We have a certain fondness for Marc Faber: he knows financial history, he is refreshingly direct, not attached to conventional thinking, and has a record of generally good investment calls (and admits to his mistakes).
Reader Dean provided us his latest newsletter, plus a story covering recent interviews (no, Dean is not his PR agent, just a disciple). Some excerpts, first from the BusinessIntelligence article:
Any proposal to rescue the US financial system will fail to avert a recession said Marc Faber, the Swiss fund manager and Gloom Boom & Doom editor and publisher, now based in Thailand.
A stock rally in the event that a package is approved will be temporary and should be used as ‘an opportunity’ to sell, said Faber.
“The rejection of the package is good because it shows that some people in the US are still sane,” Faber said… “A bailout will not buy the US a way out. The government is less powerful than markets in fixing this mess.”
“Most of the investment community are focusing on the financial crisis,” Faber told TV newswire last night.
“But what they should be focusing on is that earnings will continue to disappoint for a long time, and that global growth is going to go down substantially. Most economies already today are in recession.”
Noting that the US Dollar should continue to find support as investors rush to try and re-pay their debts “I think gold will be a relatively good investment under any kind of scenario until the US government bans the ownership of Gold in the United States.
“They are very good at changing the rules of the game – now banning short sales [of financial and other US equities].
“So yes – physical gold, you should own. Not derivatives with Citigroup, J.P.Morgan, UBS and investment banks, but physical and outside the US,
And from his newsletter:
I should add that, unlike what Mr. Paulson says, falling house prices are not the problem. It is the huge leverage that is the problem. If your house is 100% self-financed (no mortgage outstanding) a rise or a decline in the value of your house has no direct economic or financial impact. In short, my view is that the bail-out plan is not addressing the cause of the problem, which is excessive leverage. Moreover, it is unlikely to help struggling homeowners but is designed to encourage even more speculation by financial companies. Peter Boockvar of Millar Tabak is furthermore concerned that it will lead to further bailouts.
According to him,
the Paulson bailout plan is a government bailout of the previously failed government bailout which was a bailout of the previously failed government bailout etc… Each bailout had its own unintended consequences which the next bailout tried to address. Greenspan bailed out the economy after the stock market bubble popped with 1% interest rates which sowed the seeds for thecredit bubble. In order to bail us out, Bernanke slashed interest rates to 2% and a dramatic rise in commodity prices ensued. When that bailout didn’t work, he instituted a bailout of the investment banks with the initiation of the TSLF and PDCF credit facilities for investment banks. That slowed down the deleveraging process as it gave the investment banks a false sense of security. I highlight Dick Fuld’s comments soon after it began where he said it takes the liquidity issue off the table. The lack of dramatic deleveraging brought us to last week’s panic in GS and MS, a failed LEH and a shotgun wedding for MER which led us to the Paulson bailout. The unintended consequence of this bailout will be a much lower US$ and selloff in the US bond market which will leave us with higher interest rates and higher mortgage rates throw’s the intentions of the Paulson plan out the window. Who will bailout this bailout”?
…..here’s a plan for Washington DC, tell the banks to stop paying dividends to their shareholders. I went back and looked at just 20 of the top banks, including GS, MS and MER and saw that they are paying out $40 Billion per year out in dividends. The lending rule of thumb is $1 of capital can service $10 of lending. That is $400 Billion in lending capacity that can get freed up. That is more than half of the Paulson bailout plan and it costs the taxpayer ZERO.
Recently, a reader of this comment (I read all emails I receive), suggested that there is no logic in my call for a stronger US dollar. I think I have tried to demonstrate in earlier reports that in an environment of a relative shrinking global liquidity (declining US current account deficit) the US dollar should strengthen. However, I should also like to point out that in the world of investments logic should be used only very carefully….Markets can simply move in a direction that seems illogical to us.
Take as an example the correlation between US fiscal imbalances and the US dollar. According to Deutsche Bank, there have been two regimes of correlation between US fiscal balance and the dollar: negative -0.63 during 1973-1988 and positive +0.42 since 1988, thereby supporting both views that larger deficits can result in a weaker or a stronger dollar. Similarly, the US current account deficit exploded between 1981 and 1986 and the US dollar strengthened while after 1986 the current account deficit shrank and the dollar weakened….
