Marc Faber - Finanacil Markets Pres - 2008-09-30

Dr Marc Faber 2008
Presentation for Enam Securities Pvt Ltd

14.00, September 30, 2008
By telephone conference
WILL GLOBAL ECONOMIC AND

FINANCIAL CONNECTIVITY LEAD
TO A GLOBAL SLUMP?
Marc Faber Limited “Really catastrophic depression … is likely to occur when there
Suite 3311-3313
Two International Finance Centre
is profound monetary instability – when the rot in the monetary
8 Finance Street, Central system goes very deep.”
Hong Kong J R Hicks
Tel: (852) 2801 5411/10
Fax: (852) 2845 9192
Email: mafaber@attglobal.net
Website: www.gloomboomdoom.com
www.gloomboomdoom.com
2
TOPICS FOR DISCUSSION
Threats
Credit crisis is very serious. The Fed can cut rates and pursue even more expansionary monetary policies.
Also fiscal measures can be expanded further. However, in the current conditions such policy measures
will increase the rate of inflation and accelerate the monetary depreciation of the U.S. dollar.
Regardless of policies followed by the U.S. government and its agencies, the consumer is in recession and
the recession will deepen. Trade and current account deficits will shrink further and diminish international
liquidity. The shrinkage of global liquidity is bad for asset prices, including commodities. Also, deleveraging
is occurring among financial intermediaries. This is extremely negative for an economy addicted to credit growth.
We had an unprecedented global economic boom. A global bust is likely to happen.
Inflation shifted in the early 1980s from rising consumer prices to asset prices, which subsequently soared
in value. Now, the opposite seems to be occurring. Most asset prices may no longer be rising while
consumer price increases accelerate. This will have a negative impact on the valuation of equities. It
should also be very negative for long dated bonds.
Geopolitical tensions are on the rise. Balance of power has shifted to the resource producers of the world.
Commodity shortages lead to increased international tensions and to resource nationalism.
A likely scenario is that we are in a water torture bear market in asset prices, which will deflate one asset
class after another.
3
Opportunities
We have a modern day John Law at the Fed. This is favourable – or relatively favourable – for everything where
the supply cannot be increased at the same rate the money printer creates liquidity. Since Mr Bernanke cut the
fed fund rate last September, oil has increased by more than 50%.
Even in a slump some region and sectors will expand. As a result, the demand for commodities from China,
India etc. will not vanish. Nevertheless, a slowdown in demand growth should be expected.
Some equity markets have already declined significantly. Selectively, some buying opportunities are beginning
to show up. The same applies to selected commodities, which had larger price declines.
Volatility will stay high! Large upward and downward moves – like in the 1970s – will occur in all markets.
Real estate should be interesting in commodity producing countries. A huge shift of wealth and power is
underway. New kids on the block may be the prime beneficiaries of the current crisis.
4
ARTIFICIALLY LOW INTEREST RATES LEAD…
US economy began to expand in November 2001, but Fed Fund Rate

remained at 1% until June 2004
Source: Ed Yardeni, www.yardeni.com

5
… TO STRONG MONEY SUPPLY AND

CREDIT GROWTH
6
U.S. DEBT RATIOS HAVE BEEN PUSHED HIGHER
BY REFLATION
Source: Ned Davies Research, Bridgewater Associates www.gloomboomdoom.com

7
EXCESSIVE LIQUIDITY ALSO LEADS TO INFLATED
ASSET MARKETS AND ROLLING BUBBLES
Source: BCA Research
8
THE ALL-THE-SAME MARKET COMPOSITE INDEX,
1997-2007
Source: Robert Prechter, www.elliottwave.com www.gloomboomdoom.com

9
U.S. HOUSING BUBBLE
ESTIMATION OF HOUSING BUBBLE:
Comparison of Recent Appreciation vs. Historical Trends
However, housing bubble was not endemic to the US. Other housing markets – Ireland,
Spain, the UK – were even more extreme
Source: Paulson & Co

10
BUT NOW CREDIT GROWTH IS SLOWING DOWN

AS CREDIT STANDARDS ARE TIGHTENED
Source: Ed Yardeni, www.yardeni.com www.gloomboomdoom.com

11
IN PARTICULAR, COMMERCIAL PAPER

OUTSTANDING IS DECLINING

12
NEW CREDIT CREATION AS % OF GDP IS

IS SLOWING DOWN ABRUPTLY
Source: Bridgewater Associates

13
“EXCESSIVE CONSUMPTION” LEADING TO A SOARING
U.S. TRADE AND CURRENT ACCOUNT DEFICIT
Real Merchandise Trade Balance
U.S. Household Spending + Residential Construction – U.S. Current Account (Inv.)
Source: Ed Yardeni, www.yardeni.com; Bridgewater Associates www.gloomboomdoom.com

