Fed should not interfere with the market and money supply

Marc Faber reaction to US Fed's interest rate hike.

The best would be to have no monetary interventions. In other words, as Milton Friedman pointed out, to have a steady growth in money supply, fixed by the constitution at 2% or 3% per annum. We don't need a central planning authority to intervene and buy assets and boost the money supply or slow down the growth of money supply.

I'm against these constant interventions in the price of credit with monetary policies, but if they're going to do them, they should have raised rates in 2011 and 2012 when economic growth was much stronger than it is now. Right now, the global economy is slowing down meaningfully, so they should not have increased interest rates. But they did so to maintain some credibility.

The global economy is probably already in recession now. It will be more obvious in the U.S. in March or June of next year. At that time, the Fed will say, "Well, we didn't want to increase interest rates, but there was pressure on us to do so. So we increased them, and now we have a recession, and now we have to cut them again and flood the market with QE4."

They'll use whatever happens as an excuse to cut rates again and engage, as [ECB President] Draghi is currently doing, in unlimited purchases of assets.

Fed should have raised interest rates few years ago instead of now

They [Fed] kept interest rates near zero for seven years. This has never existed before, such a long period of next to zero interest rates. Now they increased rates a quarter percent exactly at the time the global economy is weakening dramatically. The global economy has decelerated very badly, and many countries are already in recession, or going into recession

They are increasing interest rates at precisely the wrong time. 

Potential fed rate hike is not important

In my view the likely Fed rate hike is not very important. The most important is the global economy has decelerated very badly and many countries are in a recession or going in a recession.

If they raise rates, in theory, it's precisely the wrong time.

Best countries to store Gold physically are Dubai, Singapore, Hong Kong

I think the US government, when gold really starts to move, will take it away. They will pay something. Say like in 1933, they paid $25 per ounce of gold that people held, and after they have collected most of the gold – of course not the gold that was held by government officials, or to precisely say “by corrupt government officials,” because they’re all corrupt – they revalued the gold to $35. So the investor lost out. And I think what will happen, the US will eventually, under some kind of an excuse, whether it’s terrorism or whatever it is, expropriate gold. They’ll pay, say, at today’s price, $1220 an ounce, and then they’ll go to the ECB.

The ECB and the Federal Reserve are one and the same. The Bank of England also. They talk to each other every day. They’re the chief manipulators of everything. And then they say to the ECB, “Well, because we do it, you also should do it,” and the Draghi-type of – I don’t want to say what I think of him, but I say, Draghi-type of personalities, they’re saying, “Yeah. Yeah. We’ll do it also,” and then the Bank of England, of course, will do it also. Then they knock on the doors of the thrifts and say, “You thrifts, you also have to do it,” and the thrifts, they have no backbones anymore. The thrifts will say, “Okay. We’ll also do it.”

And so the threat is really for an investor, is where do you store your gold? Because if you have it in a bank or in an ETF, it may be taken away. And whereas I think that the Sprott Physical Gold are the best ones. When the US knocks on the door of Canada and says, “You have to do the same,” the Canadians will also say, “Yeah. Okay.” And so the best, probably, to store gold in Dubai, in Hong Kong, Singapore, physically.

Summary of December 2015 Monthly Market commentary

Ezekiel J. Emanuel, a well-known oncologist and a vice provost at the University of Pennsylvania argues that in the field of healthcare “more care can produce worse health outcomes.” Emanuel opines that “We - both physicians and patients - usually think more treatment means better treatment. We often forget that every test and treatment can go wrong, produce side effects or lead to additional interventions that themselves can go wrong. We have learned this lesson with treatments like antibiotics for simple medical problems from sore throats to ear infections. Despite often repeating the mantra ‘First, do no harm,’ doctors have difficulty with doing less - even nothing. We find it hard to refrain from trying another drug, blood test, imaging study or surgery.” 

Translating this simple wisdom into economics would surmise as follows: We both economists and fund managers - usually think more interventions mean better outcomes. We often forget that every experiment and intervention with fiscal and monetary policies can go wrong, produce side effects or lead to additional interventions that themselves can go wrong. 

We have learned this lesson with central planners in the former Soviet Union and in China under Mao Zedong. Despite often repeating the mantra “First, do no harm to the market and to the capitalistic system,” economic decision makers have difficulty with doing less - even nothing. They find it hard to refrain from trying another QE, government spending spree, bailout, new regulation, transfer payments, or outright wealth confiscation through negative interest rates.”

British physician, homeopath and bacteriologist Edward Bach suggested that, “The main reason for the failure of modern medical science is that it is dealing with results and not causes.” I think that the same is true of economics, and that to paraphrase Moliere, nearly all economies die of their fiscal and monetary “remedies” and not of their illnesses.

I wish my readers a wonderful festive season and excellent physical, mental and financial health in 2016. 



via Gloomboomdoom.com

Why academics and economicts never criticize the Fed

Just in the last say twelve months, I have observed an increasing number of academics who are questioning monetary policies.

I mean some academics that have been quite mainstream in the past. I mean John Taylor has been critical for a long time as well as Ana Schwartz but she passed away and as Milton Freedman who also passed away a long time ago. But basically now I see more and more academics and influential people, also among the Republicans that are actually questioning the Fed and also the integrity of the Fed. That is a crack and as you said the credibility of the ECB is in my view badly tarnished already because people say how could they lend so much money to Greece?

But you understand, they never ask ordinary people, they ask academics, or economists and they all also get paid somewhere because they are either in the one or the other commission, so they are not going.......... it’s like if you go into a hospital and a doctor has killed a few patients unintentionally, another doctor will never testify against him. He will shut up because he is afraid one day other people will turn against him. Mistakes happen. And so among academic circles you will very seldom find criticism of central banks.

Investment opportunities in Iraq vs Iran

Investing in Iraq

I think the future of southern Iraq is guaranteed in other words, from Bagdad south, that whole region where the oil is, Basra, that is Shia, their political future is essentially guaranteed because the Shias of Iran will not let ISIS capture that territory nor let Saudi Arabia invade. The Iraqi stock market is very inexpensive, it is very cheap. It is very difficult to invest now in Iran but in Iraq it is much easier and there are funds so that is an opportunity in my view. 

