MARC FABER’S 2010 INVESTMENT OUTLOOK
22 December 2009 by Cullen Roche
13 Comments
This must see three part interview details Faber’s 2010 outlook. He likes commodities (wheat and natural gas in particular), Japan & hates the U.S. He continues to forecast hyperinflation as the government prints its way out of the crisis (this is very similar to Julian Robertson’s outlook). He still believes the capitalist system will fail in spectacular fashion. For more investment guides and outlooks please see our complete 2010 investment guide.
Part 1:
Part 2:
Part 3:
this guy is using drugs
I’d love to be on some drugs that helped me forecast these events as well as Faber does.
I’m amazed how these guys continue expecting inflation right around the corner. The diary book that came our recently from the GD also talked about the author’s fixation with inflation. But it never happened then and it won’t happen now. Understanding the excess bank reserves gives us a completely different perspective on the ongoing crisis. There are no willing borrowers! As households deleverage, no one wants to take on additional debt. This is perfectly normal behavior! But poor Bubble Ben thinks the world will end if there isn’t a 42″ flat screen across every toilet in middle America.
Sharp downward revisions to the sum of our countries production do not appear to move markets anymore. Surely a disappointing Christmas season cannot suppress the relentles pursuit to new valuation extremes. My Christmas wish is that a key Fib retracement doesn’t get in the way of the fable that printing money was the hidden financial innovation to steer us out of these dire straits. When everyone goes running towards the exits at the same time, the fall will be spectacular.
I think Faber makes an important point though. Monetary policy can have a positive lasting impact for several years. Just look at what happened in 2002. Of course, it all unraveled, but it last for 4 years before it was proven to be a farce. We could be in the middle of something like that right now. I still think the profits picture supports stock prices in the near-term.
As for inflation – I think you are dead right. Consumers are still deleveraging and with elevated loan standards and low demand from borrowers there is simply no way we are getting hyperinflation. The forces of deflation and inflation will likely drown eachother out over the next 6 months much as we’ve seen during the prior 6 months.
Your observations are true as well for 92, 98 (asian tigers and tech bubbles). One thing that bugs me at the same point in the rate cycle vs ’02 and ’92 is the extreme volatility of 2s10. ’94 was also very bad for bonds.
The lessons I learned from these bubbles is to take a calculated gamble (ie. don’t go 100%) early and/or wait until there are multiple clear trends (micro and macro), then take your profits as credit growth increases and tightens or when your neighbour starts asking for hot conglomerate/internet/oil/china stock tips, whichever comes first.
Absolutely, monetary policy can and has had a wonderful impact over the last twenty years. But you have to understand your crisis before you determine which medicine to apply. The situation right now reminds me of that Chris Rock joke about the proverbial African-American family that uses Robitussin for all ailments: “Your arm broke? Put some Robitussin on it. Your bank got a gaping hole thru it’s balance sheet? Pour some ‘tussin on that.”
Monetary policy will not work b/c, unlike 2002, our banks now have massive holes across their balance sheets as a result of the collapse in real estate prices. Koo is spot on in his analysis about how a balance sheet recession is so much different from any of the other run-of-the-mill corrections we’ve suffered. No matter how low interest, you cannot get consumers to extend new lines of credit when their most prudent option is to pay down existing and crippling debt levels. And when everyone does this on a macro scale, such as is happening now, the results are highly deflationary and devastating.
This is why Rosenberg will ultimately be proven very correct, but unfortunately, b/c the guy has the word “Economist” on his business card, he has to put on blinds and shoo away these moments of financial euphoria. 2010 is going to be one hell of a year!
AS you know, I agree with your long-term assessment. Koo’s assessment is spot-on, but even he has the wrong solution. He thinks we can spend our way out of this. I disagree. Ultimately, we will pay the piper for all of this failed stimulus. When? I can’t be certain, but we will all pay.
I’ve gotta respectfully disagree with you on that point. The stimulus has not failed. We all, rightfully so, hold our noses to govt spending b/c it’s so much less efficient than it’s private-sector sibling. But where would be be without all the fiscal efforts to date? Would we have had a positive GDP number announced this morning with Cash for Clunkers and all the other pork coming out of the hog nest in DC? The only thing keeping this economy up is all the fiscal spending to make up for the deleveraging that is occurring in the private sector. Without it, safe to say the s&p would be a bit more summer gazpacho than melting lava.
If you agree with the Koo theory, naturally you have to see it all the way thru. Fifteen extremely prosperous years went by before Japanese corporations had righted the ship, torpedoed by the fall of their asset bubble. And America can somehow stumble out of this crisis in a couple of years as the rest of the world implodes in debt? What makes us so different than the Japanese, who saw their index fall 80+% from the peak of their bubble?
