marc faber - finanacil markets pres_2008-09-30

8/14/2019 Marc Faber - Finanacil Markets Pres_2008-09-30

1/50

WILL GLOBAL ECONOMIC AND

FINANCIAL CONNECTIVITY LEADTO A GLOBAL SLUMP?

Marc Faber Limited

Suite 3311-3313

Two International Finance Centre

8 Finance Street, Central

Hong Kong

Tel: (852) 2801 5411/10

Fax: (852) 2845 9192

Email: [email protected]

Website: www.gloomboomdoom.com

www.gloomboomdoom.com

Dr Marc Faber 2008Presentation for Enam Securities Pvt Ltd

14.00, September 30, 2008By telephone conference

Really catastrophic depression is likely to occur when there

is profound monetary instabilitywhen the rot in the monetary

system goes very deep.

J R Hicks


2/50

TOPICS FOR DISCUSSION


Threats

Credit crisis is very serious. The Fed can cut rates and pursue even more expansionary monetary policies.

Also fiscal measures can be expanded further. However, in the current conditions such policy measures

will increase the rate of inflation and accelerate the monetary depreciation of the U.S. dollar.

Regardless of policies followed by the U.S. government and its agencies, the consumer is in recession and

the recession will deepen. Trade and current account deficits will shrink further and diminish international

liquidity. The shrinkage of global liquidity is bad for asset prices, including commodities. Also, deleveraging

is occurring among financial intermediaries. This is extremely negative for an economy addicted to credit growth.

We had an unprecedented global economic boom. A global bust is likely to happen.

Inflation shifted in the early 1980s from rising consumer prices to asset prices, which subsequently soared

in value. Now, the opposite seems to be occurring. Most asset prices may no longer be rising while

consumer price increases accelerate. This will have a negative impact on the valuation of equities. It

should also be very negative for long dated bonds.

Geopolitical tensions are on the rise. Balance of power has shifted to the resource producers of the world.

Commodity shortages lead to increased international tensions and to resource nationalism.

A likely scenario is that we are in a water torture bear market in asset prices, which will deflate one asset

class after another.

2


3/50

Opportunities

We have a modern day John Law at the Fed. This is favourableor relatively favourablefor everything where

the supply cannot be increased at the same rate the money printer creates liquidity. Since Mr Bernanke cut the

fed fund rate last September, oil has increased by more than 50%.

Even in a slump some region and sectors will expand. As a result, the demand for commodities from China,

India etc. will not vanish. Nevertheless, a slowdown in demand growth should be expected.

Some equity markets have already declined significantly. Selectively, some buying opportunities are beginning

to show up. The same applies to selected commodities, which had larger price declines.

Volatility will stay high! Large upward and downward moveslike in the 1970swill occur in all markets.

Real estate should be interesting in commodity producing countries. A huge shift of wealth and power is

underway. New kids on the block may be the prime beneficiaries of the current crisis.

3


4/50

ARTIFICIALLY LOW INTEREST RATES LEAD

US economy began to expand in November 2001, but Fed Fund Rate

remained at 1% until June 2004

Source: Ed Yardeni, www.yardeni.com www.gloomboomdoom.com

4


5/50

TO STRONG MONEY SUPPLY AND

CREDIT GROWTH


Source: Ed Yardeni, www.yardeni.com

5


6/50

U.S. DEBT RATIOS HAVE BEEN PUSHED HIGHER

BY REFLATION

Source: Ned Davies Research, Bridgewater Associates www.gloomboomdoom.com

6


7/50

EXCESSIVE LIQUIDITY ALSO LEADS TO INFLATED

ASSET MARKETS AND ROLLING BUBBLES

Source: BCA Research


7


8/50

THE ALL-THE-SAME MARKET COMPOSITE INDEX,

1997-2007

Source: Robert Prechter, www.elliottwave.com www.gloomboomdoom.com

8


9/50

U.S. HOUSING BUBBLE

ESTIMATION OF HOUSING BUBBLE:

Comparison of Recent Appreciation vs. Historical Trends

However, housing bubble was not endemic to the US. Other housing marketsIreland,

Spain, the UKwere even more extreme

Source: Paulson & Co www.gloomboomdoom.com

9


10/50

Source: Ed Yardeni, www.yardeni.com www.gloomboomdoom.com

BUT NOW CREDIT GROWTH IS SLOWING DOWN

AS CREDIT STANDARDS ARE TIGHTENED

10


11/50



IN PARTICULAR, COMMERCIAL PAPER

OUTSTANDING IS DECLINING

11


12/50

Source: Bridgewater Associates


NEW CREDIT CREATION AS % OF GDP IS

IS SLOWING DOWN ABRUPTLY

12


13/50

EXCESSIVE CONSUMPTION LEADING TO A SOARING

U.S. TRADE AND CURRENT ACCOUNT DEFICIT

U.S. Household Spending + Residential ConstructionU.S. Current Account (Inv.)

