China Has A "Colossal Credit Bubble" And No One Knows How It Will Unwind, Marc Faber Warns

Tyler Durden's picture

A little over a week ago, Marc Faber dialed in from Thailand to chat with Bloomberg TV about the outlook for US equities, the American economy, and USTs in the new year.

The US is "already in a recession," the incorrigible doomsayer said.

Stocks will head lower in 2016, Faber continued, taking the opportunity to mock the sellside penguin brigade for adopting a universally bullish take on markets going forward. "Well, I don't think that the U.S. will continue to increase interest rates," he concluded, before predicting what we've been saying for years, namely that in the end, the Fed may be forced to do an embarrassing about-face and return to ZIRP and eventually to QE. "In fact, given the weakness in the global economy and the deceleration of growth in the U.S., I would imagine that by next year the Fed will cut rates once again and launch QE4." 

On Wednesday, Faber was back on Skype with Bloomberg to chat more about his outlook for 2016. 

Asked why he believes the US is already in a recession, Faber says all one need do is "look at exports, look at industrial production and the slowdown in credit growth."

As for what's likely to work as an investment now that central banks have created bubbles everywhere you look, Faber says the following:

"With the exception of those that held Bitcoins, the performance of all asset classes has been poor. The Fed has created an atmosphere where the future return on assets whether it’s stocks or bonds or art will be poorer."

Next, he bemoans the lack of market breadth, and warns that although the "indices are holding up well, the majority of market is already down 20% or more." The S&P, he says, peaked in May and will fall 20-40%.

"Janet Yellen will go down in the history books as the biggest joke, the biggest failure," he continues, noting that in hindsight, the Fed will be shown to have hiked right on the eve of a recession. 

As for China, Faber thinks it's better to be "overly cautious than overly optimsitic" given the fact that the country "has a colossal credit bubble" and no one knows how it's going to unwind.

Quizzed on whether the Chinese economy will ultimately experience a "hard landing", Faber says simply this: "We had a hard landing in the stock market already. We had a hard landing in commodities. [So yes], we could have a hard landing in the economy."

Watch the video below:

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Looney's picture

Some call it a “Hard Landing”. I call it “Walking drunk until the ground suddenly comes up and hits you in the face”. ;-)

Looney

daveO's picture

2008 again? A crash followed by QE and a Communist elected to the WH?

Money Counterfeiter's picture
Money Counterfeiter (not verified) daveO Jan 6, 2016 2:40 PM

“And No One Knows How It Will Unwind”

Real fricking simple Marc.

Bankruptcy, liquidation, CNB sell their assets, and from the chaos a new order will emerge in 6 to 18 months.

Let this be a lesson to central planners the world over.  Central planning fails 100% of the time.

Bokkenrijder's picture

Wasn't Marc cheer-leading China and Asia only a year ago? Oh no, that must have been Peter Schiff.

Additionally, Marc is a master at talking for 10 minutes leaving people hardly any wiser than 10 minutes before. He talks like a lawyer, always leaving himself an escape route, and being vague enough to be able to later twist it around to his advantage.

It obviously works well for Marc, but I'm not so sure whether I as a private citizen with a very small financial footprint have any benefit from listening to him.

MrSteve's picture

Another 100% of the time situation: - every inflation ends with a deflation, historically, absolutely every one ever launched, even the Spanish gold-based inflation with all the Inca / Aztec looted gold; it's what inflations do.

Consuelo's picture

 

 

It's been a 'hard landing' for them since long about 2008.   Tomes have been written regarding such.   But when you have as much $$$€€€FX reserves as the Chinese do, along with no external debt, one could potentially stay in the air for quite some time I reckon.   And with their (yet to be announced physical gold holdings), who knows how long.   I guess we'll find out when the U.S. and Australia no longer have any gold to sell to Hong Kong maybe...?

Fester's picture

Same song different verse.

Let's get this show on the road or give me some $800 gold.

 

Ham-bone's picture

The causes of the greatest depression are entirely visible and predictible...

http://econimica.blogspot.com/2016/01/sources-of-growth-examined-and-found.html

However, how it plays out is a political determination and unknowable.

ShrNfr's picture

Nobody knows when Faber will finally be right on something either.

Hongcha's picture

I spent two weeks in Chiang Mai last June; the city has grown and lost a lot of its charm but the Thais were as gracious as ever and the food is very good.  They have the additional good fortune of being a Buddhist nation, nationalist, proud of themselves, subtly but decidedly xenophobic; and harboring no fossil fuels for Amerikans to Free the fuck out of.

A five-star jungle life in the Golden Triangle - well played, Dr. Doom!

KnuckleDragger-X's picture

China is working hard to be a bad example, and they're going whole hog. Should be interesting if/when they start to unwind......

Mick Shrimpton's picture

We haven't had a hard landing anywhere yet with the exception of oil prices and oil stocks.  This is just the beginning.

Spungo's picture

In other news, the sky is blue. wtf kind of article is this? Even CNBC seems to acknowledge China's epic bubble, and that means it's extremely old news. 

RaceToTheBottom's picture

No fan of Old Yellen, but the Faber should not let the Bernank off the hook so easily.  Greenspam and the Bernank set the US and therefore the world on this path.

Old Yellen is just rubber stamping the previous mess.

taketheredpill's picture

 

 

I think the Fed never believed the growth story either.  The Unemployment Rate story was just a cover for a rate hike that was the first baby step in trying to get out of the hole that has been created.  QE doesn't work, at least not the way it was hoped, so they want to kill this monster.  25 basis points, manage the fall-out, try another 25 etc.  Except markets will revolt and has been described in many places Fed will be forced back to ZIRP...then QE4....then Chopper Money.

RaceToTheBottom's picture

Then confidence in the dollar >>>> dinar.

 

Consuelo's picture

+++++

 

And he only variables that remain are:

a. Time

b. Acceleration

Vergeltung's picture

anyone else read this and hear all the quotes in Faber's voice/accent?  :-)

Rainman's picture

How time flies . Five years ago Professor Larry Lang announced :

  " Every province in China is Greece "

                 http://investmentwatchblog.com/professor-larry-lang-every-province-in-china-is-greece/

              

Dr. Engali's picture

Glad we're on the same page with gold and the ten year Marc.

moonmac's picture

When most Chinese homeowners get their down payments from mafia loan sharks there’s bound to be trouble.

The Ram's picture

No Shit.  I am not a Faber fan, but at least he is not saying something obviously wrong.  Not that America is any bastion of transparency, but the Chinese economy is is even more steeped in out right larceny, obfucation, and corruption.  They will be able to continue the show a little longer.  In the end, it's about feeding the billion plus people.  If the currency collapses to the point that their production workers get a hand full of rice every other day, the term 'hard landing' will be a huge understatement.

Consuelo's picture

 

 

Whew...   Amidst the 24/7 China-about-to-implode (since 2008) meme, it's might reassuring to know the U.S. doesn't have any of these problems.   When do the playoffs start...? 

Bill of Rights's picture

Thank of it as a tower of domino's...

charliebrown's picture

Leaders like Farber are only willing to say what they think the government will do, ZIRP, QE, rather say what the government should do, provide for an orderly liquidation of positions as consumers take over from government central planning.

Repet's picture

Just another reason why Bitcoin will displace gold as the safe haven currency in the years to come.

Fuku Ben's picture

Janet should have her feet held to fire and so should Greenspan and Bernanke. They're the 3 stooges of fiscal comedy. Or Hear No Evil, See No Evil, Speak No Evil of fraudulent fiat. They could reproduce this NASA photo. It would be fitting.

https://s-media-cache-ak0.pinimg.com/736x/e8/b4/d9/e8b4d9cd042c185ad44b6...

Aeneid's picture

You must not be reading ZeroHedge Marc! Tell us something that we don't know already. Captain Obvious

polo007's picture

According to Macquarie Research:

https://app.box.com/s/ju6d0ren3gfg4m3dbr2o3qx09q9dp0tn

China’s savings dilemma

In our latest commentary, we ask whether China’s economy can be re-balanced.