14
BUT NOW U.S. CONSUMER SPENDING IS WEAKENING
Source: BCA Research
15
MISLEADING ECONOMIC STATISTICS
U.S. CPI Farce
Source: UBS Source: UBS
Source: John Williams, www.shadowstat.com

16
MISLEADING ECONOMIC STATISTICS
Birth/Death Adjustment as % of
Change in Total Nonfarm Payrolls Rising Part Time Employment
12-month changes
Source: Paul Kasriel, Northern Trust

17
CHINESE EXPORT BOOM, WHICH LIFTS
COMMODITY PRICES AND GREASES THE ECONOMIES
OF RESOURCE PRODUCERS
U.S. Crude Oil Outlays Asian Crude Oil Outlays
Huge transfer of wealth to resource producers!

18
FIRST SYNCHRONISED GLOBAL BOOM IN
200 YEARS OF CAPITALISM
Global economy has become
more synchronised
Risk Premiums remained low for too long!
Source: Morgan Stanley
In 2007: only one country in recession – money-printing Zimbabwe!

Source: ABN Amro
19
GLOBAL TRADE LINKS ARE STRENGTHENING

Trade as Percentage of World GDP ¹
Share of Imported Inputs in Manufacturing Production ²
1. Imports of goods and services

2. Based on weighted average of major OECD economies
Source: World Bank, World Development Indicators Database; www.gloomboomdoom.com
OECD Structural Analysis database
20
GROWTH IN U.S. TRADE & CURRENT ACCOUNT
DEFICIT LEADS TO INCREASING INTERNATIONAL
RESERVES AND A WEAK U.S. DOLLAR
Strong inverse correlation between the growth rate in FRODOR and the US dollar!

21
FROM NOW ON FASTER GROWTH IN

EMERGING ECONOMIES
Source: Barry Bannister, Stifel Nicolaus & Co. www.gloomboomdoom.com

22
PER CAPITA GDP (IN 1960 U.S. DOLLARS)
Rising wealth inequality between the MDCs and the LDCs over the last 250
years has reversed for good!
Source: Paul Bairoch, Victoires et déboires

23
UNSUSTAINABLE IMBALANCES!
U.S. Net Asset Balance as % of GDP
U.S. Asset Returns versus Foreign Asset Mix, 2000-2007
Source: Bridgewater Associates

24
Problem of Current Account Deficit
Weak dollar.
Transfer of Wealth.
Rising Import Prices – Higher Inflation, Rising Interest Rates, and Interest and Dividend Payment
Burden to Foreigners
How to Stabilise the Current Account Deficit?
Tight Money = Strong Dollar and Weak Asset Markets. Hardly an Option for the Fed.
A massive U.S. Dollar Devaluation? But against what?
Capital Controls, Protectionism?
Lenin is said to have declared that the best way to destroy the capitalist system was to debauch the Currency.
By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part
of the wealth of their citizens. By this method they not only confiscate, but they confiscate arbitrarily; and,
while, the process impoverishes many, it actually enriches some. The sight of this arbitrary rearrangement of
riches strikes not only at security but [also] at confidence in the equity of the existing distribution of wealth.
- John Maynard Keynes, “The Economic Consequence of the Peace, 1919”
25
CHINESE YUAN: 1981-2008
Source: thechartstore.com
26
URBANISATION IN ASIA
Source: The Bank Credit Analyst, UNDP www.gloomboomdoom.com

27
THE FINANCIAL REVOLUTION AT WORK:
WHICH WAY WILL DEBT LEVELS GO?
Source: GaveKal Research www.gloomboomdoom.com

28
IS THERE A CHINESE PROPERTY BUBBLE?
China Housing: Prices China Housing: Prices

Relative to GDP, Relative to Household
1998-2007 Income, 1998-2007
Source: Jonathan Anderson, UBS Source: The Bank Credit Analyst Source: Jonathan Anderson, UBS
29
CHINA’S SHARE OF WORLD COMMODITY
CONSUMPTION ( 2004)
Source: Goldman Sachs

30
FOR WHICH COMMODITIES WILL DEMAND

NOT COLLAPSE?
Source: Bank Credit Analyst

31
OIL CONSUMPTION
Source: Barry Bannister, Stifel, Nicolaus & Company, Inc

32
CRUDE OIL DEMAND IN CHINA AND INDIA,

1987-2008
33
SLOWDOWN IN DEMAND IN OECD COUNTRIES
Total daily world production is around 84 million barrels. But, in 1964 the world found 48 billion barrels
of oil and used about 12 billion. In 2005, the world found 5-6 billion barrels of oil and used 30 billion!