Emerging markets 

For the last few years emerging markets have under-performed say the US grossly, but if I look at the next ten years and in the immediate future, I don’t think that the emerging markets will perform well, they will come off further in my view but they are markets that offer relative good value in the sense that you have many shares say in Singapore, Malaysia, Thailand...that have a dividend yield of say 5-6% so at least you paid to wait. It is not yet at a very attractive valuation level but it´s reasonable. It is a world of inflated assets. 

Gold weakness explanations

Well as you know there are so many explanations [regarding Gold under performance] ranging from manipulation to essentially Chinese selling which could have been the case you know that margin calls went out for stock accounts, the margin buyers may not have been able to sell their shares because still about 20% are not trading.

Number two, they can’t sell their properties because you can’t sell overnight the properties so the margin call has to be met the next day and property transactions may take, I don’t know three months until you close and maybe there were some corporations or individuals that were holding gold and so that they could liquidate, that is an explanation that I could sympathize with.

Or you could say because of the strong dollar people became, or had hesitations of owning gold because they said if the dollar is strong why would I own gold? I mean there are lots of explanations. The simple explanation is of course that there were more sellers than buyers at that particular time. Now if you look at the pole market in gold, 1999 255 dollars went to 1921 dollars in September 2011 and then we had this correction which now we are in 2015, four years on and the price was always holding around 11 or 12 hundred and now it looks like it has broken down on the downside and then you have to ask yourself well is it a breakdown that will lead to further selling in other words, prices would move lower and find the low at, I don’t know, maybe 700, 800, 900 dollars, a thousand or is it a final liquidation from which prices will start to move up.

I really don’t know, all I know is that I own gold and it doesn’t worry me that it went down because as I mentioned to you I have this diversification, the bonds in US dollars and the cash in US dollars has been a good investment essentially over the last twelve months. Then I own equities and I own properties in Asia that have been reasonably good investments so the fact that gold is going down doesn’t worry me and I buy every month a little bit but I think on this weakness I will increase the position substantially because I had maybe say 25% in gold but because equities and properties went up, the dollar went up and gold went down, the allocation to gold is no longer 25% but maybe only 10 or 15%.

Full interview with Sprott and Tekoa

Marc Faber interview with Tekoa Da Silva of Sprott Global

TD: Marc I saw some recent commentary of yours indicating that there’s only so much debt-funded capital investment a person can make in their business before the debt becomes superfluous, unhelpful. Can you talk to that?

MF: Well, I distinguish between productive credit and unproductive credit. A productive credit is something like—let’s say we start a company. We buy the land. We build the factory. We acquire machinery and inventories and we hire people and then we produce either goods or services.

That credit is then serviced by the cash flow our businesses will generate and by the earnings over time, we will repay the loan.

An unproductive credit is a credit whereby you and I borrow money to go and gamble in Las Vegas, or buy a car. Then every month we have to pay off that loan. So that unproductive credit loan, in the initial stages of society, yes it stimulates economic growth above the trend line because future demand is advanced to today.

Otherwise, people would save for ten years and then buy a car. Now, they can buy the car today and pay it off over time. But unless the wages go up substantially, it’s a very unproductive credit.

TD: Marc, I’ve also seen you note that early American railroad companies, heavily indebted, mostly went bankrupt. But they left behind lots of physical assets created by the debt.

Currently, is Western society creating anything with all the debt? 

MF: Yeah, I love that question because when the people default on their household debt, mortgage debt, and student debt, I wonder what will be left behind. They will be people you can’t hire because they studied the wrong stuff.

The difference with the US is that if there is a massive default, nothing will be left behind. At least in China they will have railroads, tunnels, bridges, highways, airport infrastructure, port facilities and so on.

So I say that China, with all its shortcomings and faults, at least they have had productive credit until recently. Recently it has also changed somewhat. But at least it has been productive credit that builds something. Here in the US, credit is used largely for consumption.

TD: Do you have any idea how this is going to resolve itself?

MF: Well, my sense is that the current neo-Keynesian interventionists, using fiscal measures and monetary policies, will in time fail massively. It’s not going to work. If in the US, you print money, then yes, real estate recovers somewhat, stocks go to new highs and so forth.

But the median household income is down because the cost of living for most people is going up much more than wages. So these monetary policies have, in my view, in the long run a very negative impact on economic activity and not a positive impact.

Anyone with halfway common sense can understand that printing money does not create a rich and prosperous society. Otherwise, nobody would work and everybody would have a money-printing machine at home.

TD: Another piece of data I saw you publish recently was a chart showing the increase of service sector employment contrasted against a decline in manufacturing employment in the United States.

How does that resolve itself? Does something change with the currency and cause export opportunities to become more attractive over time?

MF: Well, the manufacturing sector in general has high-paying jobs. They’re not the highest-paying jobs but they’re relatively high-paying jobs because nowadays, in manufacturing, you have machines that cost $5 million. Some cost $25 million.

You can’t have someone operating that machine that spends the whole day on his Facebook account. You need someone with some skills and most people that come out of universities nowadays have zero skills but lots of student debts. That’s the difference with previous generations compared to this generation.

On job creation, we’ll soon have more bartenders in the US than people employed in manufacturing. Of course it’s more fun to work in a bar than in a factory but it doesn’t help society overall.

It’s actually very interesting that although the cost of labor in China and other countries has gone up a lot in the last 10 years (in other words the wages went up a lot), the US in terms of goods, the deficit is still rising. It’s not contracting.

Where it’s contracting in terms of trade deficit is the oil sector. In other words, the US needs to import less oil. So that has helped but on manufactured goods, the deficit of the US is going up, up, up, and up.

So the manufacturing sector which is at the backbone of an economy is basically shrinking relative to the whole economy in the US.  People working in healthcare, nursing homes, bars, restaurants (in other words low-paying jobs)—that is booming. Amusement parks also.

Prosperity is not created as a result, and this is reflected in statistics such as home ownership rates. Young people, they generally have no money to buy a home. They hardly have the money to rent their homes. So they stay with their parents or they share an apartment with one, two, three, four, five, six, seven different people.

This is the new reality. Then you hear statements by the Fed and the financial sector on how great everything is because the stock market has gone up.

I was recently in Turkey. Some media hack said to me, “Well, the stock market is going up.” So I said, “How many people in Turkey own shares?” He said, “1.3 million.”

Of a population of 80 million, I told him, “You mean to say that you favor say monetary interventions that benefit 1.3 million at the expense of the other 79 million?”

