Video: Marc Faber: A lot of funny deals in China’s colossal bubble

Gloom Bloom & Doom publisher Dr. Marc Faber shares some very interesting insights on China and on Russia’s Putin in the following video interview with Bloomberg.

With regards to China’s deflating colossal bubble and statistical inconsistencies (transcript from Zero hedge) [bold mine]

...we had a colossal credit bubble in China and that this credit bubble is now being gradually deflated and will bring about problems in the real estate market and among some major players in the commodity markets as well. So overall, if I look at export figures from China, and they are very closely correlated to overall economic growth, then there is a huge discrepancy between what China reports and what China’s trading partners are reporting.

So if you look at the figures of China, exports are still growing. If you look at the trade figures China exports to Taiwan, so China records exports of so and so much. The Taiwan report imports from China at a much lower level. So which figures are more reliable? I think the figures of the trading partners of China are more reliable. And they would suggest that growth has slown down considerably.

Well deflating bubble and a slowing economy has not been surprising to us. 

More on the reliability of statistical data....

Governments will always publish the statistics that they wish to show irrespective whether that is in China or in other countries. Governments control basically the statistical offices, so they can show whatever they want. As Stalin said, it’s not important who votes but who counts the votes. And the government counts the statistics.

Now the kicker: A lot of funny deals in China’s trade financing…

...the fact is simply that Chinese stocks have been just about the worst performing stocks since 2006. Now analysts will dismiss that and say everything is perfect in China, but the stock market does not seem to believe everything that the government is saying about the economy. And clearly there are strength signs in the Chinese economy. In particular, as I said, we have this huge explosion of debt. Debt as a percent of GDP has increased in the last five years by more than 50 percent. Total debt is now over 215 percent of GDP, and a lot of it is trade finance that is being rolled over.

In addition to that, there are lots of funny deals. A friend of mine who analyzes China very carefully, Simon Hunt (ph), he pointed out that trade finance between one state-owned enterprise and a private company has amounted to over $5 trillion by continuing to roll over the same collateral several times. There’s lots of funny things that are happening in China. And when the whole thing unwinds it will be a disaster.

This looks like "Rehypothecation" which Investopedia.com defines as “The practice by banks and brokers of using, for their own purposes, assets that have been posted as collateral by their clients.” In other words, perhaps a lot of the trading finance debt has very little or even no collateral supporting them. 

On Putin’s action at Crimea

Mr. Putin did the right thing from his perspective. We have to look – put ourselves into his shoes. He did absolutely the right thing at the right time.

...By that I mean that there was interference by foreign powers in Ukrainian politics that were unfavorably from the perspective of Russia.

...The Crimea is strategically most important for Russia. It has practically no meaning strategically to the United States or to Europe. But for Russia it’s very important. I don’t think that Russia will move further into Ukraine unless there is serious provocation. But I doubt it will happen. But I think the wider implication is that we have now border lines. In other words, the US would intervene if a foreign power would establish bases in Haiti and in Cuba and so forth and so on, and the Chinese will react if foreign powers threaten Chinese access to resources.

Possible implications…

This is very important because the occupation or say the referendum (ph) in Crimea and Crimea moving to Russia gives essentially a signal to China that one day they can also move and seize some territory that they perceive that belongs to them.

This could also extrapolate to greater risks of real military conflicts surrounding territorial disputes. 

Have a nice day.

Marc Faber: A Corrupt System that Rewards Stupidity

Today’s political economic system has increasingly evolved to what Nassim Taleb calls as the lack of the "skin in the game" (or a syndrome combining principal agent problem and the moral hazard) or the stakeholders dilemma where political agents and their apologists hardly feel the consequences of their proposals or edicts.

These agents promote policies that pushes people to take reckless risk taking activities at the cost of the economy and freedom.

Dr. Marc Faber at the Daily Reckoning explains. (bold original)

For the greater part of human history, leaders who were in a position to exercise power were accountable for their actions. If they waged wars or had to defend their territories from invading hostile forces, they frequently lost their lives, territories, armies, power and crowns. I don’t deny that some leaders were irresponsible, but in general, they were fully aware that they were responsible for their acts and, therefore, they acted responsibly.

The problem we are faced with today is that our political and (frequently) business leaders are not being held responsible for their actions. Thomas Sowell sums it up well:

…we have today a system where leaders are not only not punished for their failures, but are actually rewarded…

“It is hard to imagine a more stupid or more dangerous way of making decisions than by putting those decisions in the hands of people who pay no price for being wrong.”

When political leaders or economic policymakers are seen to fail, the worst that will happen to them is that they won’t be re-elected or reappointed. They then become a lobbyist or an adviser or consultant, and give speeches, earning in the process a high income on top of their pension.

Similarly, many corporate executives and fund managers who have no personal stake in the business that employs them will receive generous pensions even if they fail to do their job properly and are dismissed. (This doesn’t apply to hedge fund managers, most of whose wealth is invested in their funds.) In other words, probably for the first time in history, we have today a system where leaders are not only not punished for their failures, but are actually rewarded…

Recently, Warren Buffett said that the Fed was the world’s largest hedge fund. He is wrong. The world’s largest hedge funds are owned by people who are risk takers with their own money, since they are usually the largest investors in their funds. The academics at the Fed are playing with other people’s money.

