Marc Faber: Taking the inflationista view of macro events

Submitted by Edward Harrison of Credit Writedowns.

This is a re-post of an article I wrote last night at Credit Writedowns where I stressed a U.S.-centric view of Faber’s comments that the Fed is a money printer. However, here I have re-dubbed the post to reflect Faber’s comments, which are more comprehensive, in effect pointing to the Federal Reserve as a blower of bubbles domestically and internationally, a view I also hold. Commenting in March of ’08 on the 1990s global economy, I said:

In my opinion, the global economy continued to grow above trend through to the new millennium because these hot money flows created bubbles only in less central parts of the global economy (Mexico in 1994-95, Thailand and southeast Asia in 1997, Russia and Brazil in 1998, and Argentina, Uruguay, and Brazil in 2001-03). But, this growth was unsustainable as the global imbalances mounted.

So, with that in mind, here is the post. Note, there are four videos at the end. Unfortunately, I can’t get video on NC for some reason. So, to see the video, here is the link to the original post. Enjoy.

Below is a synopsis of a wide-ranging interview with Marc Faber over four videos on CNBC TV18 in India explaining view on inflation, currencies, commodities, stocks and more.

Asset-based economy. In general, he thinks we are in an inflationary environment, whereas I think that deleveraging is secular and means any inflation is only cyclical. But he shares my belief that zero interest rates induce money balances to move into consumption or into higher yielding assets. He believes this is a boon over the medium-term (if not the short-term or long-term) for financial assets, whether they be stocks, bonds, commodities, real estate or art. And it is something that will continue, he says. Faber believes Bernanke will be loath to raise rates aggressively given his prior statements and writings.

Currencies. Faber takes the view with which I agree that the Fed’s easy money policies after 1998 flooded the global economy, especially emerging economies with liquidity. This has led to asset bubbles.  Hong Kong residential real estate is one example he cites.  As a result, Faber thinks the U.S. dollar is no longer overvalued at present levels. A snapback rally for the dollar resulting from oversold levels would be bearish for asset markets. But, longer term, Faber thinks the dollar is weak.

Equities. There has been a huge rally everywhere.  He says he is not a buyer at these levels. However, as central banks are going to continue to print money, stocks could continue higher – but he would not bet on a blow off rally from these levels.

Commodities. Faber thinks zero rate levels makes it extremely difficult to value anything.  Pose the question: which would you rather own – the “US dollar at zero interest rates or a ton of gold or a ton of copper or a ton of crude oil?” Of course, commodities are supply constrained, whereas dollars are not, so there is a justification for buying them. But, he anticipates the commodity hoarding by China is about to end and that is bearish for industrial commodities as well as precious metals. As with other commodities, he thinks the huge run up in oil could induce a setback. Long run, he is an oil bull because of limited supply.

Financial Crisis. He is disturbed by the fact that a crisis caused by excessive debt growth, especially as a result of Federal Reserve policy has been allowed to pass with the same players in control. He says enjoy the ride for now. Longer-term, this necessarily means the same bad policies will follow and it will lead to a system-wide financial collapse.

India. Faber is bullish longer-term. Short-term, there could be a correction. India is one of the best protected countries because of less vulnerability to the export sector. He also believes the Reserve Bank of India has one of the best monetary policies in the world – supervise the financial system closely, relatively tight, and mindful not just of core inflation but other price levels like asset prices.

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About Edward Harrison

I am a banking and finance specialist at the economic consultancy Global Macro Advisors. Previously, I worked at Deutsche Bank, Bain, the Corporate Executive Board and Yahoo. I have a BA in Economics from Dartmouth College and an MBA in Finance from Columbia University. As to ideology, I would call myself a libertarian realist - believer in the primacy of markets over a statist approach. However, I am no ideologue who believes that markets can solve all problems. Having lived in a lot of different places, I tend to take a global approach to economics and politics. I started my career as a diplomat in the foreign service and speak German, Dutch, Swedish, Spanish and French as well as English and can read a number of other European languages. I enjoy a good debate on these issues and I hope you enjoy my blogs. Please do sign up for the Email and RSS feeds on my blog pages. Cheers. Edward http://www.creditwritedowns.com

