I wish all my readers Merry Christmas and a Happy New Year. Since year-end is visiting time, remember that, "Some cause happiness wherever they go; others whenever they go" (Oscar Wilde) and that, "To keep your marriage [or a relationship] brimming, with love in the loving cup, whenever you're wrong, admit it; whenever you're right, shut up" (Ogden Nash). With kind regards Yours sincerely Marc Faber
Eventually the victory of Trump is geo-politically more favorable than a victory of Clinton because Trump understands that Russia has a different perspective of the world - that the Russia has a sphere of influence, that the Chinese have a sphere of influence. He understands that the US doesn't need military and naval bases in 200 different countries around the world. Nobody wants to attack the US.
In the 19th century a small country like Britain controlled a large portion of the world because Britain was a naval power and they had technology and so forth. They could go into China and punish the Chinese to the extent that the Chinese had to gift them an Island - Hong Kong in 1842 or 1843 and get the Chinese to pay them a huge quantity of silver coins. When you think of it nowadays Britain wants anything, the Chinese will tell them to go to hell. Its a different world. There has been a huge change structure of global power.
Before Brexit the elites and political class warned it would be a disaster. It has been a disaster for the Pound Sterling but economically not that much has changed. And similarly the elite in America, both the media, democrats and republicans warned that a Trump victory would be a disaster for the economy. Well so far the stock market has made a new high, it remains to be seen how the economy does. But in this context what will happen is if the economy goes into recession in the next two years, the media will blame Mr Trump. If the economy of Britain goes down, the media will blame it on Brexit.
The recovery in US has been in an expansion admittedly of poor quality and of poor growth but its nevertheless been in expansionary mode since June 2009. So in other words next year will be eight years into an economic expansion which is by historical standards is twice as long as the typical expansion in America. So a recession is overdue regardless. And I think the recession is going to be triggered by a rise of interest rates. Basically interest rates began to rise in July of this year, and the bond market was weak before Trump was elected and would have been weak if he had lost the elections to Hillary Clinton.
I am assuming that all of you must feel a certain Trump election victory fatigue. Still, since so many of you asked me about Mr. Trump and his future policies I wanted to share with you an article by Edward Chancellor about the election, which reflects almost entirely my views on the topic. Chancellor refers repeatedly to the economist Mancur Olson, whose book The Rise and Decline of Nations, (published in 1982) I have read several times. Mr Chancellor is well-known for his economic-historical book Devil Take the Hindmost: A History of Financial Speculation (1999). Chancellor concludes that, “at heart, Olson was an optimist: ‘it takes an enormous amount of stupid policies or bad or unstable institutions to prevent economic development.’ If - and that’s a big IF - Trump were to succeed in assaulting the ‘growth-retarding’ forces within American society, he could well end up surprising his legions of right-thinking critics.”
I am far less optimistic because as Noah Smith of Bloomberg writes, Even Trump Is a Keynesian. Furthermore, the stock bulls believe that stocks will move up while bonds will continue to weaken. However, higher interest rates would have a negative impact on the auto and housing sector, on commercial real estate, as well as on corporate earnings. Hence higher rates could more than offset any potential benefit of expansionary fiscal policies. In other words, stock market bulls and bond bears may overlook the fact that higher interest rates seem to be incompatible with a strengthening highly leveraged US economy.
The US market is not quite as strong as the indices would suggest because CNBC said the other day, 90 percent of the S&P gain since December 2014 came from Facebook, Google, Amazon, Netflix. There has been a lot of selling in the emerging economies stocks since 2011. This year most emerging economies have outperformed the US. I think that in 2017 my recommendation would be to overweight emerging economies, and I would also overweight Europe, partly because I think that the sentiment about the U.S. dollar is far too optimistic. I think the dollar is terribly overbought and overvalued, so I wouldn't get into the U.S. dollar at this time.
Watch the video below for full interview
The obvious trade with a Trump victory is to own Russian and Kazakhstan assets — bonds and equities. That is the obvious trade for the simple reason that Mr. Trump has a more benign view of the world and respects the perspective of foreign leaders. In the U.S. we have a fully priced stock market ... the large bargain you can find is in emerging markets in my opinion.
