Coming your way

Marc Faber: There are two possibilities. Banks go under and the stakeholders are left with nothing, as is the case with Lehman Brothers, or governments pump money into the financial system so that the incompetent financial clowns in Bahnhofstrasse [Zurich's financial centre] and Wall Street can continue to eat in fancy restaurants.

I am clearly in favour of the first because the consequences of these state interventions are massive budget deficits. To finance these, governments have to acquire money. For that they have to borrow money, which makes state debt and interest payments soar. US economists have come to the conclusion from the trends that there will be a US state bankruptcy.

Swissinfo: Do you share that view?

M.F.: One hundred per cent.

(Source)

Faber says $5 trillion, not $700 bn

Dr Faber thinks the real cost will be seven times greater than the proposed bailout.

... and here are his thoughts on where to be invested - and the current advantages and future perils of holding cash:

Marc Faber: backs US dollar against Euro, US economy better than Europe's

Here.

The view from Agamotto's Eye

Doctor Strange and the all-seeing Eye of Agamotto

Mish relays an interview with Marc Faber, who is a bull on the US dollar (not US stocks) and Japan.

"Europe will have to cut interest rates as well, and their economies are most likely much weaker than perceived...

... We are in a seven year bull market for commodities, so commodities can easily drop 50%. Some have already done that like nickel, lead, and zinc. Others will follow. But after that, I think that the bull market in commodities will reassert itself. But my view was that for the second half of 2008 commodities would go down."

Are oil speculators to blame?

Russell Roberts at Cafe Hayek discusses a spam email from United Airlines, which blames speculation for much of the high price of oil. Naturally, he puts on his quizzical econ spectacles and says it's like blaming a thermometer for hot weather; but maybe that's just a bit too sideways.

For isn't it interesting that in 20 years, the proportion of oil contracts purchased by middlemen who don't deliver, has risen from 21% to 66%?

And isn't there a big Space Hopper of excess liquidity squmphing around the world's markets and destabilising them, as Dr Marc Faber claims? Indeed, Faber has spent years making money from predicting the future movement of this excess. In an interview on "Financial Sense" on January 12, Faber said:

... we had during the excessive consumption period 1998-2006, a current account deficit in the US that increased from 2% of GDP to over 7% of GDP, and at the end was supplying the world with $800 billion annually. And this river flows into the world through the American current account deficits, and essentially provided the world with the so-called excess liquidity and created booms in everything from art prices to commodities, stocks, bonds, real estate, what not.
I suggest that now that the Space Hopper has been punctured, the speculators riding it have been squmphing around even faster, trying to visit as many markets as they can before their toy goes totally flat.

... which brings us back to gold.

A quote from the Economist article cited yesterday:

real returns from American shares were just 0.1% a year from 1966-81; they fell a dismal 1.3% a year from 1973 to 1981.

Although that performance was much better than the painfully negative returns suffered by holders of government bonds, it was a long way short of the 6-7% returns that shares have historically achieved. Gold was a much better inflation hedge, earning an annual 10.9% in real terms between 1966 and 1981.

Which is, I suppose, what Marc Faber means by recommending gold at this point.

Marc Faber update: take refuge in gold

Dr Faber has become a gold bug again, but is expecting a correction in other commodities. In a climate of low interest rates and high inflation, Adrian Ash seconds the call for gold.

And here's an extract from Faber's monthly "Market Comment" three years ago (July 5, 2005):

... Lastly, think about the following situation. The US manufacturing sector becomes very weak. The housing market falls and consumption declines. But oil goes through the roof because the empire of eternally rising home prices has just bombed Iran (very likely, in my opinion). Now the Fed cuts interest rates and eases massively. Just think what the stock, bond, foreign exchange, and gold market will do? The initial reaction might be a flight to safety – into government bonds and gold, and out of stocks. But, thereafter, a massive sell-off in bonds could occur as inflationary pressures build from sky high energy prices and massive money printing.

I have to confess, that I am not so sure exactly how this situation would play itself out, but it is worth thinking about it.