But getting back to the US dollar, one reason it may perform relatively well is that although the financial news coming out of the US is horrible, financial conditions in Europe could be even worse. According to Daniel Gross, director of the Centre for European Policy Studies in Brussels,
the crucial problem on this side of the Atlantic is that the largest European banks have become not only too big to fail, but also too big to be saved. For example, the total liabilities of Deutsche Bank (leverage ratio over 50!) amount to about €2,000bn (more than Fannie Mae) or more than 80 per cent of the gross domestic product of Germany. This is simply too much for the Bundesbank or even the German state, given that the German budget is bound by the rules of the European Union’s stability pact and the German government cannot order (unlike the US Treasury) its central bank to issue more currency. Similarly, the total liabilities of Barclays of around £1,300bn (leverage ratio 60!) are roughly equivalent to the GDP of the UK…..
Concerning the US stock market we note that there are several indicators,which suggest that a bottom should be reached shortly or has already been reached…..So, whereas I find it hard to make a case for a strong bull market (new highs are almost out of the question) I could easily envision a powerful bear market rally beginning in October, which could propel the S&P 500 up between 10% and 15% and the extremely over-sold emerging markets by 20% or so.
33 comments
Comments are closed.
1) ECB will cut rates, deep and fast
2) Euro will devolve power to allow governments to expand their budgets to absorb banks at their margins
(there is no time to allow a negotiation for a united euro bailout, if it doesn’t devolve power then it risks its own existence by secession or suicide)
3) Commodities will stay low as China learns to grow a domestic consumer (and thus must create pensions and healthcare)
Net capital inflow to the US = flat? With private investors and foreign SWFs replacing Central Bank and institutional withdrawals of foreign entities that need the cash for their own bailouts.
Will the US government bailouts crowd out reinvestment into the US financial and manufacturing sectors also dependent on credit?
More Faber (FT via Yahoo)
http://biz.yahoo.com/ft/080930/fto093020081235583509.html?.v=1
The credit bubble has burst for good and central banks’ easy monetary policies and large fiscal deficits will be unable to re-ignite credit and economic growth. Between 2001 and 2007 we had a global synchronised economic boom and a bubble in all asset classes including real estate, equities, commodities, art, worthless collectables and even bond prices. Now a global bust will follow with all asset prices deflating one after another like a falling domino.
Regarding the “flack” comment. Certainly not skilled enough to be his flack; perhaps able to give you some flack about it; consider me a Faber disciple.
Dean,
I was making a joke, I am sorry that you felt it was at your expense. I most certainly do not want to offend you. I really appreciate you sending along the Faber material and the other things you point me to. I think he is refreshingly incisive. able to cut through a lot of data and figure out what counts.
I toned the comment down but kept the gist of the idea.
What is that DB/Germany nonsense paragraph? If you take UBS/Suisse things look even worse: assets equal 7 times GDP. Yet the Swiss central bank has done nothing to support UBS (levered over 50 times) and is unlikely to do anything and UBS is alive although not quite well, unlike dropping banks in the USA with conservative leverage ratios of 25:1.
This Daniel Gross simply equates assets to bad assets, and assumes there isn’t much pension money under management in Europe.
Yves,
LOL. Don’t worry. I have a sarcastic dimension which I find hard to control sometimes. Actually the double meaning of flack was unknown to me. I had to look it up. So, I decided to display my new found knowledge for all to see. I owe you an apology for using your good name as a means to verbal trickery.
baychev,
As far as I am concerned, the difference between 50 to one gearing and 25 to one gearing is hardly conservative versus not conservative. Both are overlevered. And just because UBS looks like a worse offender does not obviate the point.
I can’t say more (I have had UBS as a client) but some of what they can count as capital is not in fact carried on their books, almost the reverse of the SIV situation. That doesn’t mean that they are not highly geared, but it isn’t as bad as it looks.
