Friday, November 29, 2013

We Are In A Gigantic Speculative Bubble

"We have to be careful of these kind of exponentially rising markets," chides Marc Faber, adding that he "sees no value in stocks." Fearful of shorting, however, because "the bubble in all asset prices" can keep going due to the printing of money by world central banks, Faber explains to a blind Steve Liesman the difference between over-valuation and bubbles (as we noted here), warning that "future return expectations from stocks are now very low."

- Source, CNBC and Zero Hedge:

Saturday, November 23, 2013

Real US Economy Trampled

Authored by Marc Faber, originally posted at The Daily Reckoning,

I would like readers to consider carefully the fundamental difference between a “real economy” and a “financial economy.” In a real economy, the debt and equity markets as a percentage of GDP are small and are principally designed to channel savings into investments.

In a financial economy or “monetary-driven economy,” the capital market is far larger than GDP and channels savings not only into investments, but also continuously into colossal speculative bubbles. This isn’t to say that bubbles don’t occur in the real economy, but they are infrequent and are usually small compared with the size of the economy. So when these bubbles burst, they tend to inflict only limited damage on the economy.

In a financial economy, however, investment manias and stock market bubbles are so large that when they burst, considerable economic damage follows. I should like to stress that every investment bubble brings with it some major economic benefits, because a bubble leads either to a quantum jump in the rate of progress or to rising production capacities, which, once the bubble bursts, drive down prices and allow more consumers to benefit from the increased supplies.

In the 19th century, for example, the canal and railroad booms led to far lower transportation costs, from which the economy greatly benefited. The 1920s’ and 1990s’ innovation-driven booms led to significant capacity expansions and productivity improvements, which in the latter boom drove down the prices of new products such as PCs, cellular phones, servers and so on, and made them affordable to millions of additional consumers.

The energy boom of the late 1970s led to the application of new oil extracting and drilling technologies and to more efficient methods of energy usage, as well as to energy conservation, which, after 1980, drove down the price of oil in real terms to around the level of the early 1970s. Even the silly real estate bubbles we experienced in Asia in the 1990s had their benefits. Huge overbuilding led to a collapse in real estate prices, which, after 1998, led to very affordable residential and commercial property prices.

So my view is that capital spending booms, which inevitably lead to minor or major investment manias, are a necessary and integral part of the capitalistic system. They drive progress and development, lower production costs and increase productivity, even if there is inevitably some pain in the bust that follows every boom.

The point is, however, that in the real economy (a small capital market), bubbles tend to be contained by the availability of savings and credit, whereas in the financial economy (a disproportionately large capital market compared with the economy), the unlimited availability of credit leads to speculative bubbles, which get totally out of hand.

In other words, whereas every bubble will create some “white elephant” investments (investments that don’t make any economic sense under any circumstances), in financial economies’ bubbles, the quantity and aggregate size of “white elephant” investments is of such a colossal magnitude that the economic benefits that arise from every investment boom, which I alluded to above, can be more than offset by the money and wealth destruction that arises during the bust. This is so because in a financial economy, far too much speculative and leveraged capital becomes immobilized in totally unproductive “white elephant” investments.

In this respect, I should like to point out that as late as the early 1980s, the U.S. resembled far more a “real economy” than at present, which I would definitely characterize as a “financial economy.” In 1981, stock market capitalization as a percentage of GDP was less than 40% and total credit market debt as a percentage of GDP was 130%. By contrast, at present, the stock market capitalization and total credit market debt have risen to more than 100% and 300% of GDP, respectively.

As I explained above, the rate of inflation accelerated in the 1970s, partly because of easy monetary policies, which led to negative real interest rates; partly because of genuine shortages in a number of commodity markets; and partly because OPEC successfully managed to squeeze up oil prices. But by the late 1970s, the rise in commodity prices led to additional supplies, and several commodities began to decline in price even before Paul Volcker tightened monetary conditions. Similarly, soaring energy prices in the late 1970s led to an investment boom in the oil- and gas-producing industry, which increased oil production, while at the same time the world learned how to use energy more efficiently. As a result, oil shortages gave way to an oil glut, which sent oil prices tumbling after 1985.

At the same time, the U.S. consumption boom that had been engineered by Ronald Reagan in the early 1980s (driven by exploding budget deficits) began to attract a growing volume of cheap Asian imports, first from Japan, Taiwan and South Korea and then, in the late 1980s, also from China.

I would therefore argue that even if Paul Volcker hadn’t pursued an active monetary policy that was designed to curb inflation by pushing up interest rates dramatically in 1980/81, the rate of inflation around the world would have slowed down very considerably in the course of the 1980s, as commodity markets became glutted and highly competitive imports from Asia and Mexico began to put pressure on consumer product prices in the U.S. So with or without Paul Volcker’s tight monetary policies, disinflation in the 1980s would have followed the highly inflationary 1970s.