Read the rest here

Video: Marc Faber: The Endgame Is A Total Collapse, But From A Higher Diving Board Now

In the following video, the Bloomberg interviews Gloom Boom and Doom report’s Dr. Marc Faber on the US Federal Reserve’s largely unexpected dithering from the Taper

Dr Faber quotes (via the Zero Hedge) 

Taper as the Wall Street-Government Subsidy

My view was that they would taper by about $10 billion to $15 billion, but I'm not surprised that they don't do it for the simple reason that I think we are in QE unlimited. The people at the Fed are professors, academics. They never worked a single life in the business of ordinary people. And they don't understand that if you print money, it benefits basically a handful of people maybe--not even 5% of the population, 3% of the population. And when you look today at the market action, ok, stocks are up 1%. Silver is up more than 6%, gold up more than 4%, copper 2.9%, crude oil 2.68%, and so forth. Crude oil, gasoline are things people need, ordinary people buy everyday. Thank you very much, the Fed boosts these items that people need to go to their work, to heat their homes, and so forth and at the same time, asset prices go up, but the majority of people do not own stocks. Only 11% of Americans own directly shares.

Same logic applies elsewhere as in the Philippines

In a deft rebuttal to the issue raised by the interviewer who cited that mortgage and car activities as supposed beneficiaries from the FED’s actions, Dr. Faber didn’t mince words

On September 14, 2012, when the Fed announced QE3, that was then extended into QE4, and now basically QE unlimited, the bond markets had peaked out. Interest rates had bottomed out on July 25, 2012--a year ago--at 1.43% on the 10-year Treasury note. Mr. Bernanke said at that time at a press conference, the objective of the Fed is to lower interest rates. Since then, they have doubled. Thank you very much. Great success.

In short the bond vigilantes has been the unintended consequence from Fed QE3

On the endgame or consequence from total dependence on QE:

Well, the endgame is a total collapse, but from a higher diving board. The Fed will continue to print and if the stock market goes down 10%, they will print even more. And they don't know anything else to do. And quite frankly, they have boxed themselves into a corner where they are now kind of desperate.

The FED will continue to engage in Poker bluffing but will refrain from acting out ‘exit’ or even tapering measures because they have been cognizant of the dangers or the risks of high interest rates on a debt laden and debt dependent economy

On Janet Yellen as successor to Bernanke:

She will make Mr. Bernanke look like a hawk. She, in 2010, said if could vote for negative interest rates, in other words, you would have a deposit with the bank of $100,000 at the beginning of the year and at the end, you would only get $95,000 back, that she would be voting for that. And that basically her view will be to keep interest rates in real terms, in other words, inflation-adjusted. And don't believe a minute the inflation figures published by the bureau of labor statistics. You live in New York. You should know very well how much costs of living are increasing every day. Now, the consequences of these monetary policies and artificially low interest rates is of course that the government becomes bigger and bigger and you have less and less freedom and you have people like Mr. De Blasio, who comes in and says let's tax people who have high incomes more. And, of course, immediately, because in a democracy, there are more poor people than rich people, they all applaud and vote for him. That is the consequence.

Inflationism represents just one of the many slippery slope towards more interventionism (price controls, foreign exchange and capital controls, wage and labor controls, trade controls, border controls and more) and even risks of wars.

On the direction of gold prices:

When I look at the market action today, I would like to see the next few days, because it may be a one-day event. The markets are overbought. The Feds have already lost control of the bond market. The question is when will it lose control of the stock market. So, I'm a little bit apprehensive. I would like to wait a few days to see how the markets react after the initial reaction."

On the direction of the 10-year yields:

I will confess to you, longer-term, I am of course, negative about government bonds and i think that yields will go up and that eventually there will be sovereign default. But in the last few days, when yields went to 2.9% and 3% on the 10-year for the first time in years i bought some treasuries because I have the view that they overshot and that they could ease down to around 2.2% to 2.5% because the economy is much weaker than people think…I think in the next three months or so.

My take is that if the “Feds have already lost control of the bond market” and if bond markets may not just be signaling the conditions of the economy but also as backlash from FED (and other major central bank) policies “the objective of the Fed is to lower interest rates. Since then, they have doubled”, then muting the actions of bond vigilantes (which has become a global phenomenon) may not be as deep as Dr. Faber thinks.

On why the need to buy gold:

I always buy gold and I own gold. I don't even value it. I regard it as an insurance policy. I think responsible citizens should own gold, period.

Marc Faber on US Meddling: Middle East is a powder keg and it will go up in flames

In a recent CNBC interview, Dr. Marc Faber thinks of the possibility that a big fall in US stocks may prompt asset allocators to flow back into the badly beaten emerging markets given the assumption of the world has been "swimming in the pool of liquidity"

He says that “In the US, the cycle isn’t favourable” and thinks a rally in US Treasuries will happen due to the return of “off risk trade”

Dr Faber: Interest rates are no longer a tail-wind, a headwind, the earnings growth is not there, the emerging economies…shows no growth. Where are earnings going to come from?

[my impression is that the world is presently undergoing a periphery-to-core bubble bust process such that instead of a rotation, a steep fall in US stocks will exacerbate conditions in emerging markets. In other words, the “swimming pool of liquidity” has already been draining and will continue to shrink as losses continue to mount. This leaves little room for rotations. And the worsening of real economies will only exacerbate this. Yet if the convulsion in asset markets persists or even intensifies, then it would be intuitive to expect a global recession anytime between 2014-2015]

Dr. Faber views deteriorating events in the Middle East as enhancing market risks

Middle East is a powder keg and it will go up in flames because the western arrogance imperialistic powers they still meddle in the local affairs and supply all kind of people including Al Qaeda related parties with weapons. It is going to be a disaster. It is gonna spread from Syria and Egypt into Saudi Arabia into the Emirates eventually so forth and so on. We are going to have a huge mess

The message from Dr. Faber’s interview: Deteriorating global economic conditions plus increasing geopolitical risks are hardly “bullish” for risk assets, like equities.

While US treasuries may indeed rally amidst a risk off trade, I doubt if we will be seeing a replay of 2007-8. Instead I expect combination of 2007-2008 bubble bust dynamics along with a 1970s stagflation scenario.

