FABER: DON’T TOUCH U.S. GOVERNMENT BONDS
18 August 2010 by Cullen Roche
20 Comments
Marc Faber is sticking to his guns on the inflation trade. While he’s nailed the equity trade at just about every point over the last few years his macro outlook with regards to inflation has been far less accurate. Nonetheless, Faber says there are already signs of inflation in food prices and maintains that U.S. government bonds are a very bad bet at these levels. Faber still loves gold:
Faber conflates PRICE inflation with monetary inflation. Price inflation is ALWAYS deflationary.
It’s so hard for me to trust Faber’s opinions now. Schiff, Rogers, Faber and several others have all been ranting about this apocalypse that will end with hyperinflation because of what the Fed has done, but your work shows that these guys have all been wrong. What should we make of this TPC?
Fabers equity calls have been very very good. They’ve all been right about gold even though I think the move in gold has been almost entirely misguided….
So you trust signal from a market that Fed has been biggest buyer, while calling price action from other markets is misguided, don’t you think your logic is a little bit flawed?
Let’s just look at the facts. People have been buying gold because they are concerned about the viability of the dollar and because they’re concerned about inflation. So, solvency and hyperinflation are the things to hedge against. Both have been proven wrong. The US continues to be the safe haven play in terms of the USD and bonds and the hyperinflation argument has been proven outrageously wrong. I don’t think people realize it yet, but the gold hedge is entirely incorrect. If you’re buying it for fundamental reasons then that’s different, but if you’re buying gold based on this hyperinflationist fear mongering then you’ll ultimately be proven wrong. Once this economy recovers (de-leveraging ends) and people realize that the Fed didn’t create any inflation gold prices are going to get smashed.
Yeah, and don’t forget (Scary) Gary North and the Mogambo Guru.
With Q2 GDP revision coming up this month (less than 1% according to Bass) the Treasuries have a lot more room to rally. 10Y down to 2%, 30Y down to 3% is my estimate. The bottom in interest rates hasn’t been set yet, we could still be years from that event to happen. I like Faber, but each guru dismissing deflation or a Japan scenario could be dead wrong for the coming years. I only see inflation coming up when the velocity picks up. But as Japan has proved for the past 2 decades, velocity doesn’t pick up when the banking system is broke, the economic conditions are bad, unemployment stays high and social mood doesn’t shift to optimism.
Tokyo is littered with washed out traders who continuously called the bottom in JBG yields, for some of the very same reasons people are making the same calls in the US.
Fighting a structural change in the US savings rate could prove very costly. Its cost people a fortune already this year. Put money in a 30-year Zero and be guaranteed to get 3.5x your money back in 30 years. Will Gold really be at 5,000 in 30 years to provide the equivalent return? Maybe, but there is also that not insignificant risk it is at 250$ either
I am a huge faber fan… his book Tomorrow’s Gold is about the best Global Macro “thinking” book out there… anyway, Faber will ultimately be right..but his timing on inflation is off. Ergo he’s wrong now.
What I have realized after following Faber deeply for the past couple of years is that he is really an investor. True his equity calls are correct — and thats more of a trader’s line — but his calls on Gold, Avoiding Treasuries buying Agricultural land as an income + wealth preservation play, are a 2-10 year calls. Not 2-10 month ones. Just keep this in mind.
The other thing that we do have that makes this whole Inflation / Deflation debate so darn tricky is the fact we have BOTH occurring. (Bokeh’s book “The Great Reflation” covers this very well in chapter 1). The coordinated global Fed moves have REFLATED the world’s assets from the abyss. At the same time we have Debt Deflation (aka balance sheet recession). So you can read the tea leaves and passionately call for both scenarios (ignoring the other) when in fact BOTH asset inflation and monetary/debt deflation are underway. Confusing but true. These are very weird times… as Cashin says “Be Nimble”
Back to the point – Faber’s track record is pretty solid. He’s been wrong of course but its better than mine and he’s a hell of a lot wiser. So While we are on the other end of a mountain of deflating private sector debt, he’s right in saying that its possible that ASSET INFLATION can permeate its way to the mainstream CPI. And the greater the debt deflation, the greater the liklihood that the Fed will aggressively offset and overshoot. I think he’s wrong today but anytime in the next several months to perhaps few years out will be proven correct. Unfortunately I think its more of a stagflation type scenario that we’ll be facing at that time. …ugliness.
It is a long read but worth it Inflation, Not Deflation, Mr. Bernanke by Andy Xie
I’ll second that read.
For the Faber fans, parts 2-5 of that interview are on youtube. In Part 4 he articulates his views on inflation a bit more (even though they are probably well known by Faber followers). Still I think it is in line with what Andy Xie is saying.
http://www.youtube.com/watch?v=DQt1WWT3bhw&feature=channel
good article, thanks.
I agree with Andy Xie. I don’t see how developed countries can stay deflationary while inflation accelerates in emerging countries. Don’t look at the official numbers, everyone lives in China knows inflation is going through the roof.
I expect import price to rise dramatically in the coming years.
Near the beginning of this interview, when Faber talks about buying treasuries, he says he wouldn’t buy 10s or 30s in order to hold to maturity. Note that qualification. That’s not an exceptional observation, actually. How many of us are going to hold long Ts to maturity at this point?
Exactly walden. Good observation. And it’s also a way for him to weasel out of his call if he ends up wrong (again) in the near term.
I believe Mr. Farber is correct and we will have much higher inflation and probably hyper-inflation at some point in the future. After hyper-inflation the country may experience serious deflation but not before. The feds will not let deflation occur to any large extent because it would then be impossible for them to inflate away the debt. Inflating away the debt is what the Feds are planning since the US can’t afford to pay the debt off. Scary thoughts but so true.
Hard to see how anything other than inflation can occur long term. The people in charge of the money printing presses are scared sh*tless of a Japan style deflation AND inflation is the only hope they have of dealing with out-of-control government debt.
Also consider the dollar has lost over 95% of its value since instituting the Fed Res in 1913… to supposedly help protect & preserve the value of the dollar.
I’m a big fan of Faber’s and I subscribe to his newsletter report.
Yet I don’t believe one has to be a card carrying member of the hyperinflation club to invest in gold.
My personal investment in gold is based on my lack of faith in paper, counterparty solvency reliance, and increasing energy costs – particulary in non-classical economic terms, that is, the biophysical economics EROEI view. Energy determines the values of all future paper claims. Energy allows economies and money supply to expand.
The hyperinflation/deflation argument, IMHO, ultimately revolves around the reactionary behavior of governments. Basically, it’s a bet on how governments will handle the accelerating collapse of paper claims – be they Federal Reserve Notes, Fannie/Freddie mortgages, CDSs, etc…
True economic growth independent of government largesse will resume, albeit sluggishly, after the current global monetary regime collapses. Think Exter’s Pyramid. Until then, the economy is on unsustainable life support.
People that continue being bearish on gold because of deflation have been dead wrong and continue being wrong. Read deflationists like Mish, Rosenberg, and Bob Hoye who are bullish on gold. Thye’re not predicting any inflation yet they understand why gold keeps rising unlike other deflationists like Prechter or the hyperinflationists. Faber however happens to be the most accurate of all the inflationists. He was pretty much the only inflationist back in 2008 who said the dollar would rise and that pretty much everything else would collapse. He was early in turning bullish in late 2008 but nonetheless, it was still near the bottom. His several decade track record speaks for itself.
how is it that i hear so many gold sellers trying to get me to pay 1200 dollars plus for a coin with a dsollaer face value…….