Lower interest rates not necessarily linked to consumer spending

It is the view among most central bankers that you cut the interest rate and the economy will respond positively. But that is far from certain.

First of all, interest rates provide savers income. So, if you have zero interest rate the savers, the insurance industry, pension funds are being hurt. That should be very clear.

Number two, if I came to you and say: Look, interest rates are going to go below zero and on your deposits you don’t get money any more, the reaction of you would be to spend more. But, it could also be that you would save more because say on a million dollar before you got an interest of 10 per cent and now that you get nothing and that lowering of interest rate has actually led in the case of Denmark, Sweden, Switzerland and Finland to actually higher savings rate.

In other words, people feel insecure. The household scratches its head and says what is happening? I am not getting any money in my retirement and so I have to save more. So, the view that lower interest rates stimulate growth is very questionable.

Governments are a cancer

I think that investors by and large have to shift their strategy and they need to focus on the question: how do I lose the least money? Number two, I think the governments have to focus on the question -- have we intervened too much? Are we becoming socialistic or a centrally planned economy? I can tell you, I have been visiting centrally planned economies from Czechoslovakia in 1968 to Russia in 1980, China in 1978, Vietnam in 1989. 

The centrally planned economy is a complete disaster and we have to go back to the individual, taking personal responsibility and when something goes wrong, people should not say the government should do this, the government should do that. You must remember, the government cannot help you. The government is a cancer and it can only temporary boost economic activity by throwing money at the system or by launching a huge spending packages but in the long term ,government's expansion efforts have a negative impact on the free market.

The relationship between big government, big business and big media

The Davos World Economic Forum crowd are symptomatic of the unholy dynamics between big government, big business, and big media. As someone said, “They all benefit by the billions of dollars from this partnership, and it’s in all of their interests to protect one another. It’s one for all and all for one. It’s a heck of a filthy relationship that makes everyone filthy rich — everyone except the American people.”

Naturally, I agree with the above observations about the filthy relationship between big government, big business, and big media. I would add to this triumvirate “big academics,” Ivy League type of educational institutions, and central banks around the world. “In Davos the croupiers break bread with Authority.”

I blame the Fed, BOJ and ECB for whats happening now

The central banks remind me of the movie ‘One Flew Over the Cuckoo's Nest’ where the doctors are the insane, whereas the inmates are actually quite common people with common sense and normal. This is exactly what I think is happening today.

My sense is that many policies that were implemented- in particular zero interest rates and more recently negative interest rates- are rather negative for asset markets than positive. They create a lot of uncertainty in investors’ minds and we have statistics on all the countries that have introduced negative interest rates. In all these countries actually the savings rate went up.

These policies may be actually counterproductive. They are negative for bank earnings. I’m not blaming only the Fed. I’m blaming the Fed, the Bank of Japan and the ECB under Mr. Draghi. They talk to each other every day, they coordinate monetary policies and they come from the same Neo-Keynesian background.

Indian stock market could see more declines but are approaching buying levels

When the Sensex was around 30,000, I said that given the global slowdown, it was likely that it could drop to around 24,000. We are now below 24,000 and I think personally that Indian stocks are coming into buying range. Let us put it this way. They are now more reasonably priced than they were say nine months ago.

Personally, I think India may still go down to 20,000. I think that eventually the market will go higher in India but it will obviously depend on monetary policies. I prefer India to have a relatively tight monetary policies as they practice under Raghuram Rajan who I think is the best central banker in the world because if you keep money relatively tight, the currency is relative strong and this has happened in India. 

This is the best for India to have a relative strong currency. The stock market is not important for the average Indian because few percentage of the [Indian] population own shares.

Saudi Arabia could be in financial trouble if Oil prices stay here

Saudi Arabia still has money, but if the oil price stays here for another three years the country’s basically bankrupt. In my opinion, the whole Middle East will go back to where they came from — deserts. The oil price for the Middle East, considering the huge population increase they had since 1970, needs to be around $80 a barrel. But maybe for world peace it’s better if the oil prices are nearer to $30 or $40 and the Saudis can’t finance ISIS or other adventures that may not be very desirable.