Worth the US$ 200 annual subscription, you may think. Especially since some of it goes towards the education of poor children in northern Thailand.

Marc Faber, cash and Cambodia

I said on Monday that Marc Faber was, by and large, in favour of keeping his money in his pocket, and a quick Google News trawl shows that his mind hasn't changed:

Stocks, Real Estate and Oil Are Overvalued, Marc Faber Says

Why rising inflation will trigger a bond market rout

Cambodia Starts to Beckon Private Equity
For investors, Cambodia could be the next Vietnam

The last is interesting. I have suspected for some time that Dr Faber lives in northern Thailand, not simply to hide in Shangri-La but to be nearer to the places where real bargains may be found, and so that his hunches can be informed by personal networking and under-the-radar experience. Quirky and fast-moving, he would not be the man to manage a large institutional fund: I think his lightning ex-ski champ reflexes demand more challenge.

An after-thought: if you do think cash is best, there's still the question of which currency.

Bust - or false boom and mega-bust?

Ron Paul and others discuss the state of the American economy here. Don Boudreaux (the economist who writes the Cafe Hayek blog) agrees with Ron Paul that the central bank should stop "doing something".

This also chimes with what Marc Faber said last year: the crisis should be allowed to burn through and take out some of the players. Of course, those who are in a position to "allow", are part of the club that includes the players, and there's the rub.

Housing stall, after all?

Looking at the economy now, we have to go well beyond subprime, and consider the general value of housing. Karl Denninger repeats that, in the long term, average house prices are three times income, but at the same time observes that they are "sticky". No-one wants to crystallise a loss, and you have to live somewhere, so why sell now?

If the financial victim next door has to sell his house at a 50% discount, that's all the more reason for you not to sell yours. If no-one sells voluntarily, how do you determine a real, as opposed to forced-sale value? So one effect of the housing drop could be a general slump in sales - with maybe a rise in home swaps for those who need to go to a different geographical area, perhaps for job reasons.

But what about people caught in negative equity? Here in the UK, ditching the house for less than the outstanding loan could leave you being chased for the balance, for years, unless you opt for bankruptcy. However, in the USA, many mortgages are on the roof but not on the borrower, leaving the lender short if the homeowner mails the keys back. Denninger has said more than once that borrowers need to consider this option solely on its financial/legal merits, as he thinks many lenders lost the moral argument when they knowingly advanced far too much to people who they knew couldn't maintain the loans. Now this could really upset the applecart.

Michael Panzner features a piece by FT columnist Martin Wolf. Wolf wonders what may happen if a high proportion of negative-equity homeowners default. The economic impact may be closer to Nouriel Roubini's $3 trillion, than to Goldman Sachs' more sanguine $1 trillion (the latter itself is a massive increase on the sort of figures bandied about before Christmas). Wolf sees two options:

There are two ways of adjusting the prices of housing to incomes: allow nominal prices to fall or raise nominal incomes. The former means mass bankruptcy and a huge fiscal bail out; the latter imposes the inflation tax.

But either option is so unattractive that (despite Denninger's image of paddling furiously as we head for the waterfall) there is a very strong incentive for fudge and delay. We've seen central banks pump many billions into the system in the last few days; and the ratings agencies seem to be trying their best to help maintain the status quo by not downgrading lenders as quickly and severely as some think they deserve. But again, housing is intrinsically illiquid, and houses aren't turned over rapidly like shares, which is why we have "mark to model" instead of "mark to market". What's the rush to crystallise a terrible loss now? Better a Micawberish hope that "something will turn up" than a grim Protestant insistence on an immediate collapse which would benefit very few people.

Assuming wages continue to rise over time, the gap between prices and incomes will lessen. If the homeowners can somehow be reassured that the government is determined to support house prices, then the sell-to-rent speculators could be caught out in their attempt to "short" the housing market. Can they be sure that, having sold their nice house, they can buy another such in the right area for much less, later? What will they do meanwhile?

