Marc Faber Blog

Tuesday, October 6, 2015

Gloom Boom Doom October 2015 Report

The late Kurt Richeb├Ącher opined that, “Capital and wealth increases when a community produces more than it consumes. Capital and wealth decreases when the community consumes more than it produces. What is happening in the United States is the latter - with the consequences of general impoverishment.” In an earlier report I explained how Friedrich Hayek gained fame among English-speaking economists at the London School of Economics in 1931, because he made the distinction in the use of credit for investment or consumption his key theme. At the time he explained in detail how excessive consumer spending brings about “a shortening or shrinking of the production” and so causes recession. What shrinks is the economy’s capital base. In essence, production that uses capital gives way to production using little or no capital. In other words, the whole economy adjusts to the changes in the pattern of demand implemented by the credit excess. Looking at changes in employment in the US over the years, I note that employment in capital-intensive manufacturing has plummeted, while employment in all kinds of low-paying services has soared.  

There is a difference between excessive credit growth (defined as an “increase in money capital from credits which do not originate from savings but are created out of nothing through the banking system”) flowing into capital investments, and excessive credit growth flowing into asset inflation and financing consumption. Once the boom comes to an end, the severity of the downturn can be equally severe (most likely more severe in the case of a capital spending boom), but the capital spending boom leaves the entire system with investments such as railroads, canals, and other infrastructures, and new technologies. It is a well-documented fact that all canal companies, including the most successful of them all, the Erie Canal Company, went bust. Equally, by 1895, 95% of all US railroads were either in default or bankrupt; however, the transportation network that had been built by the canal and railroad companies was a huge boon to the expansion of commerce and trade within the American continent.

Similarly I would argue that, while there certainly has been capital spending excesses in China, at least there is now infrastructure in place whereas there was none 20 years ago (unlike in India, where infrastructure is still decrepit and extremely poor). On the contrary, in the case of an asset boom and excessive credit creation which financed consumption, the system is left with hardly any new capital structures but an over-indebted consumer. In addition, consumer credit allowed the consumer to advance consumption, which then leads to reduced demand once the consumer exhausts his borrowing capacity (as is now the case for the majority of American families).

This report explains why under current fiscal and monetary policies the global economy will likely enter a recessionary phase and why equities will unlikely perform well. 

Sunday, October 4, 2015

Donald Trump is not a genius

In my view, you know you look at Trump, Donald Trump is no genius or anything, and he is not a particularly honest person either because his investors that bought bonds that were issued by his companies, most of them lost money, but he touches on one point, and this is a great dissatisfaction of the American of the typical American with his government.

Tuesday, September 29, 2015

We will see inflation again because of the Fed

Well you know it is like in a bubble. The bears are right and the bulls are right but at different times. Every bubble will go up and then eventually the bubble will burst and then you know prices collapse. So during the bubble stage the bullish people are right and during the collapse the bears are right, but at different times. This is the same with deflation and inflation; I think both will be right, but at different times. I believe that most people have a misconception of what inflation is. In other words most people, they think of inflation as an increase in price of goods they go and buy in the shop over there and over there, at the butcher and at the baker and in the grocery store and so forth when in fact this is just one of the symptoms of inflation.

You can have inflation that manifests itself in sharply rising wages, this hasn’t taken place but if you look globally, say in China, wages have gone up substantially or you take Thailand, wages have gone up substantially. Or it can manifest itself in rising commodity prices. Well I mean commodity prices have been weak lately but the oil price is still close to 50 dollars a barrel and it was at 12 dollars a barrel in 1999 and gold is still around 1000 dollars and it was at 300 dollars and below in the 1990's, the low was at 255 dollars. You understand? A lot of things have been weak recently but they are still up substantially compared to the past.

Or you take bond prices, in other words bond prices go up when interest rates go down. Bond prices in the last hundred years have never been this high; in other words interest rates have never been this low on sovereign debts. Or you take equity prices, ok some markets are down, mostly the emerging markets whether it is Russia or Brazil or the Asian markets, they are down from the peak but they are still much higher than say ten or fifteen years ago. Or you take property prices, it depends which properties but most property prices, for example if you look around here in Switzerland, the prices are much much higher than they were fifteen, twenty years ago.

Even in some areas, they may have come down a bit but in luxury areas there are record prices. Or you take the Hamptons, or Mayfair in London, or Chelsea in London, Kensington and so forth, prices are very high compared to say twenty years ago. Or you take paintings, art... I mean when I grew up and I started to work in 1970 in New York, in New York at that time a Rothko painting was offered to me for 30,000 dollars. I didn’t buy it because I thought why would I pay 30,000 for something like this! Now a Roscoe is maybe ten, twenty, thirty million dollars and I have a Warhol, it is not a big painting but nevertheless I bought it for 300 dollars in the 1970s. You understand? Prices have gone up dramatically, so if someone says to me, well there is deflation, I tell him, well tell me in what? You know, Hong Kong property prices, Singapore property prices, even Bangkok, Jakarta and so forth, all have been grossly inflated.

Therefore I think we have to re-examine the definition of inflation whereby maybe we have some sectors of the economy that are deflating, like if we measure wages inflation adjusted, they are all going down in the western world because a) the consumer price inflation that the Federal Reserve and Europeans report has nothing to do with the cost of living increase, the cost of living increases and we have studies about this, in most American cities are rising at between 5 and 10% per annum and if you include insurance premiums, health care costs, education costs and so forth.

So these prices are going up strongly. Or taxes, indirect taxes like tunnel fees or bridge tolls and so forth, all that is going up much more than the CPI and this is where people have to pay for to actually go to work and live. This is then reflected, this kind of inflation is reflected in a diminishing purchasing power of people, that’s why retail sales are relatively poor in the US despite of the fact that we are six years into an economic expansion. I am always telling people, you know when I started to work I didn’t have to be smart because if I put my money on deposit with the banks or bought government bonds they were yielding 6%.

Then from 1970 to 1981 interest rates continuously went up, so the compounding impact was very high. Now if I am a young guy, say your age; then I want to put my money on deposit, I am being F*d essentially by the banks because they are not paying me anything. If I buy ten years US treasury notes I am getting a yield of less than 3%; 2.3% at the present time and it was below 2% six months ago. So how can I really save? How can I make money? I want to buy a house ok?

Then you have to pay a huge price and the mortgage rate may still be around 4% you understand? So it is still relatively high interest rates on mortgages and one of the reasons that new home sales are not particularly strong is that young people just don’t have the money to buy it because a) they are also burdened with student debts. So I mean these are all issues that are very complex.

My sense is that knowing the central banks, and knowing the way that they think, what will come up when they realise that the global economy is not healing but actually back into contraction under the influence of the neo-Keynesians like Krugman, they will say, you know what?

We haven’t done enough, we have to do much more, and then they will print again and that is why I think that eventually we could have high inflation rates and a renewed increase in commodity prices.

They will print again and that is why I think that eventually we could have high inflation rates and a renewed increase in commodity prices.

Monday, September 21, 2015

Japan printing money because it has no choice

In America many cities are basically bankrupt as well as some states or semi states like Puerto Rico. Then, have a look at Japan, the Japanese situation is very serious in the long run because if interest rates, they are now on 10 years JGBs 0.03% but already at these very very low rates, Japan pays, I think close to 45% of tax revenues go to payment of interest on the debt. Now if the interest rates went up on JGBs to say 1%, all the tax revenues would have to be used to pay the interest on the debt! 

In my view, Japan has no other option but to print money or default and that will then imply that the Yen will then become weaker and so forth.

*Last update : Sep 21, 2015