Fantastic Presentation by Marc Faber: Mirror, Mirror on the Wall, When is the Next AIG to Fall?

Monday, May 31st, 2010

This is a must watch…Its a little bit long but worth the time.

It provides a great historical look at where we are economically right now…It is not a pretty picture:

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John Roque Says Rally Won’t Last

Thursday, May 27th, 2010

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Faber: Nations Will Print Money, Go Bust, Go To War, We Are Doomed…

Thursday, May 27th, 2010

On May 23rd the Austrian economic think tank, the Ludwig von Mises Institute held a conference at the University Club in Manhattan.  Marc Faber the publisher of the “Gloom, Boom and Doom Report” gave his perspective on the financial crisis and his outlook for the future:

Central banks will never tighten monetary policy again, merely print, print, print

Bubbles used to be concentrated in 1 sector or region in the 19th century, but off of the gold standard this concentration has ended

“The lifetime achievement of Greenspan and Bernanke is really that they created a bubble in everything…everywhere.”

“Central banks love to see asset prices go up,” and their policy reflects their desperation to perpetuate this

US housing bubble that Greenspan could not spot (even though he has recently spotted bubbles in Asia) stands in stark contrast to that of Hong Kong in 1997, where prices fell by 70%, yet none of the major developers went bankrupt; this was a result of a system not built on excessive debt like that of the US

“You have to ask what they were smoking at the Federal Reserve,” during the housing bubble, as prices were increasing by 18% annually when interest rates started to steadily rise in 2004

Over the last couple of years, when the gross increase in public debt has exceeded the gross decrease in private debt, markets have risen, whereas when private debt growth has outpaced public debt growth, markets have tanked

The next 3-5 years will be highly volatile

All of us will be doomed

There is no means of avoiding a total collapse in the West; at the first train station in 2008, the financial system went bust but didn’t die, at the next station nations will go bust (though this could take 5-10 years or less), but first they will print money as this is the most politically tenable option, and ultimately the world will go to war

In a nutshell Faber says he is essentially bearish on everything, though he favors commodities (especially physical precious metals and agriculture), owning a house in the countryside, equities in emerging markets tied to resources (especially necessities like water and oil) and healthcare, and most of Asia including especially Japanese stocks

Once currency depreciation does take place, stocks may become very cheap, as happened when the Mexican peso depreciated by 95% in the early 80s, as the fund managers invested in Mexican equities completely undervalued them after currency collapse

Americans must re-think what constitutes a safe asset; in a “traditional” period, one would generally rank from most to least safe assets: cash, Treasuries, corporate bonds, equities, commodities

However, last year Economist Gregory Mankiw articulated the position which according to Faber essentially echoes that of Fed #2 Janet Yellen and pervades much of the Fed generally, that “The problem is that people are saving money instead of spending, and we have to get the bastards spending to keep the economy going,” so the key is to inflate the money supply at something like 6% per annum

Thus, Faber says “As far as I’m concerned, the Federal Reserve will keep interest rates at 0, precisely 0…in real terms”

As such, cash and longterm bonds will be a bad place to hold one’s money; equities are an avenue to preserve wealth (but this is a risky proposition, given the effects of rampant currency depreciation); precious metals are a sound place for wealth preservation

As for the US being the most important economy for the world, there is a sea change going on right now; recently car sales in emerging economies (such as Brazil, China) are outpacing those of the US, Europe and Japan; oil consumption in emerging markets is increasing, while in the developed world it is contracting; the whole world does not depend on American consumption anymore – 60% of total exports are now going to the emerging world when one includes E. Europe; the US is still a large economy but it is not growing, while the growth in the emerging world is and will continue to be strong

“People still think of emerging market economies as poor cousins, but because 80% of the world’s people are here, in aggregate the consumption is huge.”; these are not saturated markets and they are growing rapidly

“Everybody should have 50% of their money in the emerging world, outside the West.”; people should also keep the custody of their assets overseas

Contrary to what the talking heads are saying, markets are not out of control, central banks are out of control printing money

The drivers of growth in the emerging world will be the urbanization of India and China; stocks won’t necessarily rise in the short term, but there will be significant growth in Asia in the long run

The shift in economic power from West to East has been remarkable in speed, largely due to the rapid industrialization of the emerging world and the speed at which information travels today

There will be a massive increase in resource-intensive industries and new export markets, met with increased volatility and tension around the world

The supply/demand characteristics of oil are great due to the need for oil in China, India, rest of Asia