In fact, one could argue that without any tight monetary policies (just keeping money supply growth at a steady rate) in the early 1980s, disinflation would have been even more pronounced. Why? The energy investment boom and conservation efforts would probably have lasted somewhat longer and may have led to even more overcapacities and to further reduction in demand. This eventually would have driven energy prices even lower. I may also remind our readers that the Kondratieff long price wave, which had turned up in the 1940s, was due to turn down sometime in the late 1970s.

It is certainly not my intention here to criticize Paul Volcker or to question his achievements at the Fed, since I think that, in addition to being a man of impeccable personal and intellectual integrity (a rare commodity at today’s Fed), he was the best and most courageous Fed chairman ever.

However, the fact remains that the investment community to this day perceives Volcker’s tight monetary policies at the time as having been responsible for choking off inflation in 1981, when, in fact, the rate of inflation would have declined anyway in the 1980s for the reasons I just outlined. In other words, after the 1980 monetary experiment, many people, and especially Mr. Greenspan, began to believe that an active monetary policy could steer economic activity on a noninflationary steady growth course and eliminate inflationary pressures through tight monetary policies and through cyclical and structural economic downturns through easing moves!

This belief in the omnipotence of central banks was further enhanced by the easing moves in 1990/91, which were implemented to save the banking system and the savings & loan associations; by similar policy moves in 1994 in order to bail out Mexico and in 1998 to avoid more severe repercussions from the LTCM crisis; by an easing move in 1999, ahead of Y2K, which proved to be totally unnecessary but which led to another 30% rise in the Nasdaq, to its March 2000 peak; and by the most recent aggressive lowering of interest rates, which fueled the housing boom.

Now I would like readers to consider, for a minute, what actually caused the 1990 S&L mess, the 1994 tequila crisis, the Asian crisis, the LTCM problems in 1998 and the current economic stagnation. In each of these cases, the problems arose from loose monetary policies and excessive use of credit. In other words, the economy — the patient — gets sick because the virus —the downward adjustments that are necessary in the free market — develops an immunity to the medicine, which then prompts the good doctor, who read somewhere in The Wall Street Journal that easy monetary policies and budget deficits stimulate economic activity, to increase the dosage of medication.

The even larger and more potent doses of medicine relieve the temporary symptoms of the patient’s illness, but not its fundamental causes, which, in time, inevitably lead to a relapse and a new crisis, which grows in severity since the causes of the sickness were neither identified nor treated.

So it would seem to me that Karl Marx might prove to have been right in his contention that crises become more and more destructive as the capitalistic system matures (and as the “financial economy” referred to earlier grows like a cancer) and that the ultimate breakdown will occur in a final crisis that will be so disastrous as to set fire to the framework of our capitalistic society.

Not so, Bernanke and co. argue, since central banks can print an unlimited amount of money and take extraordinary measures, which, by intervening directly in the markets, support asset prices such as bonds, equities and homes, and therefore avoid economic downturns, especially deflationary ones. There is some truth in this. If a central bank prints a sufficient quantity of money and is prepared to extend an unlimited amount of credit, then deflation in the domestic price level can easily be avoided, but at a considerable cost.

It is clear that such policies do lead to depreciation of the currency, either against currencies of other countries that resist following the same policies of massive monetization and state bailouts (policies which are based on, for me at least, incomprehensible sophism among the economic academia) or against gold, commodities and hard assets in general. The rise in domestic prices then leads at some point to a “scarcity of the circulating medium,” which necessitates the creation of even more credit and paper money.

- Source, Marc Faber via the Daily Reckoning:

Thursday, November 21, 2013

Gold and Gold Miners

Gold peaked at $1,921 an ounce in September 2011. Since then, it has been in a correction mode. Sentiment is bearish, but some countries are accumulating gold, notably China, which will buy an estimated 2,600 tons this year, exceeding annual production. Prices probably are bottoming.
Gold-mining shares aren't expensive either, although many exploration companies won't make it. If you buy the miners, look for companies that have raised capital already or have sufficient reserves. They are best-positioned to survive the next few years if there is no upturn in the gold price.

- Source, Zero Hedge:

Tuesday, November 19, 2013

Stocks Could Be Dead Money For A While

"Since September 2011's $1921 peak, gold has been in correction mode," Mark Faber tells Barrons in this brief clip, but the overhwleminly bearish sentiment combined with the major accumulation (most notably by China) means "gold prices have probably bottomed," and some gold mining stocks are well positioned. While Faber has recently expressed concern at the potential for a major correction in stocks, he notes that there are pockets of value worth investigating including European Telcos and Indo-China travel-related stocks. However, the Gloom, Boom & Doom report writer warns that "stocks could be dead money for a while."

- Source, Zero Hedge:

Sunday, November 17, 2013

The Price of Gold is Bottoming

The Gloom, Boom & Doom writer says the price of gold is bottoming. Plus: How to profit from a new breed of Chinese tourist.

- Source, Barron's:

Friday, November 15, 2013

Marc Faber - US FED is Counter Productive

Paul Ebeling via Live Trading News:

“The question is not tapering. The question is at what point will they increase the asset purchases to say $150-B, $200-B, or $1-T a month,” Mr. Faber said Monday in a TV interview.

