grow in the long-term. But for the industrial commodities, it will slow down meaningfully. And so the impact on other emerging economies where we have hardly any growth at the present time, will be felt. As is the case in the West, real growth will be very difficult for many Asian economies.

This bull market is ageing

The market hasn't had more than 11 percent correction since October 2011. A bull market frequently goes on for longer than expected. The current bull market is very old, we have been going up since March 2009. 

This bull market is more than Five years old. The one thing I can say is we are in an ageing bull market, and the economic recovery has lasted longer than the typical recovery or expansion phase over the last 100 years. Now can the bull market go on for a while because of additional money printing...possible... but in my view for asset prices to go up, the Federal Reserve actually has to increase the asset purchases and not taper and that is quite difficult politically to do.

Markets not making sense and unpredictable

All the central bankers are money printers and the problem with the easy monetary policies in the US was that it essentially propelled the Euro to artificially high levels. Because the Euro economy is not doing well, the Euro zone economy is in recession and contracting. 

And so you have these movements that are very unpredictable. And if you look at the performance of macro hedge funds, they are all poor, because a lot of things do not make any sense.

Marc Faber says Markets are mispriced

We've had relatively low volatility in bonds and in equities and in currencies and I think in the next 6 to 12 months will be characterized by far more volatility. 

What we had since essentially early April was the Euro strength and since then the Euro has been weakening and then until July we had Yen strength and now its weakening. And bond prices have continued to go up. Its interesting that at the present time, Spanish government 10 year bonds yield less than US treasury. Spanish bond yield 2.25 percent and US 10 year note yields 2.4 percent. I believe all the markets are grossly mis-priced because some people say intervention, I say central banks have manipulated interest rates to artificially low levels and so you have this complacency in the market place. 

We are more than 5 years in the bull market. Can the market go up another 10 percent or so, yes its possible. Since August 7th, up to today the S&P is up roughly 100 points, at this rate(in one month), the S&P in the next 12 months will be up 1200 points. I dont think its very likely. And if there is a strong blow up phase, it will be followed by an equal sharp downturn.

via Bloomberg interview

Evidence of US Dollar decline signified by Russia-China deal

The US supported the opposition in Ukraine thinking that Russia will do nothing. 

But Crimea is strategically important to Russia since it gives their fleet access to the Mediterranean and the Middle East. And so, by supporting the opposition in Ukraine, the Americans essentially removed a democratically elected president. He may have been incompetent, but he was democratically elected nevertheless. That’s democracy! In democracy you have incompetent people at the top. 

The Americans also thought they can push the Russians a bit further by trying to lure Ukraine into NATO. That was a step too far and so the Russians reacted by signing a gas deal with China! The significance of this deal lies in that the payment will no longer be made in Dollars but in local currency, the Ruble or Yuan. I think this is symptomatic of an empire, the US, in decline and a global currency in decline as well. 

Don’t forget, until WWI, the world currency was the British Pound and its importance diminished afterwards. And now we have a gradual lessening importance of the US Dollar. 

Marc Faber on democracy and big government

Generally, in small societies, democracy is more successful than in large societies. 

In countries like India or the United States, the federal government has become so large that they take decisions that are not necessarily in the interest of the individual. This is different from Switzerland, where we have municipalities, “Gemeinden”, and states, “Cantons”, with a lot of decentralized power, which I find very desirable. 


Basically, over the last, I would say, 100 years, the Keynesians and the
Neo-Keynesians thereafter propagated their view that the larger the
government and the more the interventions the better a society becomes.
They have managed to discredit the Austrian School of Economics. As a
result, society in general has turned into an entitlement society where we
have an insurance policy for everything and the government is expected to
pay the bills. And so, the freedom of the individual is undermined. But with
freedom comes responsibility, personal responsibility. This has been pushed
aside and people don’t realize that they can’t be free if they don’t take on
responsibility. Adam Smith said the government should be in charge of a
well-structured legal system, low taxes and defense and nothing else! 

Instead, we have more and more socialism and state planning, which 
diminishes people’s freedom. I believe we need to have a huge change in society to make people understand that if you want to have freedom you also have to take on personal responsibility.