Our friend Sydney Williams states that, “Across the globe, men and women have begun to stand up against elites who control government, unions, banks and large businesses. People have grown weary of the lies, the corruption and the self-dealing. Brexit in England was manifestation of this unrest, as was the Republican nomination of Donald Trump in the United States.” Peggy Noonan writes in the Wall Street Journal that, “Those in power see people at the bottom as aliens whose bizarre emotions they must try to manage” and that, “This is about distance, and detachment, and a kind of historic decoupling between the top and the bottom in the West that did not, in more moderate recent times, exist.” For several years now, I have been reading my friend Jawad Mian’s Stray Reflections. This is not to say that I agree with everything he says, but over the years I enjoyed his views on markets (frequently very contrarian) and his thoughts on life. In The Forgotten Man, Jawad addresses the same concerns Williams and Noonan brought up, but from an economic and financial perspective. I wish all my readers a wonderful festive season. I also wish that my American readers vote wisely because as Plato observed that, “The price of apathy towards public affairs is to be ruled by evil men” and as Frank Kent opined that, “The evils of government are directly proportional to the tolerance of the people.”
It's not politically correct to say it, but for the social system of the Western world and for capitalism a serious recession would be desirable, because the financial sector as a percentage of the economy is still too big. In 1973 when I came to Asia everybody said that if the US sneezes, then Asia catches a cold, because all Asia's exports went to the US.
Most individual investors have the tendency to commit financial suicide. In other words, if they see the NASDAQ going up they may resist buying expensive stocks for a long time but in the end, they go to cocktail parties and all their neighbors say, “Today I made so much money buying this stock.” Of course at cocktail parties you have a group of people, they own different shares, all of them go down but one goes up. They’ll talk about the one that goes up. They never talk about the ones that go down. In the end, they also buy those NASDAQ stocks and the whole thing collapses. “Then they go again to cocktail parties and then they see the neighbor’s house appreciating by 20% per annum. Finally, they can’t resist. They buy homes in 2005, 2006 but since they lost their money on NASDAQ they have to borrow 100% on the homes. The Feds tell them that home prices will never go down and don’t forget Ms. Janet Yellen, she was the president of the San Francisco Fed from 2005 to 2010. The San Francisco Fed is responsible for Arizona, Nevada and California, the three biggest housing bubbles in the whole country. Thank you very much Ms. Yellen. You’re now in charge of the whole US. You can create other bubbles.
It’s basically gloom, boom and we’re all doomed. The question is: when? I believe the central banks in this world have embarked on an experiment whose consequences will be very bad eventually. It will end either by the government defaulting or by massive money printing, and by doing that, you essentially lower the purchasing power of paper money. There will be a default regardless either through money printing or a straight default. It’s only a question of time, but default will also occur in various other ways. Pensioners or Social Security recipients would either get their incomes cut massively, or they will get their income in money that isn’t worth anything. In other words, today they can buy a basket of goods with their pension, but in the future they may only be able to buy a loaf of bread, if anything. What should the average investor do My advice would be diversification and I don’t believe you can trust paper money anymore. It has to function to be a store of value. The purchasing power of money has gone down a lot. By “a lot” I really mean by a lot.
It's very hard to short a bubble, because you never know when a bubble will burst. The Nikkei was in a bubble at 25,000 points – then it went to 39,000. Let's say central banks will continue to print money and keep rates at zero or below, then what is the worst investment? It's cash. If you are really bearish about the world, then you don't want to be in cash, you need to invest. Oil There is a real danger that oil could go up substantially, maybe not immediately, but in the long run, Bonds Everybody says they hate bonds. The 10-year Treasury yields 1.74 per cent, which is very low, but compared to Japanese and Swiss bonds it's relatively attractive. US government bonds still have upside potential, especially if the US Fed continues to implement lower and lower interest rates.