Understand what I mean? Because if you print money in Turkey, the currency goes down and it hurts most people, but it benefits shareholders because stocks go up. 

TD: Marc, what do you see over the next decade or two in terms of Asian growth? In decades past if you look at 100 people, a certain number may have a car, a certain number may have a refrigerator, etc. What do you see when you explore these days?

MF: Well, everything is relative. I think that realistically seen, Asia can grow without the rest of the world. What we need is peace. If there is peace I think there could be growth across Asia. I would say 4%-5% per annum. Maybe some countries like Vietnam can grow at 6% per annum trend line. Maybe India can grow at 5%-6% trend line.

Compared to Europe, I think there will be no growth for the next 10 years. In the US in my view, there will hardly be any growth, and the standards of living and real incomes will go down.

So a growth rate of 3%, 4%, or 5% in Asian regions would be fantastic.

Near term, my sense is that the Chinese economy is growing at a maximum of 4% per annum. In most countries I visit, whether it’s Singapore, Hong Kong, Thailand, Malaysia, Indonesia—we have at the present time practically no growth. Maybe some contraction. In Singapore, the manufacturing sector has been contracting.

TD: With that in mind, how far into this commodities down cycle do you think we are?

MF: Well, compared to the stock market commodities are probably relatively inexpensive. But a strong price recovery I don’t see. First of all, a lot of commodity supplies are coming on stream.

Second, a lot of producers will continue to produce as long as they cover variable costs. Three, as I mentioned before, demand from China is not likely to pick up anytime soon.

So the outlook for commodities is maybe not much lower on the downside and maybe you can have a rebound. Oil fell from over $100 down to around $40. Maybe we can have a rebound to $60. I would guess the long term equilibrium price of oil is somewhere between $40 and $60. But you can undershoot, like in 2008, when it went down to $32.

TD: How do you see the precious metals--gold, silver, platinum, palladium fitting into that picture?

MF: Well, precious metals are relatively inexpensive compared to equities. So if you want to invest new money at the present time, I would recommend looking at mining companies and the precious metals. Personally, I don’t think precious metals, gold, silver, platinum, have a lot of downside risk.

But other people will disagree with me and say well, “the metals are useless, they will go lower.” That I doubt because of what I just said. With central banks coordinating policies and printing more and more money, I think some people will gradually say, “Well, if we get negative interest rates on deposits, then why not hold some gold?”

If on a ten-year Japanese bond I get only 0.29%, I would rather own gold. You understand?

So I think in the absence of anything more compelling, with grossly-inflated assets markets, gold, silver, and platinum are relatively attractive. And statistically—gold mining shares compared to the rest of the stock market are incredibly inexpensive.

TD: Marc, what would you advise to the individual—what can they do to shield themselves?

MF: Well, my view is that we had a fabulous time for asset holders, from 1981 to recently. Stocks went up. Interest rates went down. In other words, that lifted bond prices.

If you invested continuously with the cash flow every year since 1981 in 30-year bonds, you’ve actually outperformed equities. But you have to roll it over and you have to reinvest the interest.

If you invested in homes in 1980, even after the recent decline, you’ve still made a lot of money. In particular, if you invested in high quality homes, in say Newport Beach, Vancouver, Whistler Mountain, Sun Valley, Aspen, the Hamptons, New York City, Madison, Fifth Avenue and so forth, those have gone ballistic.

If you bought a Roscoe or Picasso painting in 1980, by now it’s up maybe 20x. So lots of things have gone up a lot in price, and that was the ideal time for asset holders. But from here on I expect asset returns to be very muted.

Now you can come to me and say, “Yes, but if you invested in Facebook, you would have made a lot of money.” Yes. But I can then turn around and say that Facebook investors, they probably also owned GoPro. They owned Yelp and Twitter, all stocks that have tumbled. You understand?

So that one stock has done fantastically well and this is one of the problems for the stock market. At the present time, there are only about 10 or 15 stocks making new highs. The broad market-- in other words the ‘generals’ are moving ahead, and the soldiers behind are no longer following. They’re all down. They’re all dead.

So the market in my opinion has very little upside potential. Bonds have very little upside potential. Gold, silver, and platinum probably have the best upside potential in this environment. But it may take a while until it really gets going.

TD: Marc, is there anything you think we may have missed?

MF: I think this covers it. But I did mention to an audience today that I like Indochina, Cambodia, Vietnam, Myanmar, Thailand and so forth. It is a region that will grow a lot and there is great economic potential.

Marc Faber talks jobs, current generation college graduates, money printing and MORE

Cost of living for most people is going up higher much more than their wages. So these Monetary policies, in my view in the long run has a very negative impact on economic activities and not a positive impact. 

And by the way, anyone with half way common sense can understand that printing money does not create a rich and prosperous society otherwise nobody would work and everybody would have a money printing machine at home.

Optimal size for Government to GDP

The problem with communism was that the whole economy was run by the government. In other words, essentially the whole economy was 100% government. That was a problem. 

In Singapore we had the leader, for the last, essentially, 50 years, and he’s done a great job. 

And in other countries also we had great leaders, but the issue really is, “How much government do you want? How much transfer payments do you want?” 

In my view, a small government is the best, the maximum, say 15 to 20% of GDP. But now, in the Western world, we have, through all the transfer payments, governments that are close to 50% of GDP, and in some countries, more than 50% of GDP.

Uneven benefits for economy from money printing

If you print money, the money will not flow evenly into the economic system and this has already been observed by Copernicus who wrote about money and it was later also observed by David Hume and by Irving Fisher that when you print money, the money flows do not benefit all classes of society and all industries equally at the same time.

What then happens is that you look for instance at commodity prices, ok, we had money printing and then prices rose but not only because of money printing, they rose mostly because of the incremental demand from China, but the Chinese boom came to some extent from money printing in the US which led to rising trade and current account deficits until 2008, until the crisis. Since then actually in terms of goods, the trade balance in the US has worsened again, further, but because of the oil industry the overall trade and current account deficit has been diminishing.

The point is simply this, the over capacities that we have in some industries like steel in China, cement and in resources, iron ore, this was made possible by money printing. I am not saying only, by to some extent money printing was responsible. The housing bubble, the housing inflation in the US was made possible by money printing and keeping interest rates artificially low. Now we have a bubble in sovereign debt and we have a bubble in equities, certainly in US equities.