Oil is the top priority for China, as they are now a net importer

US has a huge strategic advantage over China given that we have access to our own oil, and that of Mexico, Canada, the Middle East and off the western Coast of Africa, in addition to the ability to travel on the Atlantic or Pacific Ocean; meanwhile, China sources 95% of their oil from the Middle East, and while they are building pipelines throughout Eastern Europe for example, their oil supply points in terms of ports for example are limited, and the US has defense bases surrounding these areas; Chinese subs could sink our boats however; the Russians are also not happy about our forces being in the region, and tensions will grow as the need for natural resources in these nations grows

Eventually, there will be war and one will want physical commodities “not paper from UBS or JP Morgan”

In war, cities will not offer safety because one can get bombed, water may be poisoned, electricity shut off; instead, one should buy a house in the middle of nowhere/on the countryside

The tremendous economic Sophism of the day is that a nation can print its way into prosperity; “If debt and money printing equaled prosperity then Zimbabwe would be the richest country.”

“Mugabe is the economic mentor of Ben Bernanke.”

Our fiscal situation is much more horrendous than it is made out to be; total debt (public and private) as a percentage of GDP counting unfunded liabilities is an astounding 800% of GDP, more than double that during 1929

Sovereign credits in the Western world are all bankrupt, but before bankruptcy governments will print money; US government leaders will try to postpone the hour of truth, pushing the problems off till succeeding Presidents and Congressmen

If deficits didn’t matter as many like Economist James Galbraith argue today, why should citizens even pay taxes?  It would make everyone happier if they didn’t

Faber is sure that the economists in academia are intelligent and they study the textbooks hard, but they study the wrong textbooks and are totally inconsistent in their philosophy

In an environment of money-printing and high volatility that exists in the US and that will be created by future policy, physical gold is the best thing to own

Source: biggovernment.com

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Decennial Pattern Redux

Tuesday, May 25th, 2010

In my March 7th Blog Post I talked about the Decennial Pattern and I suggested that we should look for a -25% decline, which is the average decline in years that end in 0, at some point this year. I believe that decline has begun and I think it is time we revisit that research. A 25% decline from the high of year on the Dow of 11,258 would take us down to 8443. That is a long ways from here and I do not expect it to happen right away. My best guess is that we see a very large decline in the fall that takes us back to that 8443 level and probably lower. Here is a reprint of my post from March 7th:

Earlier in the year the Chart Store posted some interesting charts on the decennial pattern. While I am familiar with these charts and the decennial pattern, I am more interested in further detail about the performance of the Dow Jones intra-year. My own analysis about the intra-year behavior, which I think is even more important than these charts is contained in the table below the charts.

The decennial pattern charts from the chart store:

Source: http://www.thechartstore.com/default.aspx

Here is my 2 cents which I think goes hand in hand with the above analysis and may be even more important:

I went back and checked the data for all years ending 0 since 1900 and found that every year had at least a 13.5% decline sometime during the year. This doesn’t tell you how the year is going to end up but it does tell you to be extra careful and on the look out for a pretty significant decline at some point. Here is the raw drawdown data for each year ending in 0 since 1900:

Year Drawdown

1900 -23.65%

1910 -25.14%

1920 -39.25%

1930 -46.44%

1940 -26.81%

1950 -13.54%

1960 -17.42%

1970 -22.20%

1980 -20.50%

1990 -22.48%

2000 -17.84%

Average: -25.03%

Thus, my conclusion is that we can probably expect at least a -13.5% decline, at a minimum, this year. When is that decline coming? That is the $64,000 question! More importantly, make sure your stops are in place to protect yourself if such a decline does occur.

That decline I believe has begun and rallies are to be sold unless the Dow can make a new yearly high above 11,258. Expect a summer rally that fizzles late summer and large decline later in the year.

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Check Out These Charts

Monday, May 24th, 2010

The first chart shows the correlation between unemployment and mortgage delinquencies:

Source: Calculated Risk

The second chart is a shows the progress of increasing US bank failures:

Source: The Chart Store

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Prechter Speaks

Saturday, May 22nd, 2010

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Breakfast With Dave: Scary Math and a -31% Correction Looms

Friday, May 21st, 2010

Here are a few excerpts from a great article, which is attached below, from David Rosenberg of Gluskin Sheff:

“In the past 130 years, whenever the Graham/Dodd/Shiller normalized P/E ratio goes above 20.6x (it is 21x today), the market experiences a significant correction – a correction of 31% on average over the next 16 months. It never fails.”