I am spending a lot of time thinking that the current financial system, that we can all agree is not sustainable in the long run. The big question is how will it all unwind? Will it unwind with a breakdown of democracy, with a breakdown of law and order? We just do not know. But one of the potential significant problems that may occur is what the Fed and other central banks actually wish for and that is inflation. There is a good chance that commodity prices have bottomed out and that inflation in general will accelerate. In other words, people’s cost of living will start to go up more than what is desirable. And that will depress real earnings, but it will be good for assets such as commodities, especially precious metals. Obviously, very negative for bonds and probably negative for equities when yields go up. So, I want to own some commodities. If you look at sectors in the US or globally, what is inexpensive? Gold shares have rallied 100 percent from the lows, but they came down before by 90 percent, so they are still relatively inexpensive. You look at basic stocks that are producing copper or aluminium, these companies are not terribly expensive from a long-term cyclical point of view. So there, I see some value and that is where I would put some of my clients' money. If you come with USD 1 million, I am not going to buy and put it all in gold and gold shares, that would be irresponsible. But I would tell you, maybe you should have at least 25-30 percent of your money in an asset that cannot be printed by central banks.
The US market is so much more expensive based on price to sales, price to earnings, price to book than any other market in the world that US stocks are in my opinion more vulnerable than in general perceived. We were in February of this year at 1,810 on S&P 1,810 from here would be a decline of more than 10 percent. But if the market goes to 1,810 we could go down also to 20 percent or even 40 percent. But I believe that as we would approach the February lows on the S&P at 1810 that the Fed - under the influence of the money printers and people like Larry Summers - and other central banks will step in and start to buy equities to support the market.
European banks are in a very poor financial condition. They will need more capital but in theory, the European Central Bank (ECB) and other central banks can essentially provide liquidity to the established banks and the governments if they like. They can basically bail out banks. They may have bail-ins here and there where some bond holders -- like there are coco bonds outstanding -- would get hurt to some extent but basically the government can essentially buy shares in the Commerzbank or Deutsche Bank and recapitalise them. As a result of that, the government will be an owner of the 50 percent of the bank or 30 percent or whatnot. That is all possible. We just don't know. We are writing a report about this in a not-so-realistic economic and financial world.
I would tell my clients we have had an incredible bond market rally since 1981. Bond yields are not going to go down much more, they may not go up substantially but they are not going to go to -5 percent. So, the bond market is relatively unattractive. Does it mean that equities are much more attractive? That is far from certain because if yields on say the US 10-year treasury goes to 2.5-3 percent, that may hit back the equity markets as well. So, I would tell the guy, look I am happy to invest your money but the returns over the next 5 or 10 years will be very disappointing to you because you expect to make between 8 and 12 percent on your portfolio every year. That is simply not going to happen.
The belief is obviously that a Trump victory would be negative for asset markets, for the US market, and that a Hillary victory would be positive. But I am not so sure about this belief for the simple reason that Hillary is basically a neocon and a warmonger. She has invaded or supported the invasion of variety of countries already. So, that may lead to more international tension. Whereas Trump is more aware of the fact that the US' superpower standing is gradually waning and that other countries are coming up and that US cannot fight and be the policeman of the whole world. [Trump realizes] they have to gradually start to negotiate with other countries on equal terms.
The Fed sniggers at the thought of a Trump victory. They are supporting Hillary Clinton as incidentally as the entire media establishment is support Hillary Clinton and is anti-Trump. My view is that in this environment we have now clear voices at the Fed and other central banks that basically they should be able to implement negative interest rates and that they might do well if they bought equities. So, under this scenario, you ask yourself what is actually the downside risk.
In my view under both Trump and Hillary will continue to print money, there is no other way out, the system is basically bankrupt. So, money printing will continue and then the question is what will happen to asset market? In theory, they can continue to go up. As I pointed out, I am not optimistic about the global economy. But if you print enough money -- central banks' balance sheets have increased sixteen times between 1998 and 2015 -- why can't they go up another 10-20 times in the next five years? In that scenario, the Dow Jones could go to 100,000 and so on, anything is possible. We don't know how far the math professors at central banks will go.
The last few years, active fund managers, by and large, have been playing a lottery. Some have done well, and some haven't. In general, active fund management has suffered badly at the expense of indexing. I believe, we are moving into a period where small investors have a huge opportunity to make money, as they have a window to capitalize and take advantage of market inefficiency. Index funds mostly buy large companies. As a result, it leads to undervaluation of smaller companies, and that's where I see an opportunity for the individual investors.