34
THE GEOPOLITICS OF OIL
Chinese Share of World Oil Demand Map of Iran

and Production
Source: The Bank Credit Analyst Source: Perry-Castaneda Library Map Collection
35
THE GEOPOLITICS OF OIL IN ASIA:
THE CONTROL OF SEA LANES
36
THE SCO INCLUDES CHINA, RUSSIA, KAZAKHSTAN,
KYRGYZSTAN, TAJIKISTAN AND UZBEKISTAN
Source: 1999 MAGELLAN GeographixSM, (805) 685-3100:

www.maps.com
37
RISING COMMODITY PRICES LEAD TO
INTERNATIONAL TENSIONS –
WARS LEAD TO SOARING PRICES
PPI for Energy, Agriculture, Metals and All Commodities, Y/Y%, 10-yr. M.A.
Source: US Bureau of the Census, Historical Statistics of the

United States, Colonial Times to 1970, Legg Mason Format
38
COMMODITY PRICES IN REAL TERMS ,
1800-2008
Source: Barry Bannister; Nicolaus & Co.

39
M3 MONEY SUPPLY GROWTH
VERSUS CRUDE OIL PRICES
Source: Barry Bannister; Stifel Nicolaus & Co.
40
AFTER THE PRICE REVOLUTION OF THE 16TH CENTURY
COMMODITY PRICES SLUMPED BUT REMAINED FAR
HIGHER THAN IN THE 15TH CENTURY!
Source: Elliott Wave International

41
MAJOR CONCERNS: EASY MONEY AND DEBT
GROWTH HAVE A DIMINISHING IMPACT ON
U.S. ECONOMIC GROWTH.
“ZERO HOUR” MAY ALREADY HAVE ARRIVED!
2000-2007: Nominal GDP Growth: + $4.2 trillion

Total Credit Market Debt: + $21.3 trillion
Source: Barry Bannister, Stifel Nicolaus www.gloomboomdoom.com

42
HIGHER COSTS OF NECESSITIES =
LESS DISCRETIONARY SPENDING!
Source: David Rosenberg, Merrill Lynch, Federal Reserve Board www.gloomboomdoom.com

43
IN THE PERIOD 1981-2001 A RECORD NUMBER OF
AMERICANS TURNED 40. THEY ONLY KNEW CHEAP
COMMODITIES RELATIVE TO THEIR WAGES.
WILL THEY BE ABLE TO ADAPT?
Source: Barry Bannister, Stifel Nicolaus & Co.

44
AN EARNINGS BUBBLE?
REAL S & P EARNINGS PER SHARE, 1880-2007
Since 1990, financial sector earnings up 5 times. Non-financial sector earnings up 100%
Source: Paul Kasriel, Northern Trust www.gloomboomdoom.com

45
DOW JONES INDUSTRIAL AVERAGE MONTHLY –

ADJUSTED FOR INFLATION BY THE CPI 1949-2008
Source: www.thechartstore.com www.gloomboomdoom.com

46
DOW JONES INDUSTRIAL AVERAGE
AND DOW JONES INDUSTRIAL AVERAGE IN GOLD $
(Monthly High/Low)
Source: www.thechartstore.com www.gloomboomdoom.com