Greed is such a fascinating and compelling emotion that it cannot possibly be captured in these fancy econ models. I’ll take cold, hard data over projections any day. That’s why I’m so curious about the reaction to today’s data. We’re only growing at a measly 2.2% but that’s ok b/c somehow someway our tea leaves tell us that number will shoot up to 5+% in the coming quarter. The current market P/E is at 88, double the 2000 valuations, but that’s ok b/c if earnings go back to the most profitable time ever, after a credit collapse, valuations will fall back to historic norms. What an incredible time to be alive…
I guess it all depends on what your definition of “success” is. Positive GDP is not success to me. Japan has had two decades of strong GDP with negative asset prices at the same time. Is that success?
This is what is so fascinating about the current environment. Everyone is getting sucked back into the “everything is okay” idea. But all we’ve done is continued to feed the debt beast (this time via massive government spending). Ultimately, you can’t print your way to prosperity. It has never happened in the history of economics. If we can transition from government growth to private sector growth then we have a different future ahead of us, but I don’t see that occurring so smoothly.
Ultimately, in my opinion, it comes down to a flawed monetary and fiscal approach. We have been duped by the efficient market hypothesis and Keynesian economics as the one stop shop for all fixes. This is a different beast though. The only way to truly solve a debt crisis is via a contained demolition of those who made mistakes. The losers must lose. Otherwise, the mistakes perpetuate.
We have learned nothing from this crisis. Therefore, we will continue to suffer from the mistakes. This is not a “success”. In my opinion, it is the farthest thing from that. And I could give a damn what the stock market does over the next few months or years. If that is our barometer of social and economic success then we are all damned.
That’s all the markets are for better or worse. And I take no joy in watching my parents’ generation about to take the biggest screwing since the great depression. But the myth that this build-up is built upon, the very foundation, that Bubble Ben solved our problems and is the Man of the Year b/c he printed a boatload of cash, it defies logic. And as more and more people have someone whisper into their ear, “get out you moron, it’s all a lie” the cumulative effects will be stunning.
Sucess to me is preventing out-and-out deflation. Arguably, there is some credit to be given for stalling it, albeit temporarily, but ultimately the effects of deflation after an asset collapse cannot be avoided. Conveniently, at least from Bubble Ben’s perspective, is that the money printing has distracted folks from deflation. But if you or I go into our bedrooms, print one billion new Benjamins, and lock up the freshly minted notes in our garage, we have not done a damn thing to increase inflation. Replace ‘garage’ with banks, and ‘you and I’ with Bubble Ben, and it gives us an idea of what’s happening. And when people realize this en mass, the momentum train leaves the station again, only this time in reverse. What’s exciting is that it appears to be happening right at this big ol’ resistance point.
If you are familiar with war process, you can forecast what has happened and going to happen with more accuracy.
Basically so far, in prior recessions, industry rotation/technology boom, corporate America could in large extent pull US out of recessions with very little Govt intervention. However the last 2000 recession needed much more Govt intervention and still could defer the normalization process by only about 4-5 years. Still during this timeframe, although in technical term, US wasn’t in recession, the prosperity of average Americans was going down.
In this current recession, Govt came into the battle with full self. Basically private corporations pretty much are gone now as Govt owns the biggest corporations (Fannie, Fredie, AIG etc.) already.
However just like Greenspan just deferred the market normalization temporarily and ended up making the crisis even bigger as the underlying problems weren’t addressed and were let grow bigger same thing is going to repeat with Bernake’s sinister plans. Only next time the crisis will be much quicker, multi fold bigger and will take down the US Govt.
Corporate America has never done anything for America. Corporate america invested in the railroads for the good of america (not)? CA expanded industrial capacity in the 40s for america (not)? CA built internet companies for america? They were all aided by the government and/or pure greed (BTW I’m not saying it’s bad!). I think CA’s job is to front run the government and the people. You’re right about taking down the US gov/Fed … at some point the Fed put that everyone has been relying on will expire worthless and we’ll realize it was one big AIG. How’s that for counter-party risk! Some already think that time is now.
To add my 2 cents,
My observations on my recent trip to Asia.
Due to global fund flows and seamlessly interconnected financial system,inflation is rearing it’s ugly head in Asia. Even where there is no scarcity of supplies prices have gone up a lot.
Due to Yuan peg to dollar culminating in low interest rates middlemen borrowing in yuan are hoarding food supplies in Singapore, Thailand, Vietnam e.t.c pushing the prices up though their costs have not differed the low interest makes losses impossible ( easy profits, based on their calculations).
You fret about over supply of Residentail & Commercial Real Estate in China, India is right there, on my recent visit to India i’ve come to know and see almost an avg of 40K vacant and 20K underconstruction residential properties in 2 major cities of India and most of the developers rolled over their loans and has recapitalized, but prices seems to have been improving since April ( due to low interest rates like in US).
I think we probably might see a 2 Tier Global economy for a while, stagflation/deflation in developed countries as they print more money to reflate, much of those funds flow to emerging markets chasing growth creating Inflation there. ( very much like Australia where urban centers unemployment is high and inflation is comparatively less but outback Australia with low unemployment and high inflation as most of the money is going there)