Now we have a bubble in sovereign debt and we have a bubble in equities, certainly in US equities.

When that bubble deflates eventually in sovereign debt and in equities, what the impact will be on the economy will be interesting to watch because the markets are not prepared for rising interest rates.

Market crash is yet to come

I don't think the crash has happened yet. Say you're a young person and you're just starting to work. So take me in the 1970's. In the US, with 20 hours of work, I could buy the S&P 500. Now you need more than 90 hours of work to buy the S&P 500 if you're young, say with a medium income. When I was young you could buy a home at a reasonable price, even in Hong Kong. 


What I want to say is that the Fed has basically created with their colleagues in Japan and at the European Central Bank (ECB) and the Bank of England (BOE), they've created a colossal asset bubble. And the returns going forward are going to be disappointing.

Advance/Decline numbers

The composition of an index is that it's usually capitalization weighted. So one stock that goes up vertically could theoretically drive up an index and 99 percent of the shares don't make new highs. We had a strong day on Wall Street, but on the New York Stock Exchange, out of more than 3,000 shares that are being traded, only less than a hundred made a 12-month new high. The advance is very narrow.

Some markets are still strong, but the bulk is no longer moving up so in other words the advance of asset price inflation has been narrowing significantly.

Soft landing for China economy will not be easy

I think it's very difficult if you had the kind of bubble like you had in China, and the credit bubble, to then engineer a soft landing. You could maybe cushion the downturn somewhat, but the fact is I don't believe that the economy isn't growing at all, but I think that I have argued and this for the last 18 months that the economy was slowing down meaningfully, and that growth would be roughly at three to four percent, which it is at the present time, I would imagine.

China is a massive country

I think many people don't understand that China has a population twice as large as the U.S. and Europe combined. It's not just a country. It's an entire empire. And you can have growth in some sectors of the economy. I have no doubt that some service sectors are growing, but other very important sectors like industrial production isn't growing at the present time.

     
If you really want to have a good view of the service sector and how well it's doing in China, ask Yum!, the fast-food chain in the U.S. They will tell you about their Chinese sales.

And the way the U.S. had sometimes a recession in California like in the early 1990's, and other states were growing, you can have in China some provinces growing and others contracting. And so and to measure economic growth in a country this large with that many people is very difficult. But say the evidence shows that it's nowhere growing at the same pace it was growing say between 2000 and 2007.

Credit bubble disaster ?     

And what we have had in China, and this investors should realize, is a credit bubble of epic proportions. I have read economic history. I've never seen credit as a percent of the economy growing as fast as in China in the last seven years.

Financial mess for average american household

Michael Smithson, a social scientist at Australian National University uses this analogy about knowledge and ignorance: “The larger the island of knowledge grows, the longer the shoreline - where knowledge meets ignorance - extends. The more we know, the more we can ask. ....Answers breed questions. Curiosity isn’t merely a static disposition but rather a passion of the mind. ....Mapping the coast of the island of knowledge, to continue the metaphor, requires a grasp of the psychology of ambiguity. The ever-expanding shoreline, where questions are born of answers, is terrain characterized by vague and conflicting information. The resulting state of uncertainty, psychologists have shown, intensifies our emotions: not only exhilaration and surprise, but also confusion and frustration.”

Matthew Winkler, Editor-in-Chief Emeritus at Bloomberg, opines that, “Markets, represent the judgment of buyers and sellers of what’s valuable. By that yardstick, shareholders already have decided that Obamacare is a boon for the American economy.”

The facts, however, seem to repudiate Winkler’s views. According to Bankrate.com, which conducted a survey of 1,000 adults, nearly one in three (29%) American adults (that’s roughly 70 million) have no emergency savings at all - the highest percentage since Bankrate began doing this survey five years ago. What’s more, only 22% of Americans have at least six months of emergency savings (that’s what advisers recommend) - the lowest level since Bankrate began doing the survey.

These findings mirror others - all of which paint a rather unambiguously abysmal picture of Americans’ ability to withstand an emergency. Greg McBride, the chief financial analyst for Bankrate.com, says these low savings reflect that households haven’t seen their incomes ramp up and thus ‘household budgets are tight.’ Plus, he adds ‘people don’t pay themselves first - they wait until the end of the month to save what’s left over and then nothing is left over.’ 


via Gloom Boom Doom

Marc Faber buys more Gold

I added to my gold position about two months ago and I bought some gold related equities. But other than that I’ve done very little because I believe that in this extreme volatility when markets suddenly drop 10%, individual stocks drop 10% or 20% in one day, it’s a very difficult environment to make a lot of money unless you take huge risks.

via CNBC

Optimistic about IndoChina Region economic boom

Indo-China, It’s a boom region. It includes Vietnam, Cambodia, Laos, Thailand–which is not booming right now–but Myanmar also and in the north Yunnan province of China, and in the south Malaysia, Singapore. This region can grow at six percent to eight percent per annum for the next 10 years, provided there’s peace. 

Cambodian exports were up 20% this year. Vietnamese exports are up approximately 10% this year. So relative to the rest of the world, this is a boom region.

Stocks can go down even in low interest rates environment

Markets go up and down as we all know. And you can’t be always sitting there and say oh stocks always go up, real estate always goes up and so forth and so on. You could have zero interest rates and stocks go down as they’ve done in Japan until three years ago. So, even at these very low interest rates, something can happen that could dampen the enthusiasm of equities and I’m just a believer that the U.S. equities are now fully priced. 

Now can the indices make a new highs ? Possible.... Even if the indices make new highs, I would I would think the majority of shares will not make new highs.

Heavy capital flight out of China

We have had very heavy capital flight over the last 8 - 9 months coming out of China. And if I had to bet on someone the locals knowledge or some economist around the world talking up China and how great it is, I would bet on the locals who are shifting moving out of China at record levels at the present time............ 

[Watch the full video for Marc Faber's detailed comments on China]

Contrarian reason why Apple stock could be in trouble

The future is unknown and we are not dealing with markets that are free markets anymore. A free market is defined as a market when no market participant has a dominant influence and can manipulate the market. Now we have government interventions everywhere and you don’t know what they will buy next. They bought bonds and mortgage backed securities to depress the yields on these securities, they pushed interest rates essentially everywhere to 0, and by doing that they basically expropriate savers because money, one of the functions of paper money is to store value but at zero interest rates there is no store of value.

