When I think of central banks, I think of alchemists. They were trying to mix all kinds of powders and chemicals to produce essentially gold. And they all failed. The central banks are just mixing water, in other words, paper money and the results cannot be a favorable outcome in the long run.
It's possible that suddenly inflationary pressures will be there, that central banks should then act but they cannot because the system is so over-leveraged. Now with this low interest rates and negative interest rates, Pension funds, even in these beautiful years of returns, 2009 to today, they have become less funded, they have become more underfunded. With interest rates at zero and this low, their portion that's in bonds is never going to meet the expected returns of 7.5 percent. It's physically not possible. They are going to continue to print money and the Fed's balance sheet and the other central banks' balance sheets will continue to grow until the whole system collapses and then you and I in gold assets will be better off than in paper assets.
Probability that the U.S. will go into a recession by 2020 Marc Faber: 100% probability. We are in a lengthy expansion already, far above the average expansion in the 20th century. We have a lot of imbalances, in my view a recession is inevitable. But unlike central banks, I do not regard a recession as negative. It's like the human body, an economy also needs a resting period occasionally to adjust. A recession is not something that has to be avoided at all costs. The European Union will break up by 2020 Marc Faber: 80%. Economically, the EU would probably will break up. But it's also a political issue as there may be lot of political obstacles to complete a split from the EU. Whether they can really split from the EU is not entirely clear.Some countries like Austria or France would like to split from the EU, but if they could do it in practice is not entirely clear to me. Gold price will hit 5000 per ounce by 2020 Marc Faber: I think 60% probability but I hate to put in a price. My projection is that it will go up against the loss of the purchasing power of paper money. If someone says to me I dont trust the markets anymore I want to be 100% in cash. I'd tell him which cash and how do you keep your cash. In a bank deposit ? You know there is a risk the bank could go bankrupt. So for someone to be 100% in cash is very risky. The Chinese currency RMB will depreciate 10% from current level against U.S. dollar before 2017 Marc Faber: 20%. I dont assign a high probability because unlike other people, I'm not that bullish about the U.S. dollar. I don't see anything much great about the U.S. economy. On the contrary, China is still a competitive country even if wages have gone up substantially. I don't see a necessity for China to devalue. World War III before 2025 Marc Faber: Under Hillary Clinton, 80%. Under Donald Trump the probability of World War III is low... 20%. The neocons led by the Bush family are pro-Hillary, because they know they can manipulate her, they have made a deal with her, in which she does her social agenda in the U.S. while the neocons take over foreign policy. As such, the people in Asia are more likely to become harsher towards China. In Ukraine, for example, if Hillary's administration starts a conflict there, the Chinese will react because China now has the power. Nowadays, an aircraft carrier is a sitting duck ready to be shot down. A Mars colony before 2050 A: Even if people can live on Mars, I don't think there will be an economy any time soon. Maybe some people will go on a holiday there, I dont know. The cost of travelling there will be very high.
Would Dr Faber go Long or Short ? The Federal Reserve: Short The European Central bank: Short The People's bank of China: Short USD: Short Euro: Short RMB: Short Japanese Yuan: Short Thai Baht: Long Gold: Long Oil: Long Steel: Short Natural Gas: Long Soybeans: Long Windmills: Short Solar power: Short New York Property: Short Silicon Valley Property: Short London Property: Short Beijing Property: Short Hong Kong Property: Long Shopping malls in China: Long Facebook: Short Apple: Short Tesla: Short Uber: Short Amazon: Short Tencent: Long Alibaba: Long S&P500 Index: Short The Hang Seng Index: Long The Shanghai Composite Index: Long Hedge funds: Depends Planet Earth's Environment: Short Containing climate change: Short World peace: Short Terrorist attacks: Long Social unrest: Long Donald Trump: Long Hillary Clinton: Short
Most assets by traditional valuations are overpriced. Now are they overpriced compared to zero interest rates or negative interest rates? If you take the 10-year German bonds or the 10-year Swiss bonds or the 10-year Japanese bonds, you have no or negative yield. But you can buy equities that give you a dividend yield of 2 percent or more. Then you say stocks compared to negative interest rates are a bargain. But they are not cheap by traditional valuation methods. However, I think it’s dangerous for someone to say: “We all agree that it will end badly, so we keep 100 percent of our money in cash.” First, you have to decide which cash. Number two, we don’t know what the time frame until it ends badly is. And in an extreme money-printing environment, the Dow Jones Industrial Average can go to 100,000. It may likely not go up against precious metals, but it can go up in nominal terms endlessly. It’s not going to help the typical household. I have seen many hyper-inflating economies, and in each case, the standard of living of average people declined. That will be the case. If I were interventionist—which I’m not, and I do not support the interventionist—if I were a central banker and I said to myself the right policy now is to increase the negativity of interest rates, we go from 0.5 percent negative to 5 percent negative. In this particular instance, the people and companies take the money out of the financial system and store it in cash in a vault. The measure to implement negative 5 percent is not going to work very well, so one way to make it work is to abolish cash. You can still hoard real estate, food, cigarettes, and precious metals, but you can’t hold cash anymore. So that is likely to happen, in my view, if they go all the way.
We already have large deficits but no deficit is large enough for the interventionist, so they will boost fiscal spending. They will finance deficits by issuing government debt, which the central banks will monetize. The Treasury will issue debt, and then the Fed will buy all these debts. Of course, that will not end well, but it will postpone the problem for a while.