The US Fed has grossly overestimated growth rates of the economy, and it appears that it the economic growth has slows down considerably. I think by December 2016, the economic statistics will be even worse. So no rate increases will happen then .... Janet Yellen vs Clinton vs Trump If Hillary Clinton is elected, I very much doubt that she will increase interest rate. If Trump is elected, the likelihood of her increasing interest rate is very high.
In the last few years, as you know, the world has gone into an indexing madness. They just put money into an index. I believe the next 10 years will allow active managers to make a lot of money because they can move from one sector to another. Now some will outperform and some will underperform, but at least they have an opportunity. If you just index, usually you will underperform the index.
My view is that the U.S economy has been slowing down over the last 12 months and corporate profits have been coming down over the last 12 months, and so it’s not a good time to increase interest rate. On the other hand, the Fed went to almost zerointerest rates in December 2008. So in December 2016, we are now eight years, at zero interest rates, the economy must be stinking if you can’t increase interest rates during eight years of an expansion so something is wrong. So my view is that they should have already increased it in 2011 and basically they should increase it now. I think on balance, zero interest rate – and now there are many voices that propose negative interest rate – is rather negative for the economy.
I think it would be good for the world if we had a U.S. President who is not a neocon and that is not guided by people like the Bush family and Dick Cheney and so forth, but someone who is prepared to see the world the way it is. The world is not as it was a 100 years ago where western powers were able to colonize the world and impose their will. Today, we have countries like India and China and even Russia that have become very powerful. And so we have to negotiate with these countries keeping in mind their perspective, not just our perspective of the world.
And this is something Hillary Clinton just can’t do. She was Secretary of State so we know what her record is. She supported the invasion of Iraq. She supported and launched the invasion of Libya and she supported also the nation-building in Egypt and the war in Syria – all major disasters. And so I am saying to myself, maybe after all, Trump is a better choice.
Basically we have volatile markets and we have a lot of leverage in the system. Hedge funds borrow money to buy gold, silver, equities, bonds, and currencies. So if you look over the last 2 years, gold dropped almost 30 percent. So we have this volatility. People say well the markets are not volatile, but that’s not true. There’s a lot of volatility. And I think that the positioning in gold was heavily long. And you have to see some of the hedge funds. They know what the positions of other hedge funds are. And so when they know a hedge fund is heavily long gold on the margin, they may squeeze that position out by selling gold. And then the hedge fund which has large positions may have to dump gold and the price goes down. And then they can cover.
We ... don't know how the world will look like in five years from how - how crazy and insane the central bankers will become. Central bankers can buy all the government and corporate bonds. As in the case of Japan, they can also become a major shareholders in companies. So in essence, they can buy all the stock market. Through money printing, the world can move into State-ownership, socialism and communism.
Today, Britain is completely irrelevant for the world economy. It contributes less than 4% of the global GDP and is a very small manufacturer. What is relevant for the world are growth rates in China and India. A number of analysts fail to understand that if India gets its act together, then it could have a growth rate of maybe 5% per annum....we need that consistently. A consistent growth rate of 5% is an incredibly high rate. We don't have any growth in Europe and Japan. If we were to measure the GDP correctly in the US, there would be no growth. And we are talking about a demographically attractive population. What India needs is liberalization of businesses and the reduction in government intervention. That apart, a number of things have to come into place. But, there is hope.
If you keep printing paper money, the supply of money increases and assets that are in short supply or limited supply—whether it’s a Ferrari or a Gaugin painting—they are in tight supply, so they will appreciate.
They will not all appreciate at the same time and to the same extent. There will be bubbles in real estate and collectibles; there will be bubbles in equities, as we have had three times since 1999.