Video: Marc Faber on the Parallels of 1987 Stock Market Crash

Dr Marc Faber in a short 90 seconds CNBC interview draws some eerie similarities between events preceding the the Black Monday US stock market crash in 1987 and today. (hat tip zero Hedge)

In my view, incompatible forces between record stocks and a slew of negatives--elevated interest rates, $100 oil prices, a prospective shift in the Fed leadership, exploding debt levels, seemingly confused central banks whom are seemingly caught between the desire for more easing but continues to float the 'taper', parallel universes, increasing signs of struggling economies, government manipulation of statistics (China) and pervading symptoms of 'this time is different' manic outlook by the mainstream--all combines to increase the risks of a substantial downshift in global equity markets. 

Although I am not inclined to see a 1987 scenario, considering that financial markets have been founded on the equivalent of sand castles predicated on central banking steroids and guarantees, such a black swan scenario shouldn't be ruled out.

Video: Marc Fabeer: Best course of action is to actually not buy anything, but rather to reduce positions on a rebound

In the following video interview by CNBC my indirect investing mentor Dr. Marc Faber, the Swiss fund manager and publisher of the 'Gloom, Boom and Doom Report thinks that browbeaten markets may stage an oversold bounce. (ht: lewrockwell.com)

He also thinks that the US equity markets will fall soon:

I think the high was 1,687 on May 22nd and will go down 20-30%

He also warns of a likely contagion on EM markets premised on what a sees as a slowdown or even a "no growth" in China's economy.

Dr. Faber thinks that China has a "massive" credit bubble.

Amusingly he even lectures media talking heads

I would listen to the markets. I mean, look, some emerging markets have tumbled by 20-30% since their highs earlier this year, some have dropped 20% in 3 weeks...I would listen to that and not sit there and say everything is fine.

Same goes here, one-two day rebound and "everything is fine"

Dr. Faber remains bullish on gold, even if he thinks that gold prices may go lower for 2 reasons: Commercials (professionals) have a very short exposure on gold, and that the cost of production has gone up dramatically.

Dr. Faber's has a good advise which I share:

I think as an investor you need discipline and patience, and I think the best course of action is to actually not buy anything, but rather to reduce positions on a rebound

Quote of the Day: Watch Asset Classes that are the Most Vulnerable to Wealth Taxes

When a government goes bust in a democracy (and most Western governments cannot possibly meet their unfunded liabilities) the majority of people who have no assets or just a few assets will always find it appealing to collect money from the evil “fat cats” (in the case of the US, the 1% who own 42.7% of financial wealth). It should be obvious that if 80% of the population owns just 7% of financial wealth, they will be tempted to transfer at some point in future, part of the wealth of the 5% or 10% richest Americans to the masses that have no savings.

The problems we face today are there because the people who work hard for a living are now vastly outnumbered by those who vote for a living.

Normally, we analyze various asset markets and individual investment opportunities according to their merits. But now, we also need to think which asset classes are the least and which ones are the most vulnerable to wealth taxes.

(bold mine)

This perspicacious insight is from Dr. March Faber from his latest market commentary. The point is one should think "out of the box". This isn’t your daddy’s markets. Other experts such as PIMCO’s Bill Gross has also echoed on this. 

In the recognition that financial markets are being explicitly and implicitly manipulated, looking at the effects of interventions would be the best approach rather than to just mimic or parrot what the mainstream says or thinks. 

The above also is a great description of today's mob rule politics.

Video: Marc Faber: I love the fact that gold is finally breaking down

Quotes and video from ETFDaily News

On Gold’s decline in perspective

I love the markets. I love the fact that gold is finally breaking down. Because that will offer an excellent buying opportunity. I would just like to make one comment. At the moment, a lot of people are knocking gold down. But if we look at the records, we are now down 21% from the September 2011 high. Apple is down 39% from last year’s high. At the same time, the S&P is at about not even up 1% from the peak in October 2007. Over the same period of time, even after today’s correction gold is up 100%. The S&P is up 2% over the March 2000 high. Gold is up 442%. So I am happy we have a sell-off that will lead to a major low. It could be at $1400, it could be today at $1300, but I think that the bull market in gold is not completed.

Gold fundamentals intact, signs of deflation?

$1300. Nobody knows for sure but I think the fundamentals for gold are still intact. I would like to make one additional comment. Today we have commodities breaking down including gold. At the same time we have bonds rallying very strongly. If you stand aside and you look at these two events, it would suggest that they are strongly deflationary pressures in the system. If that was the case, I wouldn’t buy stocks or sovereign bonds because the stock market would be hit by disappointing profits if there was a deflationary environment.

Dr. Faber is referring to bursting bubbles via asset deflation.

What to do under deflationary (bubble bust) conditions

Yes, I agree. That’s why I said if the gold market collapse is saying something about deflation and at the same time we have this sharp rise in bond prices and the signals are correct that we have deflation, I wouldn’t buy stocks because in a deflationary environment, corporate profits will disappoint very badly.

Policies from Cuckoo People means we should expect sharp volatilities on any assets

Everything is possible…In the economy of the cuckoo people that populate central banks, everything is possible. What you have is gigantic bubbles, the NASDAQ in 2000, then the housing bubble and then commodities in 2008 when oil went from $78 to $147 before plunging to $32 within sixth months. That kind of volatility comes from expansionary monetary policies from money-printing.

On Gold’s short and long term view.

All I am saying as a trader I would probably enter the market quickly for a rebound of $20 or $40. From a longer term perspective, I would give it some time. We may go lower. I am not worried. I am happy gold is finally coming down, which will provide a very good entry point.

I say gold will register negative returns this year, but may recover from recent lows by the yearend.

 

On being nimble.