They may through sovereign funds, they have done it already and the Swiss National Bank already bought shares, the Swiss National Bank they own over a billion dollars in Apple stock! You can be sure that Apple will go down because whatever the Swiss National Bank does is a disaster!

That is a very good sell signal! The other sovereign funds have also bought equities. Now the sovereign funds are not going to increase anymore because most of them are oil related so they have to actually liquidate and that is a game changer from one trillion dollars in assets, sovereign funds in year 2002, they went to over seven trillion, I think they are going to come down to maybe three trillion, that will have an impact on liquidity and on yields.

Protect your gold from the government

If we think it through, the failure of monetary policies will not be admitted by the professors that are at central banks.

They will then go and blame someone else for it and then an easy target would be to blame it on people that own physical gold because they can argue, well these are the ones that do take money out of circulation and then the velocity of money goes down …  we have to take it away from them.”

That has happened in 1933 in the US…

With our brilliant governments in Europe that follow US policies and with the ECB talking every day to the Federal Reserve, they would do the same in Europe, take the gold away from people.

Gold as a hedge against Governments 

I would say an individual should definitely own some physical gold…The bigger question is where should he store it?

Euro will survive but it could be very different from its current state

We don’t know how the world will look in five or ten years´ time but I would say that I believe the euro will survive. Now the question is, in what form? Maybe there will be a euro like a US dollar, we have a US dollar, and maybe some countries like Greece, Italy, Portugal, Spain will no longer use the euro and will have essentially gone back to their local currencies. It could be, maybe not. Because you understand, the typical Italian, Spaniard and Greek, he knows very well: we leave the EU, our pensions will be paid in local currency and that will be much less than what we get now.

So on the one hand, from a nationalistic point of view, most Europeans would like to leave the EU but when they look at their pocket book, it is like when Scotland, when the vote came up to exit Britain, Great Britain, the young people, most of them voted for the exit, but the elderly people, the pensioners, they were threatened, again because as you say the media said well you leave the EU, your pensions will be cut... so if you are an elderly pensioner, what do you prefer, to get your pension and be part of the UK or leave the UK and get lower payments?

This is one reason I think the EU may stay together but of course if the economic conditions in the southern countries, Greece, Italy, Spain... do not improve, if they actually worsen again then maybe the move towards leaving the EU will become very strong. Number two, I have been writing about this, you know if you look at history, we had great empires, the Greek empire and the Roman empire and the Ottomans and the Spanish empire and the British empire and now we have the supremacy of America that I probably waning but it was certainly there after the Second World War, the point is usually if you had empires in the past, it was very costly because you had to keep armies in the so called colonies in your territories, and if there were problems you would have to send in the troops and the ships and so forth to essentially enforce your empire.

In the modern empires, like the EU, you may have to pay. It is not sending armies to Greece but basically you have to pay so that Greece stays in the empire and then comes the questions the Germans ask, how long are they going to be willing to pay for it? Because it comes out of tax payers´ money, you understand, the politicians, they don’t pay it. Most politicians don’t even pay taxes because they are with the EU in Brussels or with the IMF or the OECD, all these clowns they don’t pay tax and then they go and propose wealth taxes on the others, on us, who work. They don’t work, they don’t pay tax but the others should pay tax.

Basically the tax payer in Germany one day he will say well we don’t like the policies of Mrs Merkel and this is happening in America, they don’t particularly like Donald Trump but they like the fact that he points the finger at all these others that have abused the system so badly. My sense is that we could have not necessarily revolutions in the sense that you have armies fighting against each other in Germany and France like in the French revolution and so forth but what we could have is through the democratic process people saying we are just fed up with these bureaucrats in Brussels and the ones in Berlin and the policies that always lean on America. We are sovereign nations; we want to be free, even if it costs us something.

Inflation and asset price increases | VIDEO

Marc Faber discusses how low interest rates have helped to raise asset prices and inflation. 

Politicians not doing enough to help the poor and middle class

I have read a lot about inflationary periods in history which we have experienced from time to time, under John Law in France and then later during the French revolution and in Latin America. I also experienced periods of high inflation myself in the sense that during the very high inflationary period in Latin America in the 1980's I visited most Latin American countries because I was interested in the fact that when you have high inflation in a country, usually the currency tumbles and so although there is high inflation in local currency, in a strong currency unit, like in the 80's the dollar was strong, the price level actually went down very substantially so investment opportunities were fantastic.

You could buy buildings in Buenos Aires, the stock market in the late 1980's in Argentina... the whole stock market was worth 750 million US dollars, 750m, less than a billion. So you could essentially have bought the whole of Argentina for less than a billion dollars!! What happens in these periods of high monetary inflation is it is highly beneficial for a few families and a few well to do people because they know how to move their money between local currency and foreign currency and they know how to accumulate assets.

The people that get hurt are the masses, the middle class, the lower classes because their wages go up much less than the cost of living increases. Then what usually follows is a kind of political change of wind and you have new governments coming in and sometimes you have revolutions and sometimes you have an entire new leadership.

We had hyper-inflation in Germany and by the way there is a very good book out about the economics of inflation during the Wiemar period, but in each instance it led to a polarization of wealth and this is precisely what is happening now. You have huge merger and acquisition activity and you have stock buy-backs and if you look at the wealth inequality it is not between 1% of the population and 99, it is between 0.01%, the Carl Icahn's of this world and the big assets holders and then the masses that do not have assets so they don’t benefit from rising asset prices.

I can tell you also that here in Switzerland, 90% of the people, they think the government is no longer looking after the interests of the people but after their own interests. It is the same in Europe. I think this is a huge failure of democracy, that democracy instead of having been able to elect leaders that look after the interests of the people, they actually look after their own interests. I mean you look at the Clinton's, the Bush families and so forth, do you think they care about the ordinary Americans? They don’t care, they care about themselves, it is a power game. They care about money that is for sure.

Marc Faber speaks with Marcpolis for interview

Full interview separated in a playlist. Click the above to watch the video.

October 2015 Market Commentary | Marc Faber

The late Kurt Richebächer opined that, “Capital and wealth increases when a community produces more than it consumes. Capital and wealth decreases when the community consumes more than it produces. What is happening in the United States is the latter - with the consequences of general impoverishment.” 