47
GOLD CASH PRICE RELATIVE TO S&P 500
Source: Ed Yardeni,www.yardeni.com
48
GOLD AND SILVER RETURNS AMIDST NEGATIVE

AND POSITIVE REAL INTEREST RATES
Source: Michael Lewis, Deutsche Bank

49
INVESTMENT THEMES
•Real Estate: In resource rich emerging countries.
Avoid real estate in financial centres
•Healthcare: Pharmaceutical, hospital management companies
•Local Brands: May displace some international brands
•Commodities: Volatile, but uptrend intact. Corrections of 50% are common.
Caution about industrial commodities is warranted
•Tourism: Hotels, casinos, airports, beach resorts. Potential problem is
oversupply
•Financial Services: Banks, insurance companies, brokers in emerging economies
•Infrastructure: Bottlenecks everywhere. Potential problem could be
cancellations
•Plantations and Farmland: Indonesia, Malaysia, Latin America, Ukraine
•Japan: Very depressed, banks look interesting
•New Regions: Cambodia, Laos, Myanmar, Mongolia
•Africa as a play on Asia
•Gold and Silver
50
CONCLUSIONS
It is quite likely that the current synchronized global economic boom and the universal, all-encompassing asset
bubble will lead to a colossal bust.
Expansionary Monetary, which caused the current credit crisis in the first place, are the wrong medicine to
solve the current problems. They can address the symptoms of the excessive growth but not the cause. But,
what options does the Fed have with debt to GDP at 350%?
Central bankers have become hostage to inflated asset markets. Tight money will be difficult to implement.
However, the market participants may from time to time bring about tight monetary conditions by curtailing the
availability of credit.
As Ludwig von Mises observed, “the dearth of credit which marks the crisis is caused not by a contraction by
the abstention of further credit expansion.”
Rolling Inflation, Stagflation, Deflation may success each other in rapid sequence. In real terms, equities
would not seem to be attractive.
Secular uptrend in commodity prices is still intact. Sharp corrections should be expected.
Along with rising commodity prices, inflation and interest rates are likely to increase over the next few years.
Resource nationalism and resource driven geopolitics will increase international tensions further.

Marc Faber - Finanacil Markets Pres - 2008-09-30

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Marc Faber - Finanacil Markets Pres - 2008-09-30

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Dr Marc Faber 2008

Presentation for Enam Securities Pvt Ltd

WILL GLOBAL ECONOMIC AND

We had an unprecedented global economic boom. A global bust is likely to happen.

US economy began to expand in November 2001, but Fed Fund Rate

Source: Ed Yardeni, www.yardeni.com

… TO STRONG MONEY SUPPLY AND

Source: Ed Yardeni, www.yardeni.com

Source: Ned Davies Research, Bridgewater Associates www.gloomboomdoom.com

Source: BCA Research

Source: Robert Prechter, www.elliottwave.com www.gloomboomdoom.com

Source: Paulson & Co

BUT NOW CREDIT GROWTH IS SLOWING DOWN

Source: Ed Yardeni, www.yardeni.com www.gloomboomdoom.com

IN PARTICULAR, COMMERCIAL PAPER

Source: Ed Yardeni, www.yardeni.com

NEW CREDIT CREATION AS % OF GDP IS

Source: Bridgewater Associates

U.S. Household Spending + Residential Construction – U.S. Current Account (Inv.)

Source: Ed Yardeni, www.yardeni.com; Bridgewater Associates www.gloomboomdoom.com

BUT NOW U.S. CONSUMER SPENDING IS WEAKENING

Source: BCA Research

Source: UBS Source: UBS

Source: John Williams, www.shadowstat.com

MISLEADING ECONOMIC STATISTICS

Source: Paul Kasriel, Northern Trust

U.S. Crude Oil Outlays Asian Crude Oil Outlays

Huge transfer of wealth to resource producers!

Source: Ed Yardeni, www.yardeni.com

Risk Premiums remained low for too long!

Source: Morgan Stanley

In 2007: only one country in recession – money-printing Zimbabwe!

GLOBAL TRADE LINKS ARE STRENGTHENING

Share of Imported Inputs in Manufacturing Production ²

1. Imports of goods and services

Source: Ed Yardeni, www.yardeni.com

FROM NOW ON FASTER GROWTH IN

Source: Barry Bannister, Stifel Nicolaus & Co. www.gloomboomdoom.com

PER CAPITA GDP (IN 1960 U.S. DOLLARS)

Source: Paul Bairoch, Victoires et déboires

U.S. Asset Returns versus Foreign Asset Mix, 2000-2007

Source: Bridgewater Associates

How to Stabilise the Current Account Deficit?

CHINESE YUAN: 1981-2008

Source: The Bank Credit Analyst, UNDP www.gloomboomdoom.com

Source: GaveKal Research www.gloomboomdoom.com

IS THERE A CHINESE PROPERTY BUBBLE?

China Housing: Prices China Housing: Prices

Source: Goldman Sachs

FOR WHICH COMMODITIES WILL DEMAND

Source: Bank Credit Analyst

Source: Barry Bannister, Stifel, Nicolaus & Company, Inc

CRUDE OIL DEMAND IN CHINA AND INDIA,

Source: Ed Yardeni, www.yardeni.com

SLOWDOWN IN DEMAND IN OECD COUNTRIES

Source: Ed Yardeni, www.yardeni.com

Chinese Share of World Oil Demand Map of Iran

Source: 1999 MAGELLAN GeographixSM, (805) 685-3100:

Source: US Bureau of the Census, Historical Statistics of the

Source: Barry Bannister; Nicolaus & Co.

Source: Barry Bannister; Stifel Nicolaus & Co.

Source: Elliott Wave International