The real threat is this "jingle mail", and the potential consequences seem so dire that something creative may be done. Bankruptcy rules might be modified to protect lenders; maybe portions of recent loans may be written-off. How about part-ownership, part-rent, as with UK housing associations - having escaped the trailer park, many first-time homeowners may want to keep their foot on that first rung of the ladder. Not everyone will want to pour engine oil into the carpet and trash the light fittings.

So I think we will have fudge, delay and attempts at more creative solutions, and a long stall in the housing market. Unless there's another hammer blow that the system simply can't take, such as an explosion in the financial derivatives market, as arch-doomster Marc Faber expects and (in his inherited Swiss Protestant way) hopes. In that case, every sign we've seen so far is that our governments will run the money-presses white-hot rather than face major deflation. We all have an incentive to paddle away from the brink.

Marc Faber speaks on the crisis

Video here on Bloomberg. Summary and comment on Contrarian Investor. Some points he makes:

Bernanke's policies will destroy the dollar; he should have gone to Zimbabwe. Property assets in a bubble, but bonds (except maybe for some carefully-researched junk bonds!) also likely to be a victim of inflation. Emerging markets worse than the Dow. Deflation may hit the dollar through devaluation, rather than the nominal value of US equities. Commodities (e.g. gold) were at an inflation-adjusted 200-year low in the late 90s, so even after the recent rises they're not overvalued. Derivatives (NOT the packaged ones) will blow up in the next 3 - 6 months. He hope a major bank will fail and reintroduce discipline into the system.

Have you noticed how cheerful gloomy types get when disaster hits?

Punish the perp

Karl Denninger says we should make the people who caused the subprime problems pay for the consequences. Either they should burn up with their own debt (Marc Faber has said some players should be taken out of the game) or pass on the grief to their shareholders, issuing new shares to raise capital and so diluting the existing stockholders' portion.

Unfortunately, we in the UK have chickened out - for party political reasons to do with its power base in the north of England, the Labour government is currently holding the baby in the case of insolvent lender Northern Rock, even though the tax payer is on the hook for nearly $120 billion as a result. (Hey, that's nearly as much as the proposed new tax break to reflate America - and our population is one-fifth the size of yours!)

Hope you have better luck - or better leaders - over there. Buy a Lottery ticket and hope?

Jim Willie goes bowling

Bowling is fun - some would say, too much fun. Apparently, Connecticut passed a law in 1841 banning "ninepin lanes" and so fostered the invention of tenpin. In the old game, still played in England, you set them up manually - it gives you something to do while downing your beer and waiting your turn. The uneven boards of the alley add a pleasantly unpredictable element, too.

Jim Willie stands up nine reassuring statements about the US economy and smashes the lot down. He goes to the back of his mule for material to throw at Greenspan, Wall Street, CNBC etc and concludes that nothing is going to stop the financial melt. So he recommends gold.

He may be right, since on both sides of the Atlantic the authorities have decided to bail out lenders, instead of following Marc Faber's advice to let some of the players be taken out of the game.

However, as Faber has also pointed out recently, gold is an item everyone thinks everyone else supports, without committing themselves (elections have been lost that way). Is it not possible that we could see a continuing uptrend in the (relatively small) gold market, simply because of increased demand from existing fans? In which case, don't come late to the party - you'll have brought fresh beer but missed the fun.

Marc Faber: profile and views

Here's a profile of Marc Faber from 18 months ago, describing him as an ace, though I'd say he's a wild card: a hedonist whose philosophy is non-attachment, a lover of life who festoons his website with images of mortality. It's a cavalier, death-spiced duality that women tend to find very seductive.