In an earlier report I explained how Friedrich Hayek gained fame among English-speaking economists at the London School of Economics in 1931, because he made the distinction in the use of credit for investment or consumption his key theme. At the time he explained in detail how excessive consumer spending brings about “a shortening or shrinking of the production” and so causes recession. What shrinks is the economy’s capital base. In essence, production that uses capital gives way to production using little or no capital. In other words, the whole economy adjusts to the changes in the pattern of demand implemented by the credit excess. Looking at changes in employment in the US over the years, I note that employment in capital-intensive manufacturing has plummeted, while employment in all kinds of low-paying services has soared.  

There is a difference between excessive credit growth (defined as an “increase in money capital from credits which do not originate from savings but are created out of nothing through the banking system”) flowing into capital investments, and excessive credit growth flowing into asset inflation and financing consumption. Once the boom comes to an end, the severity of the downturn can be equally severe (most likely more severe in the case of a capital spending boom), but the capital spending boom leaves the entire system with investments such as railroads, canals, and other infrastructures, and new technologies. It is a well-documented fact that all canal companies, including the most successful of them all, the Erie Canal Company, went bust. 

Equally, by 1895, 95% of all US railroads were either in default or bankrupt; however, the transportation network that had been built by the canal and railroad companies was a huge boon to the expansion of commerce and trade within the American continent.

Similarly I would argue that, while there certainly has been capital spending excesses in China, at least there is now infrastructure in place whereas there was none 20 years ago (unlike in India, where infrastructure is still decrepit and extremely poor). On the contrary, in the case of an asset boom and excessive credit creation which financed consumption, the system is left with hardly any new capital structures but an over-indebted consumer. In addition, consumer credit allowed the consumer to advance consumption, which then leads to reduced demand once the consumer exhausts his borrowing capacity (as is now the case for the majority of American families).

This report explains why under current fiscal and monetary policies the global economy will likely enter a recessionary phase and why equities will unlikely perform well. 



via Gloomboomdoom.com

Many vested interests in rising asset prices

Greece has defaulted before and repeatedly. Greece is relatively small compared to, let’s say, Italy. For a country like that to go bankrupt it would have huge consequences...

I mean I am less concerned about say Spain, Italy, France, and Greece defaulting than a big one defaulting. You understand? The US is not in a very good position either, if you look at their unfunded liabilities.

I mean the whole system in the world is in a complete mess.

But so far the central banks and the authorities were able to paint fresh paint on the cracks and so they are not that visible. And don’t forget; who actually has something to say in economics? Most of the people are university professors but they are somewhat linked to the Federal Reserve or to another central bank through consultancy arrangements and so forth.

Basically they are bribed to support the system. Number two, the financial system consists of money managers, hedge funds, the large long bonds, long equities funds like Fidelity and PIMCO and so on.

All these guys are interested in money printing because it lifts the asset values and with rising asset values the fees go up and the performance fees go up so nobody has interest actually in an honest economic policy, they all are in favour of Bernanke´s bailout of problems that occurred in 2008.

Marc Faber on Kondratieff and where we are right now

Irving Fisher the economist who essentially became famous because of his book Booms and Depressions in the 30's, said well [its] a very difficult issue with knowing where in the cycle you are because basically it is like you are sitting on a ship and there are waves that will move the ship but then there is also wind that may come from another direction and the waves are not all regular and so forth, so the ship can have many different motions.

My view regarding the Kondratieff is that first of all it is important to understand that it is not really a business cycle but a price cycle. The price cycle obviously in the 19th century when economies were much more commodities related because agriculture until the beginning of the 20th century was the largest employer, so when agricultural prices went up, the farmers had more money and it benefited the farming population and so the economy picked up and when the farm prices went down especially in the US with cotton obviously the economies that were producing these commodities suffered.

So in the 19th century we had several cycles, upcycles and down cycles. Basically the last down cycle as I mentioned would have been in essentially 1980 to around 1998-1999, so approximately twenty years. The up cycle before was between the 1940s and 1980s. You can’t measure it precisely. My sense is that one missing element in the Kondratieff in the late 1990s and early part of 2000-2005 was that normally when the Kondratieff bottoms out, Schumpeter, he built his business cycle theory around the Kondratieff and he explained that usually in the trough of the Kondratieff, in the depression, you have a massive liquidation of debts, and that hasn’t happened, it hasn’t happened.

And so it is conceivable that we were in a downward wave of the Kondratieff after 1980 and then we had within the downward wave this upward wave because of the opening of China, between 2000 and 2008. And as the Chinese economy weakens and as the debt level today is globally as a percent of the global economy 30% higher than it was in 2007.

So we can´t say that there has been deleveraging, on the contrary! The debt level is even more burdensome today than it was in 2007. Therefore it is possible that the big debt deleveraging is yet to occur and when it occurs then obviously commodity prices will still be weak for a while.

Therefore it is possible that the big debt deleveraging is yet to occur and when it occurs then obviously commodity prices will still be weak for a while.

The question is then, if we follow through and say ok, the price of copper went from 60 cents a lb to over 4 dollars a lb and now we are around 2 dollars a lb, if it goes back down to 60 cents a lb, which I don’t believe it will, but say if it did, or if gold went back to 300 dollars and oz., if it did, what about financial assets?

Where would they be? Because that decline in commodity prices would signal a huge problem in the global economy and under those conditions I doubt that financial assets would do well, there would be massive bankruptcies among governments and massive write offs in sovereign debts. Greece should write off at least 50% of their debts and even then the debt would probably be too burdensome for an economy that hardly produces anything! So these are signals that I take very seriously and I quite frankly given the recent weakness in commodity prices, I can´t see how the global economy is getting stronger. I just can´t see it.

Money printing not helping the intended people much

The Fed and other central banks have misjudged the global economy. The global economy is not accelerating as the other economies were expecting. It’s badly decelerating. In many countries, we’re already in recession.

QE 

I don’t believe that money printing and artificial low interest rates have actually helped much except for asset prices. But the concentration of assets is very limited. It’s not among the broad public. It’s among wealthy people like you, me and the financial people you just interviewed at the Milken Institute.

Rising prices for consumers symptom of QE ?

If you look at rentals in London where you live or in New York or in other cities in the U.S., they have of course been going up much more than the CPI [consumer price index] would suggest. Even the day before yesterday, Donald Trump was interviewed... he said Obamacare is a disaster because the premiums have gone up close to 50 % for some people.

We have to define what inflation is. Inflation is basically the increase in the supply of money and credit. There are symptoms. You can have wage inflation. You can have commodity inflation.