Banks in the US typically hold 8-10% capital to assets, except when they get in trouble, like now.
Pension money is not relevant to the capital adequacy/solvency issue. You cannot seize assets under management and stuff them in your equity account.
On bailing out bailouts:
Yesterday’s WSJ frontpage lead story inadvertently got something right: “The bill’s failure puts the Treasury Department in a bind. Officials there considered the rescue plan as a last-ditch effort to come up with a systemic approach to tackling the financial crisis.”
I think ‘systematic’ was intended.
This Daniel Gros has only one S in fact (he’s not the same as the Slate bloke).
Gros publishes some of his Eurofinance musings here (free PDFs)
http://www.ceps.be/index3.php
While I’m in pedant mode, flack in the gunfire sense is more properly flak. It is one of those cheery near-acronyms (Gestapo, Stasi, Nazi etc) that the Germans specialise in. It stands for Flugzeugabwehrkanone (which monstrosity gives a clue as to why the Germans are good at near-acronyms).
Richard,
U R right. That was the 3rd meaning of flack = an artillery cannon used in air defense.
Re: strengthening dollar
This actually seems like a pretty easy call to me. We are going through a period of worldwide deflation of US assets. Therefore, there are going to be fewer dollars available for investors. But as long as U.S. Treasuries are viewed as a safe haven, demand for dollars will remain strong.
So demand trends are stronger than supply trends, driving up the price.
Until/unless investors become totally fearful of ALL dollar assets, including Treasuries. Then the demand will drop out and the currency will reverse.
I am not a currency expert (or really an anything expert), so any feedback is much appreciated.
Maybe the currency markets are supposed to already be pricing in what I’m talking about??
European banks seem to be more levered than americans but thats tricky. American banks are specialized in hidding assets through off balance sheet operations, I wonder where are the 8 trillons dollars that JPM have taken as derivatives, or why Citibanks announced months ago it was to delever 0,5 trillions when SIVs plan did not fullfilled. Lets see Wachovia, Lehman, AIG, BSterns, and GS annd MS disguising as commercial banks!!!!. The rout of investment banking may be ober but the one for commercial ones is just starting, 1100 banks are expected to fail in teh following years out of 8000 in US.
Regarding the dollar is hard to swallow, fundamentally fiscal deficits will be about 4% next year and increasing and cureent account defcit is to remained structurally high(Peter institute research. Technically there is a huge head and shoulder built in the last 20 years and now US index is retesting 80, its right shoulder. In the short term markets are irrational , but I prefer to have swiss francs or yens rather than dollar or euros.By the way financial sector comprises 20% of Switzerland GDP so I think UBS will not fail as that is an important source of income for teh swiss goverment.
Sorry, but it read like a bunch of convoluted nonesense to me.
At the beginning, he counsels that rallies should be used as an opportunity to sell.
Then, at the end, he says we appear to be at a bottom.
And while telling us that we are at a bottom, he says, look out for strong bear market rallies.
Gee, Mark—way to go out on a limb.
Could he stick any more varibles in there to cover himself?
When market goes up—“See, I told you to watch out for rallies!”
When it goes down—“See, I told you we are in a bear market!”
Also–is he actually telling us we should buy gold at a time of a strengthening dollar? Seems like unusual advice to me.
How about is correlation stats? Is he actually using .42 as some kind of strong correlation between dollar strength and the fiscal balance? Please. Maybe…(just maybe)…if it had been .42 for decades. But this is .42 after being -.63—which of course, he explains away as a “Support of both views”. Yes, it does support both views—while at the same time it also contradicts both views! Fascinating.
Finally…thanks for the advice about not owning C, UBS or JPM derivatives. I was just about to invest in a BBB- CDS that promised a yield that just seemed to good to be true. THanks for saving me from this disastrous choice!
In conclusion, I’ll state this to Dean:
Come…follow me, my son. Being a disciple of Faber is no better than following Tony Robbins. Come, follow me and I will lead you to salvation. I will bring you fame, riches and glory beyond your wildest dreams. All you have to do, my son, is to purchase my newsletter—Hotstox!!! [Make sure there are 3 !!!—all the others are just pretenders.]