Major central banks started with their easy money policies long ago. The first indication of money printing was essentially in 1998 with a bailout via the long-term capital management (LTCM). At that time, I don't think anything would have happened to the system. The central banks printed money massively and deliberately created the NASDAQ bubble. When this bubble burst, they deliberately created the housing bubble that was built on excessive credit growth. And when this bubble burst in 2007 - 08, they started in a coordinated fashion to print money by purchasing assets around the world. The asset purchases by these major global central banks - the US Federal Reserve (US Fed), Bank of Japan (BoJ), European Central Bank (ECB) and the Bank of England (BoE) - have been increasing overtime, though the US Fed has stopped now. My view is that the asset purchases by BoJ and the ECB will not stop. The balance sheet of the major central banks increased 16 times between 1998 and 2015. So why can't it go up another 20 or 100 times? Money printing is an unlimited action, until the system breaks down. By when do you see this system breaking down then? Will this bubble created by central bank liquidity across asset classes burst anytime soon?
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.
87 years old Jack Bogle founded the Vanguard Company in 1974. Today, Vanguard is one of the most respected and successful companies in the investment world. [In 1999, Fortune Magazine named Bogle as “one of the four investment giants of the twentieth century.”] In 1975, Bogle founded the Vanguard 500 Index Fund as the first index mutual fund available to the general public. Bogle’s innovative idea was that with his index fund, which would simply mimic the index performance over the long run, he would achieve far higher returns with lower costs than actively managed funds. According to Bogle, we shouldn’t expect “a revisitation of the ’80s or ’90s, when stocks returned 18% a year…. Those planning on a comfy retirement or putting a kid through college will have to save more, work to keep costs low, and - above all - stick to the plan.” The Wall Street Journal explains that “Mr. Bogle relies on a forecasting model he published 25 years ago, which tells him that investors over the next decade, thanks largely to a reversion to the mean in valuations, will be lucky to clear 2% annually after costs. Yuck. Then why invest at all? Maybe it would be better to sell and stick the cash in a bank or a mattress. ‘I know of no better way to guarantee you’ll have nothing at the end of the trail,’ he responds. ‘So we know we have to invest. And there’s no better way to invest than a diversified list of stocks and bonds at very low cost.’” Normally, I would not spend much time discussing Indexing. The point I want to make is that for the average investor (by definition a relatively small investor) “there’s no better way to invest” than Bogle’s strategy of investing “in a diversified list of stocks and bonds at very low cost.” However, I am referring here to the average investor and not to the savvy financier who knows how to select one of the few active managers who actually outperforms an index over time, or an investor who has sufficient analytical skills and discipline to select companies that beat the index over time. In a recent article for the Financial Times, William White observed that
“The monetary stimulus provided repeatedly over the past eight years has failed […] Debt levels have risen […] Consumers have had to save more, not less, to ensure adequate income in retirement. At the same time, easy money threatens two sets of undesirable side effects. First, current policies foster financial instability… and many asset prices bid up to dangerously high levels. Second, current policies threaten future growth. Resources misallocated before the crisis have been locked in through zombie banks supporting zombie companies. On the demand side, accumulating debt creates headwinds, leading to more monetary expansion and more debt […] On the supply side, misallocations slow growth, which again leads to monetary easing, more misallocation and still less growth.”
I have a high respect for Bill White as an economist because he identified the problems correctly. Unfortunately, I cannot agree with his view that “Only government action can resolve a global solvency crisis.” Therefore, I expect more of the same: larger fiscal deficits, larger governments that will own not only their public debts but increasingly also equities through their respective central banks, which will happily continue to print money. In this context my readers should remember the words of Paul Volcker:
“It is a sobering fact that the prominence of central banks in this century has coincided with a general tendency towards more inflation, not less. [I]f the overriding objective is price stability, we did better with the nineteenth-century gold standard and passive central banks, with currency boards, or even with ‘free banking.’ The truly unique power of a central bank, after all, is the power to create money, and ultimately the power to create is the power to destroy.”
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.