Real Merchandise Trade Balance

Source: Ed Yardeni, www.yardeni.com; Bridgewater Associates www.gloomboomdoom.com

13


14/50

BUT NOW U.S. CONSUMER SPENDING IS WEAKENING


Source: BCA Research

14


15/50

MISLEADING ECONOMIC STATISTICS

Source: John Williams, www.shadowstat.com


U.S. CPI Farce

Source: UBS Source: UBS

15


16/50


17/50

CHINESE EXPORT BOOM, WHICH LIFTS

COMMODITY PRICES AND GREASES THE ECONOMIES

OF RESOURCE PRODUCERS



Huge transfer of wealth to resource producers!

U.S. Crude Oil Outlays Asian Crude Oil Outlays

17


18/50

19


19/50

Source: World Bank, World Development Indicators Database;OECD Structural Analysis database www.gloomboomdoom.com

GLOBAL TRADE LINKS ARE STRENGTHENING

Trade as Percentage of World GDP

Share of Imported Inputs in Manufacturing Production

1. Imports of goods and services2. Based on weighted average of major OECD economies

19


20/50


GROWTH IN U.S. TRADE & CURRENT ACCOUNT

DEFICIT LEADS TO INCREASING INTERNATIONAL

RESERVES AND A WEAK U.S. DOLLAR


Strong inverse correlation between the growth rate in FRODOR and the US dollar!

20

21


21/50

FROM NOW ON FASTER GROWTH IN

EMERGING ECONOMIES

Source: Barry Bannister, Stifel Nicolaus & Co. www.gloomboomdoom.com

21


22/50


PER CAPITA GDP (IN 1960 U.S. DOLLARS)

Rising wealth inequality between the MDCs and the LDCs over the last 250

years has reversed for good!

Source: Paul Bairoch, Victoires et dboires

22

23


23/50

Source: Bridgewater Associates


U.S. Asset Returns versus Foreign Asset Mix, 2000-2007

U.S. Net Asset Balance as % of GDP

UNSUSTAINABLE IMBALANCES!

23

24


24/50


Problem of Current Account Deficit

Weak dollar.

Transfer of Wealth.

Rising Import PricesHigher Inflation, Rising Interest Rates, and Interest and Dividend Payment

Burden to Foreigners

How to Stabilise the Current Account Deficit?

Tight Money = Strong Dollar and Weak Asset Markets. Hardly an Option for the Fed.A massive U.S. Dollar Devaluation? But against what?

Capital Controls, Protectionism?

Lenin is said to have declared that the best way to destroy the capitalist system was to debauch the Currency.

By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important partof the wealth of their citizens. By this method they not only confiscate, but they confiscate arbitrarily; and,

while, the process impoverishes many, it actually enriches some. The sight of this arbitrary rearrangement of

riches strikes not only at security but [also] at confidence in the equity of the existing distribution of wealth.

-John Maynard Keynes, The Economic Consequence of the Peace, 1919

24

25


25/50

CHINESE YUAN: 1981-2008

Source: thechartstore.comwww.gloomboomdoom.com

25


26/50

27


27/50


THE FINANCIAL REVOLUTION AT WORK:

WHICH WAY WILL DEBT LEVELS GO?

Source: GaveKal Research

27


28/50

29


29/50

CHINAS SHARE OF WORLD COMMODITY

CONSUMPTION ( 2004)

www.gloomboomdoom.comSource: Goldman Sachs

29

30


30/50

FOR WHICH COMMODITIES WILL DEMAND

NOT COLLAPSE?

www.gloomboomdoom.comSource: Bank Credit Analyst

30

31


31/50

OIL CONSUMPTION

www.gloomboomdoom.comSource: Barry Bannister, Stifel, Nicolaus & Company, Inc

31

32


32/50

CRUDE OIL DEMAND IN CHINA AND INDIA,

1987-2008



32

33


33/50

SLOWDOWN IN DEMAND IN OECD COUNTRIES

Total daily world production is around 84 million barrels. But, in 1964 the world found 48 billion barrelsof oil and used about 12 billion. In 2005, the world found 5-6 billion barrels of oil and used 30 billion!



