The Federal Reserve's balance sheet is set to exceed a whopping $4 trillion today, prompting warnings its ultra loose monetary policies are inflating asset price bubbles and will lead to a devaluation of the dollar and signifigant inflation in the coming years.
"The Fed will never end QE for good..." blasts Marc Faber, "they may do some cosmetic adjustments, but within a few years, [Fed] asset purchases will be substantially higher than they are today." There will be another weakening in the US economy, Faber warns, and "the Fed will argue it hasn't done enough and will do more... they have been irresponsible for 20 years." Use rallies to reduce exposure, he warns, "we will go up until it is over; and when it is over the drop will be larger than 20%," and the best opportunity, Faber notes, is in the most-depressed asset-class he looks at: gold and gold stocks.
2013 was a stellar year for stocks, but how will the markets evolve in 2014? Here is our sneak preview...
"Twas the Friday before the Friday before Christmas..." and as the year end rapidly approaches the mainstream consensus is that 2014 will be another bouyant year for the stock market despite the impact of a potential Federal Reserve tapering. The optimistic view is an easy one. While it isn't popular, or fun, to look at the non-bullish view it is nonetheless important to consider the risks that could potentially lead to a larger than expected loss of investment capital. There is one simple truth about financial markets and investing: what goes up must come down. It is the downside risk that is most damaging to long term investment returns. Therefore, this week's "Things To Ponder" is a sampling of views and thoughts on what to watch out for as we enter the new year.
We present the first half of Goldman's 100 best charts for 2013.
We’ve recently been treated to two mutually exclusive forecasts: that the Great Bull Market will run until 2016 or 2018, so no worries; and that markets are exhibiting bubble-like characteristics that presage another crash. So which forecast is more likely the correct one? Though it is unsatisfyingly imprecise, the “new normal” phase strongly implies that future declines will be as dramatic as the advances and that the five-year clock is ticking on the current Bull market. Forecasting an advance that lasts years beyond this five-year pattern is equivalent to forecasting that the “new normal” phase is now ending and a new phase of much longer Bull advances is beginning. That is a bold claim, and there is little historical data to give it much weight. Stripped of complexity, the charts suggest that the current run will top out within the next few months and retrace most of the advance from 2009; i.e., a crash of significant amplitude.
"We think that something structurally has changed since the GFC, a change that seems destined to continue to hold back growth in the near-term and more worryingly has lowered the longer-term trend rate of growth. In the absence of structural reforms, a lack of appetite for debt restructuring and no ability to pursue more aggressive fiscal policy, the temptation will be strong globally to continue to throw liquidity at the problem which is likely to continue to have more impact on asset prices than the actual economy. Bubbles could easily form which could ultimately be the catalyst for the imbalances that will likely lead to the next recession or crisis... Our base case is that the world needs low yields and high liquidity given the huge amount of outstanding debt that we’re still left with post the leverage bubble and the GFC. There’s still too much leverage for us to believe that accidents won’t happen with the removal of too much stimulus. If we’re correct, we may see a reaction somewhere to tapering and this in turn may force the Fed into a much slower tapering path than it wants."
As a distant but interested observer of history and investment markets, Marc Faber is fascinated how major events that arose from longer-term trends are often explained by short-term causes.; and more often than not, bailouts (short-term fixes) create larger problems down the road, and that the authorities should use them only very rarely and with great caution. Faber sides with J.R. Hicks, who maintained that “really catastrophic depression” is likely to occur “when there is profound monetary instability — when the rot in the monetary system goes very deep”. Simply put, a financial crisis doesn’t happen accidentally, but follows after a prolonged period of excesses (expansionary monetary policies and/or fiscal policies leading to excessive credit growth and excessive speculation). The problem lies in timing the onset of the crisis.
With the world almost in total agreement that rates can only go up, that the 30-year bull market in rates is over and a return to "normal" rates is timely, perhaps a glance at the following chart of 700 years of government bond yields will enlighten a little as to where the anomalies and what the "normal" is. All too often investors are caught up in their cognitive dissonance-driving recency bias when a bigger picture may just help those who always proclaim to invest for the long-term.
- Apple, China Mobile Sign Deal to Offer iPhone (WSJ)
- Japan approves $182 billion economic package, doubts remain (Reuters)
- Volcker Rule Won't Allow Banks to Use 'Portfolio Hedging' (WSJ)
- He went, he saw, he achieved nothing: Biden's Trip to Beijing Leaves China Air-Zone Rift Open (WSJ)
- Britain announces sharp upward revision to growth forecasts (Reuters)
- U.S. Airlines to Mortgage-Backed Debt Top List of Best ’14 Bets (BBG)
- Thaksin's homecoming hopes dashed as Thai crisis reignites (Reuters)
- Age of Austerity Nearing End May Boost Global Economy (BBG) - or it may expose that it was just corruption and incompetence at fault all along
- China aims to establish network of high-level FTAs (China Daily)
While most of the world's elites are bathing in a sea of liquidity and propagandizing the status quo to keep the dream alive, Richemont Chairman Johann Rupert has unleashed a torrent of uncomfortable truthiness this morning:
- *REMGRO CHAIRMAN RUPERT 'VERY CONCERNED' ABOUT GLOBAL ECONOMY
- *GLOBAL ECONOMY 'VERY, VERY PRECARIOUS,' RUPERT SAYS
- *WORLD HEADING FOR 'BIG INFLATION' OR `BIG DEPRESSION': RUPERT
- *GLOBAL ECONOMY HEADED FOR 'TEARS': REMGRO, RICHEMONT CHAIRMAN
- *RUPERT SAYS HIS BIGGEST CONCERN IS JOBLESS GROWTH
And while things are good now, the owner of the Cartier brand warned if the global economy doesn’t do well, Richemont is not well positioned.
"What keeps us up at night? Well I can’t speak for the others, having spoken too much already to please PIMCO’s marketing specialists, but I will give you some thoughts about what keeps Mohamed and me up at night. Mohamed, the creator of the “New Normal” characterization of our post-Lehman global economy, now focuses on the possibility of a” T junction” investment future where markets approach a time-uncertain inflection point, and then head either bubbly right or bubble-popping left due to the negative aspects of fiscal and monetary policies in a highly levered world. ... investors are all playing the same dangerous game that depends on a near perpetual policy of cheap financing and artificially low interest rates in a desperate gamble to promote growth. The Fed, the BOJ (certainly), the ECB and the BOE are setting the example for global markets, basically telling investors that they have no alternative than to invest in riskier assets or to lever high quality assets. “You have no other choice,” their policies insinuate.... Deep in the bowels of central banks research staffs must lay the unmodelable fear that zero-bound interest rates supporting Dow 16,000 stock prices will slowly lose momentum after the real economy fails to reach orbit, even with zero-bound yields and QE." - Bill Gross
It seems only apropos the current exuberance that, having been put on hold due to the economic crisis, an ambitious project to build the world's biggest ship and create "a community that offers unique lifestyle opportunities" is back on track and seeking investors. With calls for wealth taxes increasing and "the 1%" becoming increasingly separate from the rest of the world, what better way that the ironically named "Freedom Ship," which as IBTimes reports, will be a vast floating city that will be more than a mile long and 25 storeys high. It will cost $10bn to build and will constantly circumnavigates the globe; and while US residents may still need to pay taxes, residents of other countries "may realise tax savings by residing in or running businesses in the Freedom Ship Community."