Then they will find some academics who will blame wealth inequality on the evil capitalists who made so much money out of asset bubbles. They will blame the economic woes on these people. To some extent this is true. But the rich people did not create the inflated asset values; it was the central banks, by slashing interest rates to zero and negative interest rates in many countries. First, you create mispricings through artificially low rates and negative interest rates and you boost the income and wealth of the super-rich. It’s at best the 0.1 percent that really benefit from asset inflation, at the cost of all the people that have no assets and so you have this rising wealth inequality. So we have to tax the rich people and tax them more. Taking money from the rich is appealing if you go to voters, and you say to them, “Look, the reason the economy is doing so badly, it’s because of the rich people, the billionaires. We have to take 20 percent away from them and give it to you.” You can be sure that everybody will vote for that because the wealthy are a minority. This is what happens after monetary policies completely fail. Some well-connected people will hide their wealth but a lot of people won’t. Even if they take 50 percent from the richest, it’s not going to help. The next step will be to take money from less wealthy people; the interventionists will go all the way.
How long could money printing go on ? The developed market central banks can go on for quite some time. If Zimbabwe prints money, the pain is more obvious right away because if you are Zimbabwe, and you print money and the others don’t, and the currency collapses, and you feel the pain much sooner. If the major central banks, the Fed, the European Central Bank, the BOJ, the Bank of England, and the Chinese monetize and print money in concert and agreement with each other, they all talk to each other; then the currencies don’t collapse against each other. There may be fluctuations, but we don’t have a general collapse of a currency. Paper money, in general, can then collapse, and it has to a large extent against asset prices like real estate around the world over the last 30 years, against equity prices, against bond prices—which have been rallying since 1981—and against precious metals since 1999. Asset price inflation is less obvious to the average person in the street. The average American has no money, so he doesn’t care if prices for paintings and real estate go up—until it touches him.
It’s nonsense to claim that inflation is only going up 1 percent per year in the United States. The cost of living of a typical family is going up much more than that—insurance, transportation, schooling are all going up. For example, health care premiums for insurance policies [have risen], so the typical household is being squeezed. The central banks don’t care about that; they don’t look at it. I suppose the system will collapse before we become like Venezuela. In the West, if they start to print money, the end game will be brief. Within five years, I expect the system to implode.
The typical investor is someone who has a job, has some money, and wants to preserve the capital he has accumulated through hard work and savings. And for that person my suggestion is diversification is the best solution. Similarities of Investors to a Tennis player We have to distinguish between say a top tennis player and the average tennis player. The top tennis player will play aggressive to win. The average tennis player is better of playing a game where he does not make a lot of mistakes.... [Watch the video above for the full interview]
Worldwide, most asset prices are grossly inflated. An asset class that became inexpensive at the end of last year was precious metals - gold, silver and platinum. While they have rallied nearly 100% since then, I think they are still reasonably attractive. If I compare their prices to stocks and real estate, I think the precious metals is where I still find value. They are exceptions to the rule that asset prices are grossly inflated. But if we were to talk about asset price inflation in general, everything will go down in value - be it bonds, equities and collectibles. But precious metals will fall less than equities.
The bubble can last a long time, one just needs to increase the size of money printing continuously. As a result, asset prices - stocks and real estate - go up phenomenally. So in essence, we have a bull market across asset classes. However, the value of paper money depreciates, as it has done for the last 30 years. Whatever the central banks do now, asset prices will depreciate against precious metals - gold, silver and platinum.
I think that most sovereign wealth funds will have significantly lower inflow in the next few years, than they had between 2007 and 2014, when their assets essentially doubled from around $3 trillion to over $7 trillion. But, I don’t believe there will be a huge selling pressure from sovereign funds.
My regular readers know very well by now that I consistently recommend investors to hold a diversified portfolio of different assets consisting of equities, bonds and cash, real estate and precious metals. The purpose of this diversification is to reduce the risk of heavy capital losses. Since nowadays, most assets are grossly inflated I am not so sure that this diversification is full proof anymore, but what I am sure of is that the strategy of owning different assets is the best option for the average investor. It is nonetheless pretty clear to me that if becoming ultra-rich is the objective, diversification is simply not an option. A friend of ours, Charlie Bilello who is the Director of Research at Pension Partners, LLC, an investment advisor that manages mutual funds and separate accounts and who is the co-author of four award-winning research papers on market anomalies and investing was kind enough to share with us a paper entitled, Big Winners and Big Drawdowns. The paper is very interesting because it shows that people like Steve Jobs, Bill Gates, Jeff Bezos, Eric Schmidt, and Larry Page became incredibly wealthy by having almost all their wealth in just one business, which however, experienced repeatedly huge drawdowns. Bilello rightly says that, “All big winners have big drawdowns. Accepting this fact can go a long way toward controlling your emotions during periods of adversity and becoming a better investor.” I fully agree with Bilello that controlling one’s emotions during periods of adversity can go a long way toward becoming a better investor. The successful investor should also be aware that the mind-boggling long term performance of stocks such as Apple, Amazon, Microsoft and Alphabet are the exception and that they are not at all representative of the returns investors should expect from their portfolios. More so, as I explained above, diversification – well-understood disciplined diversification – can help investors to better control their emotions. There is a point that is important: We investors will not only experience higher volatility and lower returns on our assets in the next few years. We shall also have to endure vicious interventions by governments and central banks, which are nothing else but an increase in taxes on private property or, as I believe, a form of hidden expropriation. The right choice of the custody and geographical location of your assets will be increasingly important. Concerning the custody of your assets beware of massive fraud everywhere – see following link: http://www.dailyinflation.com/other/premier-cru/ Following last month’s discussion of Mrs. Stutzman I received quite a few comments. The majority of the comments condemned the behaviour of Mrs. Stutzman, which I actually support.