We have in the West rumors of Gold market and Silver market manipulation by most likely the Central banks that want to depress the price. And on the other hand the Asian sovereign funds, central banks, individuals are buying Gold. And so you have to ask yourself what exactly is the motivation of Western central banks to depress gold prices. Because their interest would be to sell Gold at high prices at possible to the Asians but that is not the case. But I think in general we have had over the last 10 - 20 years specially following the Asian crisis of 1997 - 1998 a huge increase in wealth in Asia, in Central Bank reserves, in Sovereign Funds, in Private Wealth, and if you have a billion dollars what is it for you to put $10m, $20m, $30m, $50m in Gold. So the increase in demand for Gold from Asia comes from a population that has become increasingly affluent.
The central banks will continue to print money. When I compare the price of gold in the late 1990's, it was below $300 an ounce. Now it is above $1,300 an ounce. But when I compare the expansion of central banks' balance sheets, the global economy, the quantity of money and credit in the world, then I can make a case that actually gold today is cheaper than in the 1990's when I compare it with all the other monetary aggregates. I think people should still own gold.
I don't think the Fed will move on rates this year. The employment figures are very questionable on whether there was much of an improvement because government jobs went up and seasonal adjustments took place. The economy is not particularly strong and the Fed is also concerned that $12-trillion worth of sovereign bonds in Europe are having a negative yield. If they increase interest rates in the US, then the dollar will become too strong for the liking. The BoE (Bank of England), Fed, ECB (European Central Bank) and the BoJ (Bank of Japan) are still buying a monthly $180-billion worth of bonds. There is large monetization. It is larger actually than when QE1 (quantitative easing) started in the US. This will go on. Not much will happen before the election in terms of moving up rates or initiating new programs in the US. But next year, it is quite likely that we will have further monetary easing or the so called helicopter money.
Watch the Marc Faber video above or click here to play I think we can easily give back five years of capital gains, which would take the market down to around 1,100. The excess liquidity that have been generated by central banks will lead to a great deal of volatility. I've seen, repeatedly in my life, markets drop 40 or 50 percent, and in some cases I've seen a market like the Dow Jones drop 21 percent in one day. So many things can happen. The fact is, the market hasn’t really been driven by genuine buying, but by stock buybacks, takeovers and acquisitions, and market leadership has been narrowing. It’s not that many stocks that have been making new highs. It’s quite a narrow growth of stocks that have been very strong
In 2000, we had the NASDAQ bubbling. In 2007, we had the housing bubble and the stock market bubble, but not all stocks were very expensive. But now, we have high real estate prices. We have high stock prices in the U.S., not necessarily elsewhere in the world. And we have, by historical standards, the most expensive funds markets in the world in 5,000 years of history with negative interest rates on more than $12 trillion worth of bonds… So if you tell me, something is not fixed, something is not very unusual. I don’t understand the world anymore. We are all on the Titanic. We all need life saving boats which is precious metals., Gold, Silver, Platinum... physical stored in a safe place, not necessarily in ETF's.... some equities, some fixed interest securities and some real estate geographically diversified.
Previously, I had expressed a view that in the next 5-10 years the Indian market would outperform the S&P 500. I still maintain that. We do not know exactly how far the market will move. The Indian market is also dependent on the exchange rate. If the rupee weakens significantly, then the Indian market adjusts upwards. If the Indian rupee would strengthen against the dollar, then the market is less attractive in rupee terms. So, these are all factors, but in general, the Indian economy [will outperform] -- and we can debate, will really grow at 6 percent per annum for the next five years or only at 4 percent, it does not really matter. Compared to the US, that has 1 percent growth, at probably best, maybe even less. And to Europe that has no growth, the Indian economy is performing reasonably well and that equities are reasonably attractive.
I think money printing in the one or the other form will continue. Now increasingly central banks and fund managers and treasury departments are talking about helicopter money. Helicopter money you don't just buy securities that are traded in the public market like treasuries or sovereign bonds and equities, but you essentially distribute money to each individual. Distributing money is like a tax cut but whereas the tax cut only flows to people that actually pay tax, pay federal tax in the US and roughly half of Americans do not pay Federal tax. So, that tax cut is not taxing everybody but if I send a cheque to every man, woman and child for $10,000 then he gets that money and he can then go and spend that money, for a month or two that obviously boosts economic activity unquestionably but then comes the question, who finances this? So, what can happen in this helicopter money is that the treasury issues bonds that investors would buy or the treasury just gets the money from the Federal Reserve, so that is another form of money printing.