8 comments

  1. houseofcards

    “Regarding the outlook, my analysis is grim. I am not a doomsayer, I follow the cash, and so far, I’ve been correct, and the government has been wrong. Here’s the situation. We are at greater risk of a total meltdown due to a deflationary collapse than we were in 2007. After the greatest Ponzi scheme in the history of the capital markets, we’ve seen history’s greatest fiscal and monetary expansion, but it hasn’t worked. Debt levels of consumers and business exceed the capacity to repay.” (Janet Tavakoli On The Edge With Max Keiser)

  2. burntout

    While I respect MF for his accurate forecasting over last several years, I find it hard to digest his take on RBI ( Indian central bank). The house my parents built in 1997 has appreciated 30 times! Couple of pounds of tomatoes have done 10X, lentils are 10X to 12X.

    I could go on, but, my understanding is that India is on a supera inflationary ( not hyper inflationary )path and RBI is as guilty of money printing as any other CBs

  3. techy

    india:

    inflation is more of a function of demand than money supply.

    example: how do you explain housing prices climbing when a bank deposit was yielding around 10%, and the interest on mortgage was around 10-12%.

    the real estate inflation is now leaking everywhere.

    and when it comes to food, it must be limited supply than people investing to hoard for eternity.

  4. In Debt We Trust

    Let’s put this into perspective.

    The savings rate 1 year ago was -1 to -.5% Now it is 5 to 5.5% (depending on who you ask).

    That is an increase of over 1000%.

    At least 10 years of Greenspan’s monetary excesses need to be worked out. More if you take a longer term view to include the de-linking of gold from the dollar under Nixon.

    We have all the necessary tools for inflation (e.g. increase in monetary reserves). But until that money is lent out to the greater economy, then there will be little or no inflation.

    The rise in equities, credit, and bond valuations is more a function of institutional fund flows reacting to 9 months of 0% Fed Funds rate and Eurodollar futures >97.

    The two are not the same.

    1. VangelV

      We have all the necessary tools for inflation (e.g. increase in monetary reserves). But until that money is lent out to the greater economy, then there will be little or no inflation.

      I disagree. In a social democratic system the natural movement is always towards inflation. You may choose to ignore the fact that the government will choose to finance operations by monetizing debt but foreign creditors will not. And while there is no incentive for the largest creditors (China, Japan) to dump US Treasuries immediately, the smaller players know that they can exit their positions without creating a rout.

      And keep in mind that it is to the advantage of China, Japan, and other nations to force the UDS lower in a world of limited resources. By preventing the US from simply printing dollars and using them to buy oil, wheat, TVs, etc., these countries can ensure a greater supply for their own citizens who are in a better position to buy the goods and services that they are producing. In a post peak world it helps China if the US is in no position to bid up the price of the oil that its citizens want to purchase to operate all those new cars that they just purchased. For now, the Chinese are taking steps to shield themselves from much of the fallout that will occur when they are forced to dump USD denominated treasury paper. By borrowing huge amounts of USDs to finance infrastructure projects and by buying commodity companies that have a lot of long term debt on their books the damage done by a collapse of the USD is lessened and any real losses are likely to be offset by gains made by the ability to have their currency gain substantial purchasing power that allows the Chinese consumer to increase his/her standard of living.

  5. gatersaw

    At about that same time, in 1787, Alexander Tyler (a Scottish history professor at The University of Edinburgh) is reported to have said this to say about “The Fall of The Athenian Republic” some 2,000 years prior.
    “A democracy is always temporary in nature; it simply cannot exist as a permanent form of government. A democracy will continue to exist up until the time that voters discover that they can vote themselves generous gifts from the public treasury. From that moment on, the majority always votes for the candidates who promise the most benefits from the public treasury, with the result that every democracy will finally collapse due to loose fiscal policy, (which is) always followed by a dictatorship.”

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