And here's an interview he gave to Resource Investor 5 days ago. Some snippets:

it’s clear that in the U.S. we are already at some kind of a stage of stagflation where say retail sales are strong because grocery prices are rising very strongly. So that boosts essentially grocery sales whereas sales of discretionary items are sluggish...

the whole credit bubble that we’ve built over the last 25 years, I have to point it out, has now basically come to an end. We will have lower credit growth... that leads to poor economic conditions... the Fed will eventually win because they can print an unlimited amount of money, and they can essentially expand their balance sheet by not only acquiring treasury securities, but also lower quality paper... at that point I suppose that inflation will become a problem. And so in real terms you will have no economic growth, and you have a real kind of stagflationary environment...

whenever ... you have relative tightening of international liquidity ... you have a period of dollar strength... I think that we may have for the next three months at least a rebound in the U.S. dollar... I think long-term the dollar is a doomed currency because you have a money printer at the Fed and you have basically Hank Paulson at the Treasury who comes straight out of Wall Street and who has more interest in stabilizing the price of Goldman-Sachs stock than of having a strong dollar...

the global economy will slow down very considerably over the next six to 12 months...

I’m not very bullish about commodities right now. I think the price of gold will also come under some pressure... But long-term I think that having Mr. Bernanke at the Fed, you have essentially a friend of gold at the Federal Reserve because he will print money...

I would like to add to your comments that so many people are bullish about gold... people have actually very little gold in their portfolio... the gold bugs are bullish about gold, but the other 95% of the world, they have no gold exposure at all.

If he's right, my guesses (23 December) aren't too far off the mark.

Faber: why the dollar may bounce back

The International Herald Tribune ( October 24) reports a mechanism by which the dollar may recover some lost ground:

Faber said if bubbles in emerging markets deflated, the dollar may rebound from all-time lows against the euro as fund managers who have invested in emerging markets shift investments to the United States.

Backfire

Quick-Draw McGraw

Michael Panzner (Financial Armageddon, 11 October) comments on (and graphs) the increasingly synchronized movements of some speculative markets, including gold and tech shares. The range between these assets is tightening and may indicate that a turning point is due.

This would gel with other information: Marc Faber has said that he sees bubbles everywhere, including gold. True, it's also been reported recently that he's been buying into gold, but remember that he is something of an investment gunslinger and will have his own view about when to get out, too.

And Frank Veneroso thinks that the gold price rise is at least partly owing to heavy speculative backing from funds that may have to get out in a hurry, if a general market drop forces them to realize assets to settle accounts.

My feeling? We dudes shouldn't try to outdraw seasoned hands.

Faber: bubble in commodities, but buy gold

Marc Faber in ABC News, Tuesday:

Very simply, it will end in a catastrophe. We never had, in the history of capitalism, a global, synchronised, boom. If you travel around the world, everywhere you go, there are booming conditions.

Now if you look at the last 200 years of financial history, you had investment booms and mania in relatively small sectors in the economy: in the US in canals and railroad in the 19th century, some regional real estate markets. And then in the 1920s you had the stockmarket boom, and in the late 80s you have a silver, gold and energy share boom, and in the year 2000 we had a boom in tech stocks and in Japan in the 80s in Japanese shares. And each time these bubbles burst, they had an impact but the impact was largely sectorial or regional and not affecting the whole world.

Now, we have a bubble everywhere. We have a bubble in real estate prices, we have a bubble in stock, we have a bubble in art prices, we have a bubble in commodities.bigger the bubble, the bigger the bang will be. If someone argues we're in a global synchronised boom, I agree entirely. The consequence will be that the next boss will be a global synchronised boss.

By the way, I like that mistranscription, it conveys his Europeanness.

The southern Germans are comfortable with the themes of pain and loss, as you'll know if you've looked at the Meglinger painting on Dr Faber's GloomBoomDoom site. D.H. Lawrence wrote of the sensual agony in the little roadside shrines in interwar Bavaria. This is not simple morbidity - unlike modern crime/action films - but a sign that you can rise above suffering, instead of avoiding it.

A Viennese taxi driver explained to us the difference between Austrians and northern Germans: "They say, it's bad, but it's not hopeless; we say, it's hopeless, but it's not so bad."

Back to our muttons. Here he is again, quoted from various sources via Resourcexinvestor:

"Investors have to look for assets which cannot multiply as fast as the pace at which the Fed prints money."