Hotstox!!! Trade of the day. 1000% returns! In 2 months. Act now!!!
Regarding the “European banks are too big to rescue” comment:
The same article pointed to Fortis’ balance sheet which is about three times Belgium’s GDP. Yet Fortis was succesfully and swiftly (one Sunday) rescued by concerted action of three governments (Belgium, Netherlands, Luxmbourg) backed by the ECB. Dexia’s rescue has similar traits. So there are possible solutions…
Yves, who is the “we” in “we have fondness for Faber”? Do you have a split personality?
Yves,
I’d like to get to the bottom of this “real gold not derivatives”. I know you’re anti-gold anyway, but I want to know what’s wrong with buying Gold via GLD and other non-physical ways. I can see the government confiscating gold and even disallowing derivatives, but I can also see GLD going up in the meantime. IS there a reason to fear that GLD will be worthless, or that too many claims on Gold will somehow not work out? I may be too optimistic, but I’m thinking this is similar to the Delphi bk where the CDS amount was an order of magnitude larger than the underlying bond, and then the cash bond actually went UP after the bk filing. Anyway…just wondering what your thoughts are.
The real question that I have with the U.S. current account is what is the mechanism by which it will come back into balance? And I just don’t buy the presumption that the U.S. can maintain a current account deficit forever: the Chinese couldn’t in the 18th century, the Brits couldn’t in the 20th, and USAia won’t be able to in this one.
So if the current account has to balance eventually, I think that the easiest way for that to happen is a relative depreciation of the U.S. dollar. Eventually.
Anon3,
The problem with owning the derivative or an ETN is that there is usually waht is effectively a counterparty between you and the actual gold. If the counterparty goes belly up, you then have a long (months or sometimes years) and sweaty wait for your rights to be recognised. Not good if you want to sell in the mean time. This problem has recently surfaced in another place – in connection with retail investors who bought structured products issued by Lehman. What Faber is pointing out is that if you are looking for ultimate safety in times of systemic financial stress, the last thing you need is a dodgy bank in between you and you precious asets. It’s counterparty risk; another manifestation of the problem that is gumming up the credit markets. Runs on banks are another version of the same thing.
The other thing – even owning physical may not work if the government bans owning gold – the rules can get changed very quickly by authorities in a panic (e.g. the current short selling bans). And in fact owning physical gold in the US *was* outlawed during the Great Depression. Hence Fabers recommendation of an offshore location. And even then there will no doubt be rip off merchants out there in due course if there aren’t already. Panics are lucrative for crooks.
I don’t understand the double standard – things are bad in the US – good for USD, things are bad in EU – BAD for Euro. ??
It seems to me that if EU gets sucked in the deflation, Euro will strengten as well. No?
“ECB will cut rates, deep and fast”
Cutting rates will perpetuate the problem. There was too much liquidity, for too long. A great example from today’s NY Times:
http://www.nytimes.com/imagepages/2008/10/01/business/01real2_ready.html
The idea of that building fetching $480 million is absurd; half that would be absurd. Sure they’ll refurbish it and it’ll continue to be of value, but certainly not a half-billion’s worth! THAT’S what happens with rates being too low for too long. And unfortunately for our economy, we have examples like that, not just in real estate, but everywhere. So I don’t see the value of cutting rates at this point; it’ll only make things worse long-run.
That said, I fully expect the central banks to do the wrong thing and cut rates, as they’ve been doing the wrong things for quite awhile now.
Matt Dubuque
Yves-
In terms of your predicted “October rally” in the stock market because we are “oversold”, I am compelled to point out that the International Swaps and Derivatives Association has scheduled an auction for Fannie and Freddie credit default swaps (500 billion) for October 6, an auction for the Lehman credit default swaps for October 10 and Washington Mutual’s credit default swaps on October 23.
Did you factor that into your forecast?
Matt Dubuque
mdubuque@yahoo.com
And in fact owning physical gold in the US *was* outlawed during the Great Depression.
