Marc Faber: Relax, This Will Hurt A Lot
Marc Faber closed out this week's Agora Financial Symposium with a speech that pretty much recapitulated the view that the end of the world is if not nigh, then surely tremendous dislocations to the existing socio-political and economic landscape are about to take place (with some very dire consequences for the US). His conclusive remarks pretty much summarize his sentiment best: "We've had a trend for most of the past 200 years: GDP of countries like
China and India went down while the West surged. That's now changed.
Emerging economies will go up, and your children in the West will have
a lower standard of living than you did. Absolutely. We won't sink to
the bottom of the sea. But other countries will grow much faster than
us. The world is very competitive, and the odds are stacked against us.
Americans, with their inborn arrogance, will not let it go that easily,
so there will be lots of tension going forward." While long-time fans of Faber will not be surprised by the gloom and doom (not much boom) here, anyone else who still holds a glimmer of hope that at the end of the day the CNBC spin may be right, is advised to steer clear of Faber's most recent thoughts.
And while we do not have the full presentation yet, the salient points have been recreated below courtesy of the Motley Fool. For those who desire a far more in depth presentation from the inimitable Mr. Faber, we direct you to his June 2008 capstone presentation: "Where is the boom, and the doom" - link here.
On reality: My views are not all that negative. I
think they're just realistic. I want to face reality. You have people
like Paul Krugman who thinks we should have another bubble to pull us
out of this. He actually said that. But he said the same thing in 2001.
And you know how that turned out.
On unintended consequences: The Fed doesn't seem to
have learned anything at all from its mistakes. Their current policy of
cutting rates to zero is designed to create sustainable growth, but
they've created larger and larger volatility in markets. There are many
unintended consequences of their actions.
The oil bubble of 2008 is a good example. In 2008, the price of oil
went ballistic, but the U.S. was already in a recession [it began in
Dec. 2007]. There was no rational reason oil should have gone
ballistic. The Fed's easy money just fueled a bubble. It was like a
$500 billion tax on consumers courtesy of the Fed. That's the added
amount that it cost you, and it helped push consumers over a cliff in
On the Fed: The Fed doesn't pay any attention to
asset bubbles when they grow. That's their official policy. But they
flood the system with cash when bubbles burst. They only care about
bubbles when they crash. It's a very asymmetric response and it has
many unintended consequences.
Letting bubbles inflate and then fighting them when they burst
actually worked for a while. That's what makes it dangerous. It worked
in the '90s. But you shouldn't read too much into this: This period was
assisted by unusually favorable conditions. From 1981 until early last
decade, commodities were in a bear market after a bubble in the '70s
and early '80s. And interest rates were falling throughout the '80s and
'90s, too. They almost never stopped falling. That made Fed policy look
like it was working.
Bubbles can still happen without expansionary monetary policy. In
the 19th century, you had bubbles in railroads, for example. But today,
the Fed has created a bubble in everything -- in every single asset
class. This is an achievement even for a central bank. Stocks.
Commodities. Bonds. Real estate. Gold. Everything goes up when the Fed
prints. The only asset that goes down is the U.S. dollar.
On deflation: I'm a believer that the stock market
lows of March 2009 will not be revisited. You have people like Robert
Prechter who think the Dow will collapse to 700 because of debt
deleveraging. Debt deleveraging could happen, but the Dow will not fall
because of monetary policy. The Fed will keep everything inflated in
nominal terms. And if the Dow does go to 700, you'll have more to worry
about than your investments. All the banks will be bust. The government
will be bust. You don't want cash if massive deflation happens. On the
contrary: It will be worthless. You have to think very carefully about
On credit addiction: In a credit-addicted economy,
you don't need credit to actually fall for there to be problems. All
you need is a slowdown in the growth rate, and you get big problems.
Now, the government and the Fed are aware of this, so they are creating
debt through fiscal deficits and monetization. That creates a hugely
volatile environment. In 2008, government credit creation was inferior
to private credit contraction, and asset markets tanked. In 2009,
government credit creation was higher than private contraction, and
asset markets went ballistic. Lately, government credit creation has
slowed, and asset markets have gone down. Now, the Fed is aware of
this, and it's only a matter of time before it throws more money into
the system. I guarantee this.
On what the Fed will do from here on out: The
easiest way to fix our debt problems is with 6% inflation per year.
That bails out everyone in debt. Interest rates will stay at 0% in real
terms forever, in my opinion. If inflation is 5% per year, the Fed will
keep interest rates at 5%; that's how you get 0% real interest rates.
Now, we could have debt contraction in the private sector, but it
doesn't matter. It will be more than an offset with government debt
creation. So it's not a good idea to be all in cash and out of stocks.
Cash is very dangerous when central banks want real interest rates at
On the rest of the world: The U.S. today is much
worse off than it was 10 or 20 years ago compared with the rest of the
world. The Asians should thank the Federal Reserve for this. The Fed
practically created the emerging market economies. The Chinese pegged
its currency to the dollar in 1994, and until 1998 not much happened.
When the Fed began printing and boosting asset prices in 1998, there
was this huge debt growth, and U.S. consumers began spending at a
massive rate. That increased our trade deficit from $200 billion to
$800 billion. Of course, trade deficits have to be offset by trade
surpluses in other countries. So the Chinese began ratcheting up
production. Then their employment went up. Their wages went up.
Entrepreneurs began investing more money in capital spending. The Fed
is not the only factor that led to strong emerging market growth, but
it certainly was a major factor in it.
On delusions of grandeur: In the U.S., we still
think that we are the largest consumer market in the world. For some
services we are, but in general this is the wrong way to look at things.
There are huge differences in how statistics between countries are
produced. For one, the U.S. is the most leveraged. Other countries
factor this in. Also, consumption in the U.S. is 70% of GDP, but it's
almost all on domestic services. Spending on actual goods is only 20%
of consumption. In the U.S., we spend $600 billion a year on defense.
But $300 billion of this goes to personnel and retiree costs. In China,
the cost of personnel is basically nothing. When you adjust for
purchasing power, China probably spends about what the U.S. does on
We also think that we have all the knowledge of the world. We think
that's our edge. But knowledge in countries with much larger
populations have the edge. Research now is being done in Asia because
it's cheaper there. Companies like Intel, IBM, and Microsoft are researching in Asia. It's just so much cheaper there. And they are
smarter than the U.S. in many ways, too.