Scary Math

1 in every 10 American homeowners missed a mortgage payment in Q1 (a record)
1 in 6 Americans are either unemployed or underemployed
Over 4 in 10 unemployed Americans have been out of work for at least six months.
1 in 4 Americans with a mortgage have negative equity in their homes.
1 in 10 Americans believe their income will rise in the next six months.
1 in 5 Americans see business conditions improving in the next six months.
1 in 50 Americans plan to buy a home in the next six months.
1 in 8 Americans believe that current government policy is actually helping the economy.
1 in 10 American small businesses have a job opening.
1 in 10 American’s credit card usage is being written off (a record).
There are 5 unemployed workers competing for every job opening (hence downward pressure on wage growth).

Source and article: Breakfast with David Rosenberg

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Look For New Yearly Lows on Equities

Thursday, May 20th, 2010

The US equity markets continue to drop and this is probably just the beginning of a much larger decline coming this year. Right now the technical picture suggests that we should see new yearly lows down to around 1020-1030 in the S&P 500, at a minimum, before we see a meaningful bounce.

This exact patterned played out in the Nasdaq in 2000. Here we are 10 years later repeating the exact same pattern almost to a “T.” I expect the rest of this year to play out similar to how 2000 played out. Thus, look for new yearly lows then a nice bounce in the 7-10% range that gets sold back to new lows taking us down to around 900-950 in the S&P. At that point we may see a multi-month advance that leads to heavy selling starting late in the summer all the way into the end of the year.

Global growth is collapsing, geopolitical problems get worse everyday, massive potential sovereign debt defaults loom, societal acrimony is growing, and let’s be honest the economy just didn’t recover the same way the stock market did. Mush that all together and you have disgusting recipe for major stock market decline. I am sure I missed a few ingredients, but those should be enough to severely punish the stock markets around the world…

Deflation is also on the rise and central banks will not raise interest rates for a long, long, long time. I realize that this isn’t the most rosy forecast in the world, but its the truth as I see it…

If equities bounce here SELL!!!

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Can You Spell D-E-F-L-A-T-I-O-N?

Tuesday, May 18th, 2010

As I have maintained for some time we are in a massive deflationary cycle that is no where close to ending. In fact, it is just about to cripple the global economy if you ask me. Here is an excerpt of what I wrote on Feb 4:

“What people need to realize is that we are in a deflationary spiral until there is evidence otherwise. Printing money and government spending are inflationary in normal economic environments, but this is far from a normal economic environment. Anyone that thinks this is an inflationary environment is just not willing to look at reality. There is ZERO wage inflation, asset prices continue to fall, and the debt situation is getting worse not better making asset prices fall further. The central governments can keep interest rates this low forever because banks ARE NOT lending and if they raise rates asset prices will collapse because no one will be able to service their debt.

Without a meaningful debt solution I do not see how it is possible for us to have inflation. The central governments around the world can continue to print money at an alarming rate without inflation because the amount of money evaporating and going to money heaven is greater the amount being created. Short term interest rates and commodities are the best leading indicators of inflation. Short term rates are making new highs in price and lows in yield almost every day. The 6-month libor rate has dropped in yield for 24 straight months and shows no sign of an up tick anytime soon.

Are some prices rising like health care? Yes, but that hardly means there is inflation. Agricultural commodities like corn, wheat, and soybeans are very close to their lows for the past few years. Energy commodities such as crude oil, natural gas, and unleaded gas are still more than 50% below their 2008 highs, no inflation there either. While industrial metals and precious metals have had huge moves in the past year the CRB index is still more than 40% below its 2008 high, hardly inflationary. Commodities and interest rates will tell us when there is inflation and we are not anywhere close to it, yet.

The bursting of bubbles is massively deflationary and the deflation can last for decades. How long will this last? I have no idea but until evidence shows otherwise I wouldn’t bet on it changing anytime soon. In my view we are headed for a double dip and our troubles are far from over. Lastly, while the equity markets have had a V shaped recovery the economy hasn’t. Unless this changes in a hurry the equity markets are going to reflect the real economy sooner rather than later. I just don’t see it happening, so consider yourself warned.”

Here is another excerpt of what I wrote on February 6th”

“The other problem with us heading into massive inflation is that we are not acting in isolation. Many other central banks around the world are acting just as irresponsible as we are here in the US. Where is this inflation going to come from? My point is what currency is going to be the safe haven? We are too connected globally today that many of the old economic models do not work the same as they once did before globalization. If the whole world is acting as one and we are all in the same predicament I just don’t see how we go inflationary…”

The two reference blog posts are:

Trouble In The Markets I think Not

Even The Experts Get It Wrong Sometimes

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Former IMF Chief Economist Says Outlook For Global Economy Is “Bleak”

Saturday, May 15th, 2010

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