Fed created the housing bubble

One of the problems with this artificial low interest rates is the following. We all know one of the problems is the size of the governments in the western worlds, they have become larger and larger. This was enabled by low interest rates because governments could borrow more and more money. 

Mining company bankruptcies could lead to a beginning of a rally in miners

"Mining stocks are extremely depressed, I mean if someone says what is cheap in the market place then I would say the miners are incredibly low, next station is bankruptcy and maybe one of the big ones still goes bust and that would probably signal the end of the bear market in precious metals. Possible."

Mining companies cheap but could get cheaper

"I would say the miners are incredibly low, next station is bankruptcy and maybe one of the big ones still goes bust and that would probably signal the end of the bear market in precious metals. Possible."

Growth Statistics worldwide are manipulated

QE4 has to be really big to be effective | VIDEO

Marc Faber believes if the Fed will need to implement QE4, it will need to be of $1 Trillion otherwises it wont work

Marc Faber on Bloomberg Malaysia | Interview

Dr Faber shares his wisdom on various topics including QE, China, the Economy, Asset Markets and much more.

2016 US Presidential Race needs more qualified candidates

Going into the year end and the next year, I only have to look at the presidential candidates and then I know I have to be bearish. It's a pity that a country like the U.S., with so many highly intelligent and educated people, can only produce the kind of candidates we have.

Marc Faber's pick of the best candidate for stocks

He's [Republican Ted Cruz]  a relatively conservative person and that may be good for stocks.

Inflationary policies similaritaries to Socialism

Today, I would like to focus on two observations by Ludwig von Mises. According to Mises, “True, governments can reduce the rate of interest in the short run. They can issue additional paper money. They can open the way to credit expansion by the banks. They can thus create an artificial boom and the appearance of prosperity. But such a boom is bound to collapse sooner or later and to bring about a depression.”

I wished central banks would understand this issue clearly.

Mises also noted that, “Inflation-ism, however, is not an isolated phenomenon. It is only one piece in the total framework of politico-economic and socio-philosophical ideas of our time. Just as the sound money policy of gold standard advocates went hand in hand with liberalism, free trade, capitalism, and peace, so is inflation-ism part and parcel of imperialism, militarism, protectionism and socialism.”

I believe that inflation-ism is not only part and parcel of socialism but also of increased regulation, diminishing personal freedom and, therefore, of lower economic growth potential.

via http://www.gloomboomdoom.com

China in short term trouble but longer term growth exists

I think China from a cyclical point of view is in a very serious downturn but from a secular point of view I think there is still tremendous growth opportunity in the long run.

Don’t forget the US after 1800 had numerous financial crises and depressions, a civil war and went through World War One and the depression years and the country continued to grow.

There are no SAFE ASSETS

I think that because of modern central banking and repeated monetary policy interventions there is no safe asset anymore.

When I grew up in the 1950's it was safe to put your money in the bank on deposit, the yields were low but it was safe. [But] nowadays you don’t know what will happen next in terms of purchasing power of money, but what we do know is it’s going down.

I would say if I had to turn anywhere where the opportunity for large capital gains exists and the downside risk in my opinion is limited, it would be the mining sector, specifically precious metals. Commodities may still go down for a while but I don’t think they will go down forever. I would rather focus on precious metals [such as] gold silver and platinum because they don’t depend on industrial demand as much.






*Sept 11, 2015 Update - Fixed Video playback

China may be the excuse for no rate hikes in September

Markets can go down even in Oversold conditions

Well I have this to say about markets: they have become very oversold in the near term and medium term. Long term, if you look at this--say twenty years chart of the S&P--the recent decline hardly shows up, but it can get much worse. 

Let me remind your viewers that the day before the market crashed in October 1987, the market was also already oversold, and then the Dow dropped 21 percent in one day. So unusual things can happen when the goal of the authorities is to reduce some rift through central banking and monetary policies and fiscal policies. Then these depressed risks come back one day at the systemic rate, and this is what may happen now.




Updated: September 3, 2015 

Downturn in global economy causing markets to sell off

What we have is a general downturn in the global economy at the present time that will have a negative impact on earnings. That's why the markets are selling off and emerging markets have been selling off for a long time. The U.S. was in "lalaand" to believe that their economy and their corporate earnings would not be affected.

Emerging market selloff to hit US Stocks

Marc Faber speaks with Maria Bartiromo of Fox Business News


We have a big selloff in emerging economies. In dollar terms many emerging markets have tumbled. The U.S. is essentially the last man standing, and I think it will spill over to the US.

GM (General Motors) about 34 percent of the sales are in China and close to 50 percent of the profits come from China… In July car sales were down 7 percent and more to come

Marc Faber full interview with ET News

Topics include India economy, Chinese Yuan devluation, Chinese economic weakness, US Fed and much more.

Conspiracy theory for Chinese Yuan devluation

We do not know exactly why they did it [Chinese devalued the Yuan] because 2% devaluation is not going to help exports and even a 10% or 20% devaluation is not going to help exports meaningfully in a world that is slowing down. 

My view is that the central banks around the world would talk to each other and the Federal Reserve talks everyday to the ECB, to the Bank of England, to the Bank of Japan and so forth. 

The Fed may have very well told the Chinese why don't devalue their currency somewhat. This will give the Fed an excuse not to increase interest rate in September.

Context of Yuan devaluation is more important

The two or three percent devaluation of the yuan is completely meaningless.

You have to look at the Chinese currency in the context of all other currencies. 

The Chinese yuan has appreciated by 80% over the past two years against the yen. 

Over the last few years, the yuan has appreciated against the dollar, and the dollar has appreciated against just about anything in the world.

Don’t forget the People’s Bank of China has said that they will have now a currency that will reflect more market forces. And that means that if the market forces are against the currency, then the currency will go down.

Chinese Yuan further weakness ahead

It is likely that the Yuan, which has had been strong until recently, has turned the trend and here onwards, it will rather weaken. It would easily weaken from the recent peak by about 10%. We should not forget many Asian currencies and many emerging market currencies are down 30% to 60% over the last four years.

Global Recession to come warns Marc Faber

Global Recession coming up

Indices are close to a high but if you look at the 12 month new highs and the 12 month new lows, there are far more 12 month new lows than new highs.