Actually, that Depression ban lasted until Dec 31, 1974.
Matt,
I suggest you learn to read more carefully, I do not make stock market forecasts. That is Faber’s point of view. The text is clearly from him.
I warned you again Matt, and you have failed to behave impeccably. You attribute a position to me that I did not take.
Twas Faber’s forecast, Matt, not Yves’s. Those indents can be a bit hard to follow…however you will find Yves doesn’t do much in the way of market calls.
Amen Sister, tell it, tell it:
1. Any proposal to rescue the US financial system will fail to avert a recession
2. the huge leverage that is the problem
3. false sense of security
Oh wait Sister, I’m against this part: “Stop paying dividends to their shareholders”.
In theory, I agree with the amount of cash that could be diverted from dividends to loan loss reserves seems like a good idea, but dividends, IMHO are dilutive to insider/employee option grants, thus taking away future value for shareholders is a bad idea, because insiders will still siphon off cash for themselves, and leave common shares diluted in this shuffle (one way or another). Hence, I think a reduction in option grants which “should” be obviously linked to performance, which would give the fat cats an opportunity to actually work for compensation.
Taking away the dividend from shareholders hurts the long-term investor that wants cash-flow; if you take away cash flow, these people will bail and insiders will still steal cash; thus this is a structural problem where shareholders should restructure corporations to become more efficient and put pressure on the people that have caused this panic!
max,
it aint quite so when there is a liquidity squeeze. banks are scrambling for every buck to post as additional collateral, there EMEA stock was sold big time and dollars repatriated over the past few months. in such environment banks frontrun the real money and make sure that the ‘diversified investors’ get less bucks. simple as that and quite reminiscent to the dollar rally of 2005 that was driven by special tax break for corporates.
Matt Dubuque
Yes, I relied on the indents. I was surprised at the call.
Those auctions, in my view, should be factored into any stock market forecasts.
Matt
If I’m not mistaken, the Treasury ‘core’ plan pending before Congress is intact. It specifically addresses the damage over-leverage has done by allowing entities to mark their worthless paper as any value they please. I can see the need to obfuscate worth so as to pretend insolvency doesn’t exist (that’s what the President is trying to tell you but can’t) but the proposed bill is still cherries (AMT fix) and ice cream (business tax reduction) circling the black hole of debt.
Lowering the value of the dollar to somehow repair the trade deficit is just an accounting gimmick.
Short term the markets go up and long term the markets go down is not as asinine as it sounds esp. if (monetary, credit, whatever)inflation is rampant and causing price inflation. SOW at 15,000 again? Footnote: Zimbabwe
baychev,
can’t the same logic be applied lest the liquidity squeeze spreads in the EU? Again, why the thinking that if banks start tanking in the EU, it will be bad for Euro, while at the same time arguing for dollar strength because of the US banking crisis?
SEC. 132. AUTHORITY TO SUSPEND MARK-TO-MARKET AC19
COUNTING.
20 (a) AUTHORITY.—The Securities and Exchange Com21
mission shall have the authority under the securities laws
22 (as such term is defined in section 3(a)(47) of the Securi23
ties Exchange Act of 1934 (15 U.S.C. 78c(a)(47)) to sus24
pend, by rule, regulation, or order, the application of
25 Statement Number 157 of the Financial Accounting…….
The indentation threw me off too.
Anyway, Marc Faber doesn’t like the dollar. He just thinks it’s probably the best of the worst at the moment, and it’s time for a momentary bounce.
Also his statement about the stock market wasn’t a call. He was just stating something that could happen.
In addition to Richard Smith’s comments, consider that GLD and SLV have NOTHING in their prospectus’ specifically disallowing that the metal in the ETF can be loaned or leased to a third party. It’s also likely stored at an exchange or exchanges (no one will say) where it might come in handy for money making purposes. If you were a bank (look at the banks named in the prospectus) could you resist putting to work all that money sitting there “doing nothing”?
And finally, if you were going to confiscate gold from citizens, what would be easier than drawing it all to one place?
GLD and SLV are great for trading, but lousy substitutes for physical metal.