My argument is that you should always have in this kind of high volatility environment a fair amount of cash because opportunities will always arise again and again and if you have cash you can then buy assets at a reasonable price. I think Patience is very important in this environment. The question is, how do you hold your cash? Hopefully not with a Cyprus bank.

Like Dr. Faber, I am not worried about gold’s plunge, as we’ve seen this before. I am rather disturbed by how the selloff has been rationalized through disinformation by the mainstream. Global government's deepening thrust to confiscate people's savings directly (outright confiscation via bank deposits) or indirectly (inflation) will continue to provide gold with a safehaven appeal over time.

I am more worried about the growing risks of a global/regional crisis than of gold.

Video: Marc Faber Says President Obama is a Disaster for the US, Recommends Buying Machine Guns

In the following Bloomberg interview Dr. Marc Faber rants on Obama's re-election which comes with several interesting insights

My notes from his interview

-Obama is a disaster but less bad for the world than Romney. Both deserve to lose

 -Markets will drop by at least 20% in 6-9 months, may drop 50%

-Obama's regime: more regulations, higher taxes

-Bernanke's money printing led to high corporate earnings but has been coming down 

-Global slowdown may counter the effect of money printing [For me, global central banks are doing the same as Bernanke's Fed, so these would have consequences to the markets and the economy, which ensures volatility but not necessarily an asset slump]

-It is difficult to tell where the markets will go because of so much manipulation

-Congress will solve Fiscal Cliff standoff with Obama by cosmetically raising taxes and cutting spending which will be backloaded 10 years.

-trading year end rally until January before selling pressure.

-GDP is not a very relevant figure

-Dr. Faber also cites of the entitlement mentality of the markets where a decline of 2% is seen as a big deal when markets have had a "huge bull market" over the past decades    

-China's economy is growing a maximum 4% at present time

-Asia not in a recession but off the peak of business activities from nine month ago. 

-Dr. Faber jokingly recommends buying guns and machine guns, he quips of his need to buy a tank.

-Whenever you manipulate the market you willget unintended consequences

-The re-election of Mr. Obama is an unintended consequence is an unintended consequence from money printing. [For me, money printing was a political strategy by Bernanke in to the political goals of Obama, thus was hardly an unintended effect]

-Mr. Bernanke enabled the "wealthy fat cats" profiteers [which Democrats used effectively as part of their political campaign]

-Dr. Faber doubts if Mr. Obama stay at the presidency for the another four years as in "there will be many scandals".

-standards of living in the western world will continue to decline because of the cost of living increase will exceed income gains, cost of living will also go up because of all types of taxes will be increased 

 

Video: Jim Rogers is Very Worried About 2013

The legendary investor Jim Rogers recently interviewed by the Reuters. (courtesy of JimRogersChannel).

Some interesting highlights:

-EU rescue will “absolutely not” work.
-I’m very worried about 2013, more worried about EU in 2014
-I’m worried about "everybody" in 2013
-US has recession every 4-6 years; 2013 is after elections and between 4-6 years, so US will have a slowdown on 2013
-Next time there will be a US slowdown, the problem will be a whole lot worst
-Recession is coming and it’s gonna be worse
-Raising taxes will make things worst, US needs to cut spending “with a chainsaw”.
-US should be cutting taxes and spending
-China has been trying to slowdown the economy for three years; by design, by purpose
-Problems in US and America in 2013: When two of the world’s largest economy is having problems, everyone will get affected
-I don’t know anything "safe"
-Generally short stocks, long commodities.
-Owns Swiss franc, Japanese yen and Chinese yuan
-Interested in agriculture
-Owns gold and would buy more gold when prices fall
-Can’t "conceive" of the current prices of technology stocks
-"Most exciting thing I know is Myanmar" (like China in 1979)
-North Korea is going to merge with South Korea in next 5 years.

Jim Rogers seems in the same camp of Dr. Marc Faber. Dr. Faber sees 100% chance of a global recession in 2013 and even a potential market crash ala 1987.

China’s Hunan Province May Get Steroids, China’s Tax Revenues Drastically Fall

The intensifying urge for government’s opium has been palpable everywhere.

A slowing economy in China has prompted for more babbles of government spending stimulus.

Reports the Reuters

The government of Changsha, the capital of central China's Hunan province, has launched an 829 billion yuan ($130 billion) investment stimulus program to bolster the local economy, state media has reported.

The money would be spent on 195 projects, including airport, subway and urban infrastructure facilities, as well as developing energy efficient industries, said a report by the official China News Service on Wednesday.

The government of Changsha, a city known for its machine-making and non-ferrous metal industries, would also speed up financial reform and innovations, said the report, which provided no details about how the program would be financed.

The China News Service paraphrased Chen Runer, the Communist Party secretary of Changsha, saying that economic pressure on the city could not be ignored, despite relatively stable growth in the face of global headwinds, and it was time for initiative.

There was no reference to the program's existence on the government of Changsha's website on Thursday.

Zhang Zhiwei, chief China economist at Nomura in Hong Kong, calculates that the headline number on the stimulus plan is worth 147 percent of Changsha's nominal GDP in 2011, or 1.8 percent of China's national economic output.

Even if spread over five years, Zhang says the implied investment would be equivalent to 46 percent of total annual fixed asset investment in Changsha.

FINANCING QUESTIONS

Skeptics say a program on that scale is implausible and could not be properly financed with China's banks still nursing bad loans worth an estimated 2-3 trillion yuan after local governments racked up debts of 10.7 trillion yuan in the wake of Beijing's nationwide stimulus program unveiled in 2008.

The mixed signals or tentativeness being shown by Chinese authorities reveal of the ongoing political discord.