The Fed is now buying $85-B of Treasury and mortgage bonds a month in what is known as quantitative easing is now dubbed (QE-Infinity).

When the Fed started buying long-term bonds, in what was called QE-1, it said the program would last 6 months. But it started another round of assets purchases, and then another, without setting a firm ending dated. That is why the latest reiteration of the program is called QE Infinity.

“Look, every government program that is introduced under urgency and as a temporary measure is always permanent,” Mr. Faber explained. “The Fed has boxed itself into a position where there is no exit strategy.”

The continuing QE is counterproductive, he noted, stating benefits flow only to a limited number of people.

And, although inflation continues to remain subdued, Mr. Faber sees “a colossal asset bubble” as well as a debt bubble.

“The quantitative easing is wind at the back of the economy,” he said. “But when they unwind quantitative easing, which they will ultimately have to do, it will be a head wind in the face of the economy. And then it will not be so much fun.”

Few believe the Fed will increase QE or make it permanent, more experts are predicting the central bank will maintain its current level of bond purchases into next year because of growth disruptions caused by the government shutdown.

A survey of 40 economists indicated the Fed will decide to reduce its purchases to $70-B a month in March 2014, to $25-B by July and end the purchases in October 2014.

The shutdown cut economic growth by 0.3 percentage points in Q-4, the economists said. It also suspended data collection the Fed uses to set policies.

It is going to be harder to signals from the data, Fed’s policies are tied to the data, they waiting for more confirmation the economy is moving in the direction of the Fed’s outlook, and they do not have data or the data is inconclusive, then the Fed will not feel confident enough in the outlook to make a clear determination to pare or not pare. This is a continuing story, stay tuned…

- Source, Live Trading News:

Wednesday, November 13, 2013

Deflationary Collapse is Coming

"One day this asset inflation will lead to a deflationary collapse one way or the other. We don't know yet what will cause it."

- Marc Faber via a recent CNBC appearance.

Monday, November 11, 2013

The World is in Gigantic Asset Bubble

Marc Faber, The Gloom, Boom & Doom Report, shares his views on how inflation has impacted global wealth.

- Source, Yahoo Finance:

Saturday, November 9, 2013

Wealthy At Big Risk

Faber suggested that, as the main beneficiaries of Fed policy, the rich would also be the hardest hit when the policy changes.

"If you think that high end will never lose anything …" he said. "This is all the result of quantitative easing. The Fed wanted to get the stock markets going. That's what QE-1, 2, and 3 are all about. Move people out the risk curve, and so far it's worked."

- Source, The Fiscal Times:

Thursday, November 7, 2013

FED Policy Has Made the Wealthy Wealthier

"We are in a gigantic asset bubble around the world with prices of real estate having risen a lot," he said. "The high end is at record highs. In the Hamptons, in Mayfair, London, Hong Kong, Singapore, and we have a high inflation overseas, so I think that one day this asset inflation will lead to deflationary collapse one way or the other."

Faber echoes a growing number of financiers—from billionaire hedge fund manager Stanley Druckenmiller to Omega Advisors' Leon Cooperman—who argue that the Fed policy has made the wealthy wealthier, primarily through rising asset prices. Rising stock markets have fueled a record number of millionaires in the U.S., with 1.7 million new millionaires added in the past 12 months, according to Credit Suisse.
- Source, The Fiscal Times:

Tuesday, November 5, 2013

The World Will Face Massive Wealth Destruction

Faber has been predicting so-called "QE infinity" because "every government program that is introduced under urgency and as a temporary measure is always permanent." He also said, "The Fed has boxed itself into a position where there is no exit strategy."

The continuation of Fed bond-buying has helped support stocks, and the Dow Jones Industrial Average and S&P 500 Index are coming off two straight weeks of gains, highlighted by record highs for the S&P.

The world is in 'gigantic asset bubble': Faber
Marc Faber, The Gloom, Boom & Doom Report, shares his views on how inflation has impacted global wealth.
While there may be little inflation in the U.S., Faber said there's been incredible asset inflation. "We are the bubble. We have a colossal asset bubble in the world [and] a leverage or a debt bubble."

Back in April 2012, Faber said the world will face "massive wealth destruction" in which "well to-do people will lose up to 50 percent of their total wealth."

- Source, CNBC:

Sunday, November 3, 2013

Quantitative Easing is Permanent

Marc Faber, The Gloom, Boom & Doom Report, explains why the thinks the Fed's quantitative easing program is permanent and is likely to increase.

- Source, CNBC:

Friday, November 1, 2013

Central Bank Will Increase QE

Marc Faber, publisher of The Gloom, Boom & Doom Report, told CNBC on Monday that investors are asking the wrong question about when the Federal Reserve will taper its massive bond-buying program. They should be asking when the central bank will be increasing it, he argued.

"The question is not tapering. The question is at what point will they increase the asset purchases to say $150 [billion] , $200 [billion], a trillion dollars a month," Faber said in a "Squawk Box" interview.

- Source, CNBC: