Marc Faber: A Massive Systemic Shock Is Coming & The Fed Is Actively Courting It

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by Wealthion
Saturday, Oct 22, 2022 - 16:21

Veteran macro analyst Marc Faber sat down recently for an interview with Wealthion. Below are the videos of the discussion, plus Wealthion host Adam Taggart's notes of the key takeaways:

PART1: A Massive Systemic Shock Is Coming & The Fed Is Actively Courting It

The global economy has not recovered to its 2018/2019 pre-COVID peak. Valuations are still very elevated, even though down 20%+ from the start of the year.

Global money supply (liquidity) has been in contraction this year, and when this happens, asset prices tend to come down. Not very surprising.

Corporate earnings estimates have come down substantially already in many countries, but not for the US. S&P earnings estimates are still recklessly optimistic in defiance of the unfolding data. Demand destruction from inflation & Fed interest rate hikes are swiftly impacting sales. This lends a high probability that coming earnings contraction/guidance downgrades will force stock prices down materially in the future.

Both stocks, bonds, real estate and commodities are getting beaten up this year, so there’s been no place to hide — except cash, which investors have been told for years “is trash”.

True cost of living increase is much higher than CPI reflects. Real world food inflation is close to 39%. This is crimping consumer spending. 

There are no easy answers here. The authorities basically have 2 bad choices:

  • Stop raising interest rates — but inflation will resume its upward march & the currency’s purchasing power
  • Keep raising rates — this will create great pain for consumers & businesses, and will likely create systemic breakages

We are in this pickle because the central banks held interest rates too low for too long, and intervened with too much stimulus. We made the system dependent on central bank largess. And now, like an addict, it will go into shock without it.

Capitalism has been seriously compromised. In the past, yes, some entrepreneurs (e.g. robber barons) accumulated great wealth, but they did it by creating productive industries that increased the standard of living for all (e.g., railroads). US became great because its wealth was widely distributed across the nation. Most other countries have 1 or 2 centers of industry/population. US has 50+, made possible by rail, canal & road system AND limited government.

But today, too much wealth is being created without any social benefit, and oftentimes social impairment.

In past centuries, politicians who acted against the interests of the people were often beheaded. There were severe repercussions. But today, there are no repercussions for poor governance. Good or bad, politicians know there’s a cushy board job waiting for them once they leave politicians. 

Empires don’t fail from external pressures. They fail from within. Marc fears we are failing from within as the ruling class takes more and more of the spoils and the lower classes gravitate towards the false promise of socialism. The woke crowd is driving policies that are not based in reality (Marc says “common sense has died”) & putting us on a trajectory that simply can’t sustain. 

Sadly, most people are unaware/complicit in this devolution — and Marc imagines they will remain indifferent until & unless things fail to the point where it creates enough pain to continue the status quo.

Jerome Powell is (finally) doing the right thing policy-wise. That said, he bears substantial culpability for the bad situation in which we find ourselves. Marc thinks the Fed now needs to “hit the financial system into the face with a fist” to show it it’s serious in its commitment to do whatever it takes to bring inflation back down.

The Fed is way behind the curve at this point. According to the Taylor Rule, the Fed Funds Rate should be over 9% (compared to 3% today).

We need to cut government’s size down, to something like 20% of the economy. Right now it’s much higher than that and strangling productivity/growth.

Marc thinks that the only thing that really will drive us to start pursuing more sensible/sustainable policies is “hardship”. The majority of the public won’t awaken to the big issues & demand the right kind of change until the status quo becomes too painful to pursue.

PART2: ‘A Lot Of People Will Lose All Their Money’ – Huge Market Losses Lie Ahead

In this environment, investors have to ask themselves: “How do I hedge?” Marc thinks *diversification* is the best way to do that.

He thinks that we may now be in a secular era of rising interest rates. This could result in a “lost decade” (or more) for stocks. Inflation-adjusted, it could be much worse than that.

We’re now in a lengthy environment of unattractive returns of assets. Expect more taxes/regulations/meddling from the government, making things even worse. This will unfairly injure the smaller investor than the already-rich who can pay advisors to help them side-step the worst of these.

Geographic diversification is a good idea. Hold assets in different countries AND own it in accounts located in those countries (e.g., don’t own foreign assets in your domestic account).

The current US strength will one day reverse — that will have major repercussions. Investors should prepare a game plan in advance, so that whenever it happens, they’re positioned to ride its descent.

Emerging markets should start performing relatively better than US markets over the coming years. Some markets are screaming deals right now. Yes, they may fall farther in the near term — but their growth prospects are better in the long term. Marc thinks Latin/South America is particularly well-positioned. He thinks there are good values today in Vietnam, Indonesia & Hong Kong (though again, they could get even better if the global markets fall further in the near term).

Marc is heavy cash right now (as a hedge), including bonds that mature within 1 year. He’s quite bearish in the near term: “I think a lot of people will lose all of their money. Many of the rest will lose half their money.”. Marc thinks he may (hopefully) lose only 15%. It’s going to be hard in the short term to make gains.

Interest in the precious metals is weak right now. PMs are “an avenue to lose less money” — folks should own it. Use the current price weakness to accumulate.

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