I think there is a deceleration of economic activity everywhere. The U.S. has done relatively well, but also in the U.S. there are now cracks that are appearing… industrial production, new orders for durable goods… if you look at the trade balance of the U.S., imports are up and exports are basically down.

You look at corporate announcements of United Technologies and Caterpillar Tractor, which are big companies in the industrial sector… their announcements are all essentially negative for the second half. Technology companies have all warned about the second half.

China Slowdown

The Chinese economy is nowhere near growing what the government is publishing. In July, car sales and this is the first time in a very long time, car sales were down for the first time in a very long time, 7 percent in China. And yesterday I talked to someone who has a luxury car dealerships in China who says car sales have hit a brick wall and exports are down and so forth.

When the weakness in China becomes so evident, it also affects all its trading partners and China is the largest trading partner of 124 different countries in the world. The new point of view is that [China’s economic growth] is nowhere near 7% and more likely closer to 2%, if any growth at all.

Marc Faber on China's New Silk Road program

China has established the Asian Infrastructure Investment Bank (AIIB) and went ahead with plans for a so called “New Silk Road”, a huge infrastructure project, connecting China with Europe via a new land route and a maritime equivalent. Steen Jakobsen from Saxo Bank mentioned a while ago that this could be a game-changer - particularly in regards to the demand for commodities as much of the work and investment needed is in infrastructure, buildings and railroads. What do you think?

Well I think there may be some euphoria about this infrastructure building and the ´New Silk Road´. My sense is that yes, some investments will take place but we have to recognize that first of all it will take time. It is not going to be built overnight. Whether it will be really so profitable is another question and the other question is will China have the money to do it?

We are moving here into geopolitics, basically, because of the antagonism of the Western world towards Russia specifically Mr Putin, whom they portray as a villain when in fact he wasn’t the aggressor, it is NATO and the Neocons that essentially pushed the existing government out in Ukraine and began to create the whole problem that we have. If you look at the map of Europe and Eastern Europe it is very clear that Russia will not allow NATO to be east of the Dnieper River, in other words in eastern Ukraine nor will they give up the Crimea, this is strategically of great importance for Russia, has no strategic value for anybody else except for Russia. So the tensions have arisen and because of this hostility of the West towards Russia, Russia has been pushed closer to China.

They share very substantial borders areas with each other and because of the proximity of the two countries and the nature of their economies, Russia possessing the resources and China largely technology and consumer goods which Russians don’t necessarily produce, there is a symbiotic relationship going on. The Chinese and the Russians want to exploit this strength, what they call the hinterland essentially and the rim land in geopolitics.

Of course the US is completely against it because the containment policy was precisely directed against the major power emerging again in Central Asia and Far East Russia and in Russia. So this Silk Road initiative in my view is far from being a certain thing that it will succeed because there are also political obstacles and you know, when the Americans want to create trouble, that they excel at, they are very good at doing that.

Instead of building nations they destroy nations, from Libya to Egypt to Syria to Iraq and Afghanistan. Whatever they touch, they mess it up or in good English F* up!


via www.marcopolis.net

Commodities down due to China slowdown

Question: In your 2002 book “Tomorrow’s gold” you identified two major investment themes: emerging markets along with commodities. That was a great call. As for commodities, they had a great run up until 2008. Then they crashed sharply along with everything else just to recover strongly into 2011. Since then they have acted weakly, and recently commodities even reached a 13-years low. Is this the end of the commodities-super-cycle, as some have claimed, or is it more like a correction?


Marc Faber: Well that’s a very good question because obviously the weakness in commodities this time is not due to, like, contraction in liquidity as we had in 2008. 2008 commodities ran up very quickly in the first half until July. The oil prices in 2007, just before they started to cut interest rates in the US were still at 78 dollars a barrel and then by July 2008 they ran up to 147 dollars a barrel. Afterwards they crashed within six months to 32 dollars a barrel and then as you said in 2011-2012, they recovered and were trading around 100 dollars a barrel. Now they have been weak again as well as all other industrial commodities and precious metals.

My sense is that this time around, commodity prices are weak because of weakness in the global economy, specifically weakening demand from China,

because if you look at the Chinese consumption of industrial commodities, in 1970 China consumed 2% of all industrial commodities, by 1990 it was 5% of global commodity consumption for industrial commodities and by the year 2000 it was 12% and then it went in 2011-2012 to 47%, in other words almost half of all industrial commodities in the world were consumed by China.

Therefore a slowdown in the Chinese economy has a huge impact on the demand for industrial commodities and on the wellbeing of the commodity producers, whether that is the commodity producers in Latin America, in Central Asia, Middle East, Australasia, Africa and Russia.

And so because of the reduced demand from China, the prices have been very weak and I think that may last for quite some time because the Chinese economy will not go back and grow at 10% per annum any time soon. My view is that at the present time, there is hardly any growth in China. In some sectors there is a contraction and in some sectors, and don’t forget China is a country with 1.3 billion people, so some provinces may still grow and other provinces may contract, as well as some sectors may grow and others may contract. But in general I think the economy is weak.

My estimate is that at the very best the Chinese economy is growing at the present time at say 4% per annum and not at 7.8 or 8% as the government claims. We have relatively reliable statistics like auto sales and freight loadings that are down year on year, electricity consumption, exports, imports and so forth. So there has been a remarkable slow down and to answer your question about commodity prices, if the global economy slows down as much as I do believe, because other economists predict an acceleration of global growth, a healing of global growth, my sense is that it is the opposite, that within 6 months to one year we are back into recession and then it will depend on central banks and what they will do. Up until now, they have always printed money and I suppose they will continue to do that.

Now from a longer term perspective, commodity cycles last 45 to 60 years roughly, from trough to trough or peak to peak. In other words we had a peak in 1980 and then commodity prices were weak throughout the 1980s and 1990s, then in 1999 they started to pick up and went and made a peak for most commodities in 2008 and for the grains 2011-2012. Since then everything has been weak. I could argue that well, maybe this is a major correction in the commodities complex within still an upward wave of commodity prices and that the final peak prices are not yet seen.


via Marcopolis.net

High price valuations will lead to low returns

I’m of the view of Jeremy Grantham — that when you have low valuations, future returns are relatively high; when you have high valuations, future returns are relatively low.

Insurance can be in form of Gold as well

Gold is insurance if the banking system fails. 

As an investor I’d like to own something outside the banking system, and that includes real estate, art and gold.