Jeff Gundlach in the US expressed the view that you should sell everything including your children because there is nothing to buy. Philosophically, I agree with his view except the following, let us say you have $10 million and you sell everything, your shares, your property, your bonds, your gold and commodities, what will you do with the money? You can put it in a bank but what if that bank goes bankrupt? Because if you are really bearish about equities and bonds then the chances that there will be a financial crisis is high. Say if you have your money with Credit Suisse or Deutsche Bank or any European bank for that matter, there is a risk, including all the US banks. So, I say to myself the madness of central banks can go on for long time. The US treasury and Federal Reserve have stopped with their quantitative easing (QE) for now. However it has been replaced by the ECB and the Bank of Japan, they essentially bought assets worth $180 billion every month and I am quite sure that QE4 in the US will follow some time when the economy weakens in the one or the form because the treasury departments of countries and the central banks they of course work together. So, in this environment I still want to own some precious metals. This year silver has outperformed gold and in the last couple of weeks platinum has outperformed gold and of course the best performing shares were gold and silver shares this year. No group comes even close to it. I would hold some precious metals, I would hold some real estate. I think there are some problems associated with real estate like real estate taxes and so on but in India there is still plenty of opportunities in real estate especially in terms of families owning second home in resort areas. Then I would own some equities. When it comes to bonds and cash I agree with people who say US treasuries are unattractive, yes that is correct but what would you rather own? A 10- year Japanese government bonds at negative interest rate or a 30 year Swiss franc bond at negative interest rate or a 10 year treasury at the yield of over 1.55 percent? Treasury is not attractive but relative to other sovereign bonds and $12 trillion worth of bonds trading at a negative yield, relative to these bonds I would say treasuries are reasonably attractive.
We should always think realistically. We shouldn’t hope. The fact is, simply, when I look at these people in central banks, and they’re monitoring things, and believe me they will never admit that they’ve been wrong. They’ve printed money like crazy, and the global economy basically is stagnating. And I’ve written about this. The more money you print, the more REAL wages go down. That is the problem.
When People begin to fear the Government and its Tentacles, Tyranny is not far away Today, I want to share with my readers an article which shows that there are problems in a social system to which there are no clear cut answers. The article describes a “silly” dispute between Barronelle Stutzman and Rob Ingersoll. Silly, because it would have been easy for the parties to settle the dispute amicably through the acceptance of each party’s point of view – in simple English through some tolerance. But no, the state attorney general’s office and the ACLU had to get involved in what I consider to be a witch-hunt against Mrs. Stutzman, and accusing her of discrimination. Remember that already Montesquieu observed in The Spirit of the Laws that, “There is no greater tyranny than that which is perpetrated under the shield of the law and in the name of justice.” I am sure the majority of my readers will disagree with my view but I shall explain my opinion as clearly as I can.
Capitalism and free markets are not fair (in fact, capitalism is a cruel system in numerous ways), but it is a far fairer system (not crony capitalism) than all the other forms of organizing economic and social life, and in particular vastly superior to socialism, communism, and the arbitrary command economy. Western democracies had (like socialism and communism) the noble idea of creating a fair society [Albert Camus: “The welfare of the people has always been the alibi of tyrants”], but it is now ending up with system that is characterized by far more injustices and abuses by bureaucrats, powerful corporations and government officials. I understand if some of my readers may not have the time to peruse the article and the issues involved. Fine, but I can assure my readers that sooner or later they will be confronted with similar problems as Mrs. Stutzman encountered.
I think the problem will be if there are no additional QE's around the world…is that asset prices will no longer go up and we’ve seen this already in London properties, in New York properties – and this will have a negative impact on the economy. The recession in my view is not going to come really from the economy per se, but from asset price deflation.