33

34


34/50


THE GEOPOLITICS OF OIL

Chinese Share of World Oil Demand

and Production

Map of Iran

Source: The Bank Credit Analyst Source: Perry-Castaneda Library Map Collection

34

35


35/50


THE GEOPOLITICS OF OIL IN ASIA:

THE CONTROL OF SEA LANES

35

36


36/50

THE SCO INCLUDES CHINA, RUSSIA, KAZAKHSTAN,

KYRGYZSTAN, TAJIKISTAN AND UZBEKISTAN

Source: 1999 MAGELLAN GeographixSM, (805) 685-3100:www.maps.com www.gloomboomdoom.com

36

37


37/50

RISING COMMODITY PRICES LEAD TO

INTERNATIONAL TENSIONSWARS LEAD TO SOARING PRICES

Source: US Bureau of the Census, Historical Statistics of the

United States, Colonial Times to 1970, Legg Mason Formatwww.gloomboomdoom.com

PPI for Energy, Agriculture, Metals and All Commodities, Y/Y%, 10-yr. M.A.

37

38


38/50

Source: Barry Bannister; Nicolaus & Co.


COMMODITY PRICES IN REAL TERMS ,

1800-2008

38


39/50

40


40/50

AFTER THE PRICE REVOLUTION OF THE 16TH CENTURY

COMMODITY PRICES SLUMPED BUT REMAINED FAR

HIGHER THAN IN THE 15TH CENTURY!

www.gloomboomdoom.comSource: Elliott Wave International

40

41


41/50


MAJOR CONCERNS: EASY MONEY AND DEBT

GROWTH HAVE A DIMINISHING IMPACT ON

U.S. ECONOMIC GROWTH.

ZERO HOUR MAY ALREADY HAVE ARRIVED!

2000-2007: Nominal GDP Growth: + $4.2 trillion

Total Credit Market Debt: + $21.3 trillion

Source: Barry Bannister, Stifel Nicolaus

41

42


42/50

HIGHER COSTS OF NECESSITIES =LESS DISCRETIONARY SPENDING!

www.gloomboomdoom.comSource: David Rosenberg, Merrill Lynch, Federal Reserve Board

42

43


43/50

Source: Barry Bannister, Stifel Nicolaus & Co.


IN THE PERIOD 1981-2001 A RECORD NUMBER OF

AMERICANS TURNED 40. THEY ONLY KNEW CHEAP

COMMODITIES RELATIVE TO THEIR WAGES.

WILL THEY BE ABLE TO ADAPT?


44/50

45


45/50

DOW JONES INDUSTRIAL AVERAGE MONTHLY

ADJUSTED FOR INFLATION BY THE CPI 1949-2008

www.gloomboomdoom.comSource: www.thechartstore.com

46


46/50

DOW JONES INDUSTRIAL AVERAGE

AND DOW JONES INDUSTRIAL AVERAGE IN GOLD $

Source: www.thechartstore.com www.gloomboomdoom.com

(Monthly High/Low)

47


47/50

GOLD CASH PRICE RELATIVE TO S&P 500

Source: Ed Yardeni,www.yardeni.com


48


48/50

GOLD AND SILVER RETURNS AMIDST NEGATIVE

AND POSITIVE REAL INTEREST RATES


Source: Michael Lewis, Deutsche Bank

49


49/50

INVESTMENT THEMES

Real Estate: In resource rich emerging countries.Avoid real estate in financial centres

Healthcare: Pharmaceutical, hospital management companies

Local Brands: May displace some international brands

Commodities: Volatile, but uptrend intact. Corrections of 50% are common.Caution about industrial commodities is warranted

Tourism: Hotels, casinos, airports, beach resorts. Potential problem is

oversupply

Financial Services: Banks, insurance companies, brokers in emerging economies

Infrastructure: Bottlenecks everywhere. Potential problem could becancellations

Plantations and Farmland: Indonesia, Malaysia, Latin America, Ukraine

Japan: Very depressed, banks look interesting

New Regions: Cambodia, Laos, Myanmar, Mongolia

Africa as a play on Asia

Gold and Silver


50


50/50

CONCLUSIONS

It is quite likely that the current synchronized global economic boom and the universal, all-encompassing asset

bubble will lead to a colossal bust.

Expansionary Monetary, which caused the current credit crisis in the first place, are the wrong medicine to

solve the current problems. They can address the symptoms of the excessive growth but not the cause. But,

what options does the Fed have with debt to GDP at 350%?

Central bankers have become hostage to inflated asset markets. Tight money will be difficult to implement.

However, the market participants may from time to time bring about tight monetary conditions by curtailing theavailability of credit.

As Ludwig von Mises observed, the dearth of credit which marks the crisis is caused not by a contraction by

the abstention of further credit expansion.

Rolling Inflation, Stagflation, Deflation may success each other in rapid sequence. In real terms, equities

would not seem to be attractive.

Secular uptrend in commodity prices is still intact. Sharp corrections should be expected.

Along with rising commodity prices, inflation and interest rates are likely to increase over the next few years.

Resource nationalism and resource driven geopolitics will increase international tensions further.

marc faber - finanacil markets pres_2008-09-30

Documents