China savings dilemma. It is a truism to state that China’s investment and debt fuelled economic formulae is ultimately unsustainable and could lead to severe consequences for China and the global economy. Indeed it has become one of the most consensus themes and hence mechanisms by which China can rebalance and the likely time-frame have emerged as the key points of debate.

In order to understand what is ailing China one needs to appreciate the underlying causes that drive overinvestment and rising debt levels. Whilst there is nothing new in China’s model of suppressing consumption and re-directing funds towards investment and trade (mercantilist model that over centuries has been used by countries as diverse as Germany, Russia, US, Japan and Korea), the global impact of China makes all other transitions pale into insignificance.

Arguably the best way to illustrate China’s challenges is to examine its sectoral balances (given that all sectors must ultimately balance to zero, it precludes arguments that do not take into account consequences of changes in one sector on others). The key problem is that all of China’s sectors (household, corporate and government) are significant gross savers. As a result, gross national saving rate (~48% of GDP) is the highest in the world and is responsible for ~30% of entire global flows. The high level of savings can be either utilized domestically in fixed asset investment or it can be exported to other countries (via current account surplus). Indeed, China has been doing both, with high investment rates (~45% of GDP) and CA surpluses. The challenge however is that China is starting to run into constraints in both domestic (high ICOR rate, declining ROE and debt addiction) and foreign utilizations (declining ability of other countries to absorb China’s surplus, in the global economy that lacks growth; trade and liquidity). Hence, an urgent need to unhook China from its investment and debt fuelled model and move towards lower savings and higher consumption.

Unfortunately, “iron logic” of sectoral balances precludes simple solutions. The ideal outcome would be: (a) spontaneous rise in household spending at a rate much faster than investment and concurrent (b) strong recovery in global trade, allowing China to further reduce investment via higher CA surplus (as other countries would have greater capacity to accommodate China when global trade expands). We view chances of either outcome coming to pass at almost zero.

Hence China has to settle for sub-optimum choices, such as: (a) relying on long (decades) demographic transition to lower savings; (b) attempting to accelerate consumption through higher fiscal spending (eroding precautionary savings); (c) transfer of surpluses from corporate sector to households (lower prices; higher dividend and capital distributions); and (d) lower currency (stealing growth from other countries). All of these choices have side-effects and do not yield quick results. The pace of China’s re-balancing is now too slow to make much ST difference and therefore it has no choice but to continue with investment growth fuelled by debt, until it is either exhausted (under weight of excessive debt) or global and local (reforms) factors converge to assist this transition. The jury is still out on which outcome is more likely. We continue to prefer quality private sector players that offer protection if reforms stall and benefit if they accelerate.

How did we do in 2015? “Quality & Stability” portfolio delivered ~8% relative performance; outperformance since Mar’13 is ~24%. “Sustainable Dividends” finished inaugural year with ~10% outperformance whilst “Thematic Leaders” is up by ~7-8% since launch in Sep’14.

Omega_Man's picture

GOLD..................... that's what the Chinese will want... and lots of it

American Psycho's picture

I'm waiting for a Faber interview where he shows up in a bathrobe and a random Thai hottie walks through the background. 

r3phl0x's picture

Try to look at her tits rather than her dick.

KingOfMilwaukee's picture

Faber has correctly predicted 10 of the last 2 recessions.

vega113's picture

Still a lot more profitable than 0 out of 2.

vega113's picture

Still a lot more profitable than 0 out of 2.

PTR's picture

It's not called a "Chinese Fire Drill" for no reason...

Youri Carma's picture

What Fed Increase? Top Treasuries Forecaster Is Bullish for 2016
16 December 2015, by Susanne Walker Barton (Bloomberg)
http://www.bloomberg.com/news/articles/2015-12-16/what-fed-increase-top-treasuries-forecaster-is-bullish-for-2016

LeBas at Janney sees 2.22% 10-year yield at end of next year.