... He advised buying gold to defend against monetary inflation... he recommends holding physical gold bullion investments in gold-friendly countries such as Hong Kong, India and Switzerland. He counsels against holding gold in the US for fear that it might be nationalized by the government.

Golden bubble

A bubble shot through by a bullet - experiment described here

Here's a counter-blast to gold-bugs and fans of other metals:

In this long and dense presentation to the World Bank, delivered in April 2007 and revised/updated in July, Frank Veneroso says that commodities, including gold, nickel and copper, are already in a big bubble. He thinks an estimated $2 trillion in hedge funds, plus leveraging, is pumping the prices:

When it comes to metals, we see hedge fund speculation, hoarding and squeezing everywhere. Not only have some metals markets been driven far, far higher in this cycle compared to all past cycles; we see the same phenomenon across all metals. It is the combination of both the amplitude and breadth of the metals bubble that probably makes it the biggest speculation to the point of manipulation in the history of commodities. (Page 50)

Short runs costs have risen, but not long run costs. New sources are being exploited. And if recession hits, demand will drop:

... the historical pattern... for all commodities, suggests that, rather than seeing well above trend metals demand growth in the years to come as the consensus now projects, we are more likely to see outright declines in global demand for these metals as demand destruction takes hold. (Page 56)

For institutional investors, the "barren breed of metal" is unproductive compared to other assets:

... it is likely that the net nominal return to portfolios from investing in physical “stuff” has not been more than 1% per annum. By contrast, in a 3% inflation environment, bonds have yielded somewhere between 5% and 9% and equities have yielded somewhere between 8% and 11%. In effect, you gave up an immense amount of yield if you diversified out of bonds and stocks into commodities. You did gain by reducing overall portfolio volatility, but that gain was not large enough to offset the loss in yield. Diversifying with “stuff” did not enhance risk-adjusted returns. (Page 57)

So prices have been boosted by the futures market. And commodities as a market are small enough to be susceptible to "manipulation and collusion".

Readers of this blog will recall that Marc Faber recently said he saw bubbles everywhere, including commodities. Even if cash isn't king, it may be a pretender to the throne.

No easy bounce back this time, says Marc Faber

Marc Faber, quoted in The Daily Reckoning Australia on Thursday but writing in late August, anticipated the Fed's strategy of interest rate cutting, and thinks it won't work.

Unlike all the Wall Street strategists who compare the current credit crisis to the credit crisis of 1998 (Long Term Capital Management), I believe that the ongoing credit problems will be far worse and of a longer-term nature. This will make it difficult for the market to reach new highs in the near future. Moreover, even if the 1998 comparison were to hold, we would still be looking at a much deeper stock market correction than the 22% sell-off we saw in 1998....

...even if the Fed were to cut rates massively now, it is unlikely that it would stimulate credit growth, which, as I have explained repeatedly in the past, must continuously expand at an accelerating rate in a credit- and asset-driven economy in order to keep the economic plane from losing altitude. Accelerating credit growth is most unlikely now, because I cannot see how financial intermediaries will ease lending standards any time soon after the losses they have recently endured and following their dismal stock performance...

The crises that build up in international financial structures always ricochet from country to country….

...For the last several years, investors have enjoyed a massive global boom. But they should not rule out a massive global panic.

And so say all of us...

Investment experts Jim Rogers and Marc Faber agree with Jim Puplava that (a) the US will try to reflate out of its troubles, and (b) cutting interest rates to achieve this, will lead to worse trouble.

According to Bloomberg today, "Rogers said he is buying agricultural commodities and recommended investors purchase Asian currencies including the Chinese renminbi and the Japanese yen.

Faber, publisher of the Gloom, Boom & Doom Report, said he is buying gold."

DOW 9,000 update

At the time of writing, the Dow stands at 13,493 and gold at $713.70/oz. Adjusted for the change in the price of gold, the Dow has fallen by just over 10% since July 6.