Yet the Shanghai index continues with its slomo descent, which seems to have been discounting all the inveigles of inflationism

Also China’s tax revenues has been posting a marked decline

Writes Dr. Ed Yardeni (chart also from Dr. Yardeni)

The data confirm a significant slowdown in Chinese economic growth during the first half of this year:

(1) Tax revenues rose only 9.8% y/y during H1-2012, down from 29.6% over the same period a year ago. Growth rates were down across all 11 major revenue sources.

(2) Personal income taxes actually declined 8.0%. A year ago, they rose 35.4%. Corporate income taxes rose 17.3%, but that was down from 38.3% a year ago.

(3) Revenues from property transactions took a hit. The ones from “Land Value Increment” rose 14.7% vs. 91.1% a year ago. “Deed” revenues fell 9.9% after rising 27.5% a year ago.

Dr. Marc Faber lays out the contagion risks from China’s economic slowdown (start at 5:20)

Video: Marc Faber: Cosmetic Fix for the Eurozone

Investing guru, the publisher of Gloom Boom and Doom Report, Dr. Marc Faber has a great analogy for the proposed EU banking fix

Dr. Faber as quoted by LewRockwell.com

If you put one or 100 sick banks in a union, it does not change the fact that they're sick. In my view the markets are rallying because they were grossly oversold. When markets are grossly oversold, especially markets of Portugal, Spain, Italy, France, then any news that is not disastrous news propels stocks higher. Their cosmetic fix basically forces Germans to continue to finance people in Spain and Portugal and Greece that are living beyond their means.

Indeed a foolish thing is a foolish thing. Numbers don't change the essence of the problem.

Yet the common recourse for politicians and media has been to engage in verbal manipulation, particularly the appeal to the popular, in the hope that confidence may be brought back without the required reforms.

More from Dr. Faber

Talk Therapy boost US Markets

Again US stocks reportedly rose on chatters of the US Federal Reserve rescue.

From Bloomberg,

U.S. stocks advanced, erasing a weekly loss for the Standard & Poor’s 500 Index, amid reports policy makers may take steps to assist economies battered by Europe’s sovereign debt crisis…

Stocks extended gains today amid reports of plans by central banks. Bloomberg News reported that U.K. Chancellor of the Exchequer George Osborne and Bank of England Governor Mervyn King are preparing two programs to increase the flow of credit. Reuters said that central banks are prepared to take action if needed to boost liquidity in financial markets if the Greek elections cause tumultuous trading, citing officials linked to the Group of 20 nations.

Speculation grew that the Federal Reserve will discuss stimulus efforts at its meeting next week after reports showed jobless claims unexpectedly climbed by 6,000 to 386,000 last week and the cost of living fell by the most in more than three years.

‘Good Stage’

“Good inflation data and weak employment is a good stage for a Fed policy response,” Kevin Shacknofsky, who helps manage about $5 billion for Alpine Mutual Funds in Purchase, New York, said in an e-mail. “We are at the stage where bad news is good news in terms of a policy response. Jobs will be the critical factor that influences the Fed.”

Imagine “bad news-is-good news” because of the prospects of rescues? That’s how distorted markets are today. Yet until what point will the market simply imbue all talks, with no actions? This is simply addiction.

And because the Fed’s talk therapy (signaling channel) seems have accomplished more than the implemented policies of QEs or Operation Twist, indecision or policy procrastination maybe a (deliberate) decision.

Bloomberg columnist Caroline Baum explains, (bold emphasis mine)

All it took was a lousy employment report and news that Spain’s banks were in the ICU to slice the yield on the 10-year Treasury note to a record low of 1.43 percent on June 1, a 30-basis-point decline for the week. The market accomplished in a matter of days what the Fed couldn’t in nine months and $400 billion of curve-twisting operations.

I suspect we are two events away from a 1 percent yield on the 10-year note and a flatter curve. All it would take is another weak employment report and a Greek exit from the euro zone to send investors rushing for the safety and security of U.S. Treasuries. And no, those buyers aren’t expecting to earn a positive return during the next 10 years.

Compromised Compass

In the old days, the spread provided a timely reading on the economy’s health by juxtaposing a Fed-pegged short-term rate with a market-determined long-term rate. The market rate served as a kind of check on Fed policy.. Why would the Fed want to compromise a good compass and reduce the incentive for banks to lend?

The argument for additional curve-twisting rests on the idea that lowering long-term Treasury yields brings down mortgage rates and helps the ailing housing sector. Freddie Mac’s 30-year commitment rate fell to a record low of 3.67 percent last week. It’s not the rate that’s deterring home purchases; it’s the lenders, having wisely determined that a good credit score and a 20 percent down payment are important after all. Not to mention potential buyers’ fears that home prices may fall further.

If Bernanke isn’t convinced of the need for more QE just yet and twisting the yield curve is cosmetic, what else could the Fed do at the conclusion of the June 19-20 meeting? More talk therapy.

"Bad news-is-good news" because the FED believes or thinks that they can continually talk up the markets.

Yet promises alone cannot satisfy the cravings of addicts (of anything).

And rising markets based on talk therapy looks likely indeed a candidate for “two events away from a 1 percent yield on the 10-year note”, that’s euphemism for a crash.

The more the market rises on the FED’s talk therapy, the greater the risks of a Dr. Marc Faber event.

Be very careful out there.

Video: Dr Marc Faber Optimisitic When Greece Exits, Sees Global Recession Very Soon

Interesting insights from Dr. Marc Faber's interview with the CNBC (hat tip Zero Hedge). Below are my notes:

-Germany will issue Eurobonds. Quality of euro will diminish

-Euro is oversold, potential to rebound along with stock market for the short term

-People are focusing excessively on Euro while ignoring the rest like India and China

[my comment: very true.]