Marc Faber spoke at the recent seminar for the CFA Institute in Chicago, USA. Below is the summary. Dr. Faber told the investment professionals gathered in Chicago that they shouldn't be prejudiced against gold. Although the typical investment pro keeps less than 1 percent of his or her portfolio in gold, Faber suggests 25 percent. He sees it as protection from a dangerous combination of tremendous government debt and massive bond-buying by central banks globally trying to fight off recession with near-zero interest rates. Besides gold, Faber has invested in Asian real estate and some stocks and bonds. Money is made when investors dig through carnage, not when they buy something that's been popular a long time. Currently, he sees value in the stocks of companies that mine gold and other precious metals. Agricultural commodities are also cheap, but not agricultural stocks, he said. Long term, he thinks emerging market stocks will be more valuable than those in the U.S. and Europe because developing countries — especially in Asia — are growing while the U.S. and Europe are stagnant. But in the short term, emerging markets could be disrupted by geopolitical strife and global recession. Many of the investing opportunities he spotted in years past are no longer opportunities, he said. Because central banks have been throwing so much money into the system, everything has become expensive — from stocks and bonds to real estate and artwork. Typically, when investments become overly expensive, a downturn like the 2008 housing crash comes. Pros awaken some day, say the prices are crazy and start selling as a herd. But Faber is not predicting a sharp plunge is imminent. Rather, he says, the central banks are going to continue to try to stave off a global recession through ultralow interest rates. He is particularly critical of negative interest rates, which mean people earn nothing in government bonds. While people may not feel like they are getting bloodied during this, Faber says they are. Interest rates, he said, are so low people can't make money in bonds so they keep buying stocks even though the prices are inflated. Central banks want rising stock prices to make people feel good and spend, but only 20 percent of people have stocks so the result is income inequality and resentment, he said. "Young adults will earn less than their parents and die with less than their parents," Faber said, noting parents — when young — bought U.S. Treasury bonds paying 7 percent rather than bonds paying nothing today. They bought homes that appreciated greatly. Now, "young people don't have money to buy condos and houses," so they overpay on rent and are left without money to invest or spend. He blames central banks. "It's ludicrous to think that slashing rates will get people to spend." When rates are low, he says, you feel insecure as savings earn nothing. So, "you save more." via chicagotribune.com/business/columnists/ct-marksjarvis-column-marc-faber-money-doom-0724-biz-20160722-column.html
Clearly Brexit means more money printing by central banks; They will
continue to intervene. And I think before the year end we’ll have some
form of QE4 in the U.S. The Fed was fast asleep ahead of the 2007-2008 recession. So the fact that they assign a low probability to a recession doesn’t give me any comfort at all.
All I can say is that we had already free trade for hundreds of years between different countries, and we had merchant families in the world that traded goods and so forth. I don't think that for free trade you need an EU or you need the TPP and so forth. You can have bilateral agreements for free trade. What you certainly do not need for free trade is a country like the U.S. that declares an embargo. They had an embargo against Myanmar. They had an embargo against Cuba. For what? They have an embargo against Russia. You think Russia cannot buy your Mercedes car? They can import everything through China. Russia has been surrounded by countries - Baltic countries and also Balkan countries in the South, also in Central Asia, countries that have specialized in smuggling for thousands of years - and Americans, they think that an embargo will hurt Russia? It is ridiculous!
I'm in support of dismantling of the whole EU, and having individual countries, but I have to add to the problem of the currency the following: the Europeans and the Japanese and also the U.S., they always talk about the reforms and so forth and so on. How do you go about the market-based reform, if the market was reforming countries? The worst policy is, essentially, zero interest rates, because at zero interest rates, governments can borrow money without any cost, for a while. In other words, the U.S. government debt has grown, from $4 trillion in 1994, to now over $19 trillion, but the interest expense is down because the level of interest rates has collapsed. The same in Europe - if you look at the debt profile of Europe... Also, we, economists, we distinguish, I mean, at least I do, between "productive" debt and "unproductive" debt. The "productive" debt is you and I borrow money and you would build a factory, buy the machinery and we produce something, and then the cash flow from this business will sustain the interest payments and the repayment of the debt. Unproductive credit, is, basically, government credit - you lend money to the government, and the government will then give it away to people - you know, the redistribution of wealth - that is a very unproductive credit. In Europe, and in the U.S., government credit as the percentage of the economy has grown enormously over the last 10 - 20 years, enormously.
