Tuesday, April 29, 2008

GloomBoomZoom vs. GloomBoomDoom

Not only do we have the Great Debate about 'flation (In- vs. De-), but selective quotation can make the same expert give evidence for both sides.

Here it looks as though Dr Marc Faber is expecting inflation:

Dr Marc Faber has argued that even in the United States, where property prices are in decline, in an environment of high inflation he would rather own a US$1 million home than hold the same amount of cash or bonds, because the house would better preserve value.

... but here, its extreme opposite:

The view Marc is putting forward is the opposite one - that deflation will be the clear winner, dragging the whole world economy into a slump, with lower prices for commodities as well as stocks and property...

...In a real downturn, the United States (and other developed nations) would stop importing so much oil...and so much merchandise from China, which would have the consequence of reducing energy consumption by China too. Result: lower energy prices and a worldwide recession...maybe even the worst worldwide depression in history.

I think the giveaway in the first, is in the qualifying phrase "in an environment of high inflation". All I've read so far about Marc Faber indicates that his real position is represented by the second.

In my (amateur?) view, we're heading for a bust, and unless it can be avoided (which would be wonderful news), then the sooner, the better. Ideally, it would have happened in 2000 - in fact, it did, but we then got the reckless monetary reflation of 2003-2007.

Why soon? Because the longer it goes on, the more the transfer of productive capacity to the Far East, so that when recovery comes, we in the West won't be equipped to restart.


Contrarian Investors' Journal said...

Hi Sackerson!

Our belief is that Faber's argument is for the inflation scenario. We had summarised an interview with him in Marc Faber: Bernanke Policy Will “Destroy” U.S. Dollar, which he said,

... because if he prints money- and I have to add here one point: had I been the professor who had judged his thesis for his PhD, I would not have let him pass. I would have told him actually, “Mr. Bernanke, I have one condition in which I let you pass, and this is you never join a central bank, because you are a destroyer of money as store-of-value function, of the function of money being a unit of account. The only central bank that I would allow you to go to is the one under Mr. Mugabe in Zimbabwe. And I tell you Mr Bernanke with his monetary policy, he will destroy the US dollar.

In that interview, Faber also reckoned that

According to Marc Faber’s latest Doom, Bloom and Gloom report, investing in the bond market (mainly Treasuries) is “financial suicide” because with such low yields, actual price inflation will result in negative real returns. Marc Faber believed that “at some stage, the corporate bond market will offer some value.” However, the 10-year and 30-year Treasury market is a “disaster waiting to happen.” As the Fed cuts the Fed Funds Rate to possibly zero, the Treasury market will “tank” at some point in time.

Recently, in an interview with Australia's ABC, Marc Faber talked about the coming recession would not be the deflationary kind that we are all familiar. Rather, it would be towards the inflationary type of depression. Marc Faber also labelled Ben Bernanke as the "Money Printer".

Having said that, Marc Faber also have a frequent habit of qualifying his opinion (which we think is wise). He mentioned that the worst case scenario would be for China to fall into recession, which would be deflationary. However, he concede that this scenario, though possible, is unlikely.


Welcome back, CIJ. I wish I understood better, but a combination of a credit crunch and reducing velocity of money may more than make up for attempts to reflate by money printing or issuing bonds - or doesn't that make sense? After all, Japan slumped even though the government began printing spending vouchers.

A few months ago, Faber was saying that he wasn't minded to board any of the investment trains but would rather stand on the platform with his cash. But you're right, he does change his position as circumstances change.

Karl Denninger is certainly of the view that we can't stop a deflation.

Contrarian Investors' Journal said...

Hi Sackerson!

From what we can gather, there are 3 school of thought:

1. Deflation.
2. Hyperinflation.
3. Both (i.e. asset price deflation plus by commodity/gold inflation)

Since a lot of the financial excesses that is happening today is unprecedented, history may not provide a good guide of what is to come. Our feeling is that if (and it can be argued it is a matter of when) an epic economic/financial crisis ever eventuates, it will be something we have never seen before in history.

We read somewhere that Marc Faber confess that he has "no idea" what will happen. It is probably because the global financial system is sitting on a knife-edge such that either deflation, inflation or some combination of both will happen.

Either way, whether it's deflation or inflation, gold will be a good hedge to protect against what is to come.

Ryan said...

Hi Sackers,

I'm of the opinion that the western economies have these four choices:-

1] Purge the debt by raising interest rates. Don't see this happening as there is no western government attempting to do such a thing, except in Australia.

2] Inflate the problem away by creating more debt. This is the current state of play. In which case - it might not work because no-one can, or wants to create/use more debt. Even if it does work it will only delay matters.

3] Do nothing. This is likely to be the case after [2] fails. Even very low interest rates do not tempt people into taking out more debt, so growth in money supply stalls and so does the debt-based economy. Debt becomes a dirty word and we end up like Japan.

4] Default on the debt. Doing this the way Argentina did it by giving the world the finger might not be the best idea for trading nations! But technical defaults by printing more CASH instead of creating more debt would help to write off the debt - and might escape censure. Problems: unless the cash pays off the debt it will cause hyperinflation (Germany 1930s) and even if it does pay off the debt then more debt might be created causing hyperinflation. Advantages: it might be the only way to resolve a technical problem caused by vastly more debt in the system than there is cash, which would make it impossible to ever pay off the debt.

Semaj Mahgih said...

I think you can't separate the financial markets from the others. From a trade perspective, which is where I'm looking at it from, this Martin Hutchinson take makes sense:

First, the George W Bush administration and the European Union instituted (both environmentally and economically) subsidies for ethanol production, by means far less efficient than the sugar cane-based ethanol being produced in Brazil. That caused a supply shortage in corn and other crops that would not otherwise have occurred.

Second, governments, especially the United States, printed excessive amounts of fiat money, causing an immense speculative bubble.

Finally, the panic was exacerbated by a speech by World Bank president Robert Zoellick, who advocated a "new deal" for world food production, inevitably involving vast taxpayer subsidies through the World Bank, and thereby turning popular concern about price rises into panic.

The economy is all parts of it, not just the money market.

John East said...

"In my (amateur?) view, we're heading for a bust...."

but will it be an inflationary bust or a deflationary bust?

It must be the former, because Bernanke has said time and time again that he will print money if things get bad.

Commodities and gold might be in for a pounding over the next 3 to 6 months, but I've so much faith in Bernanke I'm staying long.


Thanks to all the above for your views. The least-pain-for-politicians path looks like Japan, to me. Except it's different when it's the whole developed world. No wonder Marc Faber has "no idea".

dearieme said...

The central banks will attempt to avoid deflation by running an inflation. Two questions follow:
(i) Will they fail, so that we get deflation?
(ii) Will they succeed to excess, so that we get hyperinflation?

Perhaps I should buy Uranium?


DM: How about (i) followed by (ii) followed by (iii)a new currency, or redefinition of the old, as with the French franc in 1960?