-Danger level—any outright default by any countries. Better to take losses now than to wait for the risk of “gigantic systemic failure”

-Market will be relieved if Greece exited the Eurozone. There would be some clarity. It wouldn’t be good for bank and financial shares. The markets are oversold and on exit of Greece, I think markets would rally

[my comment:

Indeed. People hardly realize that the banking system is NOT the economy as mainstream pundits would have it.

While a banking meltdown may impact business activities over the short term (like 2008), the world does NOT operate on a vacuum, people will continue to trade and resort to other means of obtaining credit, e.g. consumer financing companies filled the niche of Japan's immobilized banking system as alternative sources of credit during post-bubble bust, in 2008 trades have been conducted through barter and through bilateral financing deals, during the recent Euro crisis, in Italy the mafia has stepped up the void as a major creditor

This will especially be true, if reforms would allow for greater economic freedom, which would allow parties to fill in the void. For instance, Walmart's application for bank license was turned down from opposition by big banks, unions and etc...]

-More and more stocks are breaking down around the world. He says that this means many economies are likely to weaken. We might see “some asset deflation”

[my comment: Dr. Faber seems to be vacillating from an oversold rebound to asset deflation.]

-We could have a global recession starting sometime in the fourth quarter of this year or early 2013—100% certainty

-Hold cash US dollars and some gold.

-Although gold prices may breakdown below the low on December 29 2011 of 1,522.

[my comment: the risks seems to be tilted towards a meaningful downdraft alright, which may signal some asset deflation or even global recession, but we can't rule out the possibility that political authorities, particularly of central bankers, may confront these with even more aggressive money printing measures, which again may defer interim trends.

Nonetheless, current environment highlights the state of uncertainty we are in]

Dr. Marc Faber Warns of 1987 Crash if No QE 3.0

From Bloomberg,

U.S. stocks may plunge in the second half of the year “like in 1987” if the Standard & Poor’s 500 Index (SPX) climbs without further stimulus from the Federal Reserve, said Marc Faber, whose prediction of a February selloff in global equities never materialized.

“I think the market will have difficulties to move up strongly unless we have a massive QE3,” Faber, who manages $300 million at Marc Faber Ltd., told Betty Liu on Bloomberg Television’s “In the Loop” from Zurich today, referring to a third round of large-scale asset purchases by the Fed. “If it moves and makes a high above 1,422, the second half of the year could witness a crash, like in 1987.”

The Dow Jones Industrial Average plunged 23 percent on Oct. 19, 1987 in the biggest crash since 1914, triggering losses in stock-market values around the world. The Standard & Poor’s 500 Index plummeted 20 percent. The Dow still closed 2.3 percent higher in 1987, and the S&P 500 advanced 2 percent.
“If the market makes a new high, it will be a new high with very few stocks pushing up and the majority of stocks having already rolled over,” Faber said. “The earnings outlook is not particularly good because most economies in the world are slowing down.”

Profit Growth

More than 69 percent of companies the S&P 500 that reported results since April 10 have exceeded analysts’ forecasts for per-share earnings, according to data compiled by Bloomberg. Profits are due to increase 3.9 percent in the second quarter and 6 percent the following period, estimates compiled by Bloomberg show.

Faber said a third round of quantitative easing would “definitely occur” if the S&P 500 dropped another 100 to 150 points. If it bounces back to 1,400, he said, the Fed will probably wait to see how the economy develops.

see Bloomberg's interview of Dr. Marc Faber below

Media has the innate tendency of reducing investment gurus into astrologers or soothsayers by soliciting predictions over the short term. And investing gurus eager to gain media limelight fall into their trap. And this is why Dr. Faber’s warnings comes with a Bloomberg notice about his latest failed predictions, which has been punctuated by "whose prediction of a February selloff in global equities never materialized."

Dr. Faber, who introduced me to the Austrian school of economics through his writings, is simply stating that if a tsunami of central banking money has been responsible for the buoyant state of markets, then a withdrawal of which should mean lower asset prices. In short, the state of the financial markets heavily, if not almost totally, relies on the actions of central bankers.

Yet since we can’t entirely predict the timing and the degree of central bank interventions, or if they intervene at all, we should expect markets to be highly sensitive to excessive volatility.

And aside from money printing, the risk of high volatility has been amplified by many other interventions on the marketplace (via various bank and financial market regulations). And heightened volatility could translate to a crash. And don’t forget a crash could be used to justify QE 3.0.

As to whether the Fed’s QE 3.0 will come before or after a substantial market move is also beyond our knowledge, since this will depend on the actions of political authorities. I have to admit I can’t read the minds of central bankers.

Yet QE 3.0 may come yet in the form of actions of other central bankers, e.g. ECB’s LTRO and or SMP.

What I know is that inflationism has been seen by the mainstream and by the incumbent political authorities as very crucial for the survival of the current forms of political institutions. This is why I, or perhaps Dr. Faber, sees the probability for more central bank interventions over the marketplace. This is because the cost of non-intervention would be a substantial reduction of the political control over society from vastly impaired political institutions.

It must be noted that Austrian economics is basically an explanatory science, where given a set of actions we see the consequence being such or such. The idea of reducing logical deduction into some form of predictive science is wizardry.

In short, while I don't predict a crash I would not rule out this option. Especially not in a highly distorted and politicized markets

Marc Faber Predicts World War III in 5 years

Dr. Marc Faber sees World War III that features cyber warfare coming anytime during the 5 year horizon.

From Business Intelligence,

He sees a shift in economic and military power from West to East and is increasingly convinced that the end game will be war. But, so far, he had avoided giving a time frame to the war scenario. Not any longer.

Dr. Faber was amongst 10 investment experts assembled by Barron's last week at the Harvard Club of New York for the Barron’s 2012 Roundtable. The members of the Roundtable discussed the economy, China, Europe, market volatility, investment picks and World War III.