But at $40 they have a huge problem. Their reserves will come down substantially. Now instead of drawing down their reserves they can borrow money. I wouldn’t necessarily lend money to Saudi Arabia personally. But maybe some governments will do so.

As for the price of oil, it’s very oversold and sentiment is very bearish. Many analysts – to whom actually investors shouldn’t listen – said when the oil price was around $90 that it would go to $150. Now they are saying it will go down to $10. They were wrong once; they will probably be wrong another time. But I don’t know.

The problem with modern central banking is that the Keynesian-ism upon which they are essentially intervening rests on the argument that their fiscal and monetary interventions can smooth out the business cycle. In other words, you have less fluctuations, you have less booms and you don’t have depressions. But in reality, the central banking forces have created much more volatility. When you think, the euro is the second largest currency in the world and it dropped 40% in less than two years. Same for the yen.

So they have actually created more volatility, not less, and because commodity prices went up for a while while there were artificially low interest rates, everybody was exploring for oil and also for gold and silver and other commodities. That’s why the supply now is quite large. The demand was driven mostly by China. But China had a massive capital spending boom — also because of easy credit, and so they overbuilt capacities.

Now the demand is less and the supply is increasing so the prices dropped a lot. My view would be that the equilibrium price is somewhere between $30 and, say, $50.

Oil could drop if there is a lot of liquidation to, say, $20 or even $15. It’s possible. But to realign demand and supply in the long run, I think an oil prices of around or more than $60 is required because at $40 nobody makes money so nobody will explore for oil. That will then tighten the market over time, but not immediately. That could take time. A client just asked me whether he should buy oil. I told him I don’t know.

Regards,

Marc Faber
for The Daily Reckoning

Credit Bubble: India vs China

Basically the Chinese economy is much weaker than the government is telling you. Economy at the present time is growing at maximum 2-4 percent. In general, we have a colossal credit bubble in China and this credit bubble has to be deflated one way or the other. India in this respect is in a better position because we don’t have that kind of a credit bubble. We also have some excessive credit in some sectors of the economy but not to the extent China has. 

In my view, the Chinese economy -- you just have to look at imports and the exports from Taiwan, from South Korea, these are relatively reliable statistics. Then you look at the Baltic dry index and freight cost in China and electricity consumption and everything points out that the economy is not growing at 6.9 percent. This is complete nonsense but of course it is published by the government. 

US markets are adjusting to reality - we are in an industrial recession

The US indices have hidden the weakness behind the surface. The average stock in the US from its 12 month high is down already 26 percent. There are lots of stock down 50 percent or more. Basically the market has been weak for a while.

All the markets around the world are down meaningfully specially in US Dollar terms. Now we are almost in a recession, we are in an industrial recession.

Japan QE has not helped the average Japanese family

In my view, (the Bank of Japan's) ammunition is not working. It worked in the sense that the stock market went up in the last 12-18 months but the yen has been going down.

If you're Japanese, eighteen months ago you had a certain net worth and now your currency is down 30 percent so are you richer or poorer? Of course you're poorer. These low interest rate in Japan, in my view, and especially now these negative interest rates, are rather more negative than positive for the economy and for the typical Japanese household.

Central intervention bank interventions

We all agree on one thing, that the market economy functions best because the opposite is socialism, communism and central planning, which has been a complete failure, but now democracies have implemented a system that is basically run by a bunch of professors and they target inflation, they target exchange rates, they target the quantity of money, I mean, is the world crazy to give them so much power?,

Their policies have been a complete failure over the last 20 years and now the same people are desperate because gradually their losing their prestige and credibility and they're doubling up on medicine that hasn't worked and it won't work as long as the central bankers that we have now are in power the economies in the world will go down and not recover,

I question the view that inflation is good and deflation is bad because as you've seen in history, say 19th century U.S. economic history, for most of the time the U.S. was in deflation but real wages went up.