"On an optimistic note, World War III will occur in the next five years," Faber announced to the other members of the Roundtable, in his characteristic contrarian manner.

"That means the Middle East will blow up," he said, without providing any details about specific countries.

When this happens, "new regimes there will be less Western-friendly," he reckons.

"The West has figured out it can’t contain China, which is rising rapidly and will have more military and naval power in Southeast Asia," he explains.

The only way for the West to contain China is to control the oil tap in the Middle East, Faber argued.

The prelude to war will be a "big bust that will see the end of credit expansion," he said in a recent interview. But before this happens, "governments will continue printing money which in time will lead to a very high inflation rate, and the economy will not respond to stimulus".

Cyber war?

"This war will be different from World War I where troops faced each other in trenches or World War II where tank divisions faced each other, he said. This will be Cyber War. A war where you can turn a switch and turn the London electricity supply off. This will be a war where you can stop airplanes from flying and bring the whole financial system of a country to a halt," Faber said in an August 2011 interview.

And during war times, "commodities go up strongly,” he argued.

"If you want to hedge against war, you don't want to own derivatives in UBS and AIG, but you have to own them physically, like farmland and agricultural commodities. That is something to consider for you as a personal safety and hedge. You have to own some commodities," he stressed.

But sees this as having a positive impact on equity prices,

Asked if war will be positive for stocks, Faber told the Baron's Roundtable it would be very positive for stocks and negative for bonds, "because debt will grow dramatically. There will be massive monetization of debt."

"When the U.S. entered World War II total credit equaled 140% of GDP, and there were no unfunded liabilities. Now total credit-market debt is 380% of GDP, and unfunded liabilities make that 800%," he added.

Speaking to CNBC Thursday Faber went further: "Relax. I don’t think that equities will collapse. I think we have major support going back to August 2010 when the S&P was at 1010," he said.

It would seem that the government’s or the nation state’s default option when countenanced with a decadent society emanating from failed policies has been to resort to war. That’s because war has the tendency to divert or distract the public’s attention which pushes the masses to rally around the flag in the name of patriotism.

As Nazi Germany’s Hermann Goering Commander-in-Chief of the Luftwaffe, President of the Reichstag, Prime Minister of Prussia and, as Hitler's designated successor once said in a conversation with Gustave Gilbert during the Nuremberg trial (an Allied appointed psychologist)

Why of course the people don't want war. Why should some poor slob on a farm want to risk his life in a war when the best he can get out of it is to come back to his farm in one piece? Naturally the common people don't want war neither in Russia, nor in England, nor for that matter in Germany. That is understood. But, after all, it is the leaders of the country who determine the policy and it is always a simple matter to drag the people along, whether it is a democracy, or a fascist dictatorship, or a parliament, or a communist dictatorship. Voice or no voice, the people can always be brought to the bidding of the leaders. That is easy. All you have to do is tell them they are being attacked, and denounce the peacemakers for lack of patriotism and exposing the country to danger. It works the same in any country.

Although war is a possibility (I earlier noted that the risk of military confrontation with Iran seem to be increasing here and here), in my opinion, World War III may not be inevitable.

I think that nation states will likely suffer more from internal strife (e.g. revolutions or secessions) which eventually leads to their collapse than from a global war in the scale of World War II. But the latter is an option that cannot be written off.

And if in case this should happen, it is unclear if equity markets will remain unscathed by a warfare dominated by cyberspace engagements. To quote Dr. Faber’s conflicting points: “This will be a war where you can stop airplanes from flying and bring the whole financial system of a country to a halt”. [italics added]

Perhaps Dr. Faber refers to other countries but not the US. But what if the US is the object of such cyber assaults such as the recent case of the FBI and the Department of Justice along with the websites of the entertainment industry (which perhaps could partly reflect on the protest to censor the web)?

The fate of financial assets will entirely depend on how World War III plays out. Thus, there is no straight cut answer to Dr. Faber’s scenario.

Occupy Washington, the US Federal Reserve and the Princeton University

Investing savant Dr. Marc Faber says that demonstrators against Wall Street should instead occupy Washington and the US Federal Reserve.

The Business Intelligence Middle East quotes Dr. Faber (bold emphasis mine)

On the US Federal Reserve’s preference to support the banking and financial class through bubble policies:

We cannot blame Wall Street and well-to-do people for the mishap, for this ratio to have exploded on the upside. We have to blame essentially expansionary monetary policies that favor assets. So you have low consumer price inflation, you have no wage inflation."

In fact, the problem in America is that real wages, real compensation has been down since the 1970s. But at the same time, asset prices, equities, real estate and so forth have gone up dramatically, and that favors people who have these assets. And so the ratio expanded and you have now a record wealth inequality, and income inequality…

On Washington’s bribery of Americans in order to expand welfare state for the benefit of the political class and their cronies.

The problem with government is that the original intention of, especially a democracy, is very good.

Everybody has a say in how societies should be structured, but over time, it becomes very polarized and it moves into the hands of powerful business interests, and also interest groups like the military complex, or say the welfare recipients and so forth…

So you end up with kind of on the one hand a tyranny of the masses where you distribute all kinds of goodies to people. Like in America roughly 50% of the population gets a handout one way or the other from the government. So by continuing to support these people, you get their votes.

The protestors should focus on the root of the problem

Wall Street is a minority, anyone else would have done the same, they use the system but they didn't create the system. The system was created by the lobbyists and by Washington. So they [the protesters] should actually go to Washington and also occupy the Federal Reserve on the way

Professor William L. Anderson further suggests for an Occupy Princeton University movement (highlights mine)

That's right, I am calling for an immediate occupation of...Princeton University, and specifically, its economics department. There is no other place on earth that has given us more players and more enablers of the financial madness that has gripped this economy for many years.

Reason: Because of the notoriety of some of the academic alumnus towards interventionist and inflationist policies: Ben Bernanke, Alan Blinder, Alan Krueger and Paul Krugman

Continue reading Professor Anderson’s explanations here

Marc Faber: Asia to Benefit from Imploding Welfare States of the West

Dr. Marc Faber has been an indirect mentor of mine. It has been through his writings which has led me to learn of Austrian Economics, the major pillar of my analytical methodology.

Nevertheless, recently he says that imploding welfare states of the West should be positive for Asia.

The Asian Investor quotes Dr. Faber, (bold emphasis mine)

“Asia should send a thank-you letter to [Federal Reserve chairman Ben] Bernanke” for stimulus policies that have been an “utter failure” for the US but beneficial to Asia.

"We had, essentially, a bank failure in 2008 and the financial system in the Western world went bankrupt. Then it was bailed out by governments and the banks have learned nothing. “

Government intervention in private finance will have a damaging effect to the US and European economies over the long run, he predicts. “In 2008, the financial sector [went] bust, and in the future, the [Western] governments will go bust.”

In contrast, “the Asian banks are in a good shape”, says Faber. “Asia reacted well in the 1997-1998 crisis. A period of deleveraging followed. Businessmen became conservative. They paid down debts and the banks became very cautious in terms of their lending.”

As a result, he has more confidence in Asian banks than their Western counterparts. “I would deposit money with a Thai bank, no problem. They will pay me back. They don’t know what derivatives [are], because the derivatives salesmen never get through the traffic in Bangkok,” he quipped.

“I would rather stick to emerging economies than Europe and the US.”

For as long as Asia resists the siren song of the welfare based political economy and shun protectionism, the policy divergences between the West and the East should imply for a wealth convergence, where Asia’s potential higher returns on investments emanating from the declining relative trend of interference from the region’s governments should attract more of the savings from the West.

The above would compliment domestic growth dynamics for as long as Asian governments continue to ease on economic restrictions or regulations.

This also implies that the current contagion based financial market meltdown in Asia—mainly transmitted from the boom bust cycle policies of Western governments which have been aimed at the preservation of the unsustainable state of incumbent political institutions—is likely a temporary event.

And given the right conditions (not yet today) would present as ‘buy’.

Explaining Popularity In Terms of Predictions: Dr. Nouriel Roubini’s Case

This seems like good news to me. My favourite mainstream Keynesian bear, Nouriel Roubini, appears to have ‘capitulated’. Mr. Roubini, a popular and very well connected economist, has almost always been on the wrong side of the prediction fence, and this seems to be just another of chapter of his string of failed forecasts and eventual turnaround.

Mr. Roubini has turned bullish on the US markets, reports the Bloomberg,

Nouriel Roubini, the economist who predicted the financial crisis, said U.S. stocks may gain in the next few months as company earnings remain resilient.

Adds Thomas Brown of bankstocks.com

What the heck happened to the L-shaped recovery? Roubini’s view is now squarely within the mainstream expectation. Good for him. The facts changed, and so he changed his opinion. Keynes would be pleased.

For me, Mr Roubini exemplifies as one of the bizarre ironies of the marketplace where despite his persistent wrong predictions, Mr. Roubini has remained quite popular with media.

If his strategy has been patterned to a tournament bridge game called “playing for a swing” as Professor Arnold Kling suggests, where “It would appear that Roubini's strategy is to make forecasts that differentiate himself from the consensus forecast. This allows him to be spectacularly right sometimes and spectacularly wrong sometimes. As long as he succeeds in getting everyone to remember the right forecasts more clearly than the wrong ones, he becomes a prophet”, then his success reflects on the public’s poor memory (or survivorship bias).

Google search trends for Mr. Roubini vis-a-vis Dr. Marc Faber

While there may be some truth to this, I am not convinced.

The public seems jaded to the forecasting accuracy by experts.

In relative performance, another (less) popular grizzly bear (but Austrian school leaning bear), Dr Marc Faber, who appears to have consistently been accurate even in predicting short to medium term trends—even the latest divergence between EM and developed economies stocks—has almost trailed Dr. Roubini’s in terms of popularity. (note the difference in search volume index—X axis).

So the explanation of “spectacularly” right or wrong doesn’t seem to suffice.

Instead, I think, Mr. Roubini signifies what the public wants to hear more than the validity of his theories. He personifies the confirmation of many entrenched but flawed beliefs.

Search volume for Austrian versus Keynesian Economics

One would note of an almost similar performance between Dr. Faber and Dr. Roubini’s popularity variance levels—Austrian economics has largely been subordinate in popularity to Keynesian economics during the past years (although this could be changing).

Finally there could be another factor: pessimism bias sells.

In the question and answer portion of this splendid talk on innovation, economist Deirdre McCloskey points out that Paul Ralph Elrich remains quite popular in spite of his ‘spectacularly’ wrong prediction.

Mr. Elrich is known for having lost the famous Simon-Elrich wager- wager that based on the price of 5 metals anchored upon the overblown risks of overpopulation.

Perhaps many are simply more attracted to a pessimistic outlook, whether valid or not, out of the penchant to see or resist a change in the status quo, or based on social signalling (to conform with the consensus outlook or to show intellectual prowess or promote an ideology, e.g. using fear to expand government control)

As Professor Bryan Caplan writes,

David Hume—economist, philosopher, and Adam Smith’s best friend—blamed popular pessimism on our psychology. “The humour of blaming the present, and admiring the past, is strongly rooted in human nature,” he wrote, “and has an influence even on persons endued with the profoundest judgment and most extensive learning.”

Bottom line: The popularity of economic or market forecasters appear grounded mostly on the confirmation bias or giving the public what they want or desire to hear more than the validity of theories or the batting average or the accuracy of predictions.