Transcript for Bill Fleckenstein: The Race To the Bottom Will Be Won By the Dollar (Part 1)

Below is the transcript to Bill Fleckenstein: The Race To the Bottom Will Be Won By the Dollar:

Chris: Hello and welcome to another Chris podcast. I am your host and today we have the distinct privilege of talking with Bill Fleckenstein. Bill is the president of Fleckenstein Capital a money management firm based in Seattle. He writes a daily market wrap column for his subscription-based website as well as the popular column Contrarian Chronicles for MSN Money. Bill began writing a daily column on the Internet in 1996 - oh, those were the early days indeed - demonstrating a quite early adoption of the most transformative technology of our lifetime. And from his website we get these words, “Initially the market wrap was a daily recap of market events with an added “yes – but” emphasis. I quickly learned that the contrarian view point was often misrepresented and under reported. Since then my daily column has always called it like I see it. I have tried to write the column in a way that even a novice investor can understand. I believe it’s better to teach someone how to fish rather than just give them an occasional fish.”

He’s also the author of Greenspan’s Bubbles: The Age of Ignorance at the Federal Reserve. A classic and a critical look and I think necessary look at the disastrous tenure of the man once lauded at the maestro. Welcome, Bill.

Bill: Hey Chris thanks for having me. Thanks for the glowing introduction.

Chris: Well it’s all deserved. Absolutely.

Bill: Thank you.

Chris: You know you were one of the very first that I’m aware of to voice concerns over the economy, the housing market, the great credit bubble - when virtually everybody else in the profession saw nothing but blue skies. When did you first become concerned and what specific things led you to what was then a contrarian point of view and I guess can now to be referred to as the correct point of view?

Bill: Well I learned early on in the money management business that if you can find the right ingredients on the other side of an argument, oftentimes you get a better risk/reward profile with an investment because you’re taking other the side of what are other people’s emotions. So the contrary investment strategy-type approach was something I adopted early in my career after reading one of David Dreman’s books called Psychology and the Stock Market back in 1979 or something. That kind of explained why it gives you a bit of an edge. It doesn’t make you “righter” it just means that if you’re right you're likely to get to get a bigger return. And more importantly if you’re wrong you’re likely to get hurt worse. In any case, as to when I started to really get concerned was a little bit on the early side and that being about 1996, I had never been a Greenspan fan and I had thought he was a proponent of ridiculously easy money and had nowhere near the acumen that people thought. And in 1996, I set up a short fund because I felt that his policy was going to lead to disaster and that people were going to get badly hurt. Needless to say I was about four years too early in coming to that conclusion. Little did I know that the policies and the ideas and the things that Greenspan did up to ’96 were just rounding errors relative to what he would do in the rest of his career. As the equity problem intensified it became more and more obvious it was going to end in a huge bust. I just didn’t know when, of course. And that’s the way manias are. You can’t know how high they’re going to go or how long they’re going to go. You just know they’re going to end in disaster. And then consequently they bailed out that bubble with the housing bubble and now we’re trying to print our way to prosperity.

The thing that Greenspan, Bernanke and all the proponents and fans of the Feds continually miss is – it’s the bubble that creates the nasty bust. The busts don’t happen in isolation. Much the same if you drink a quart of water and you get up in the morning, you’re not going to be hung over. But if you drink a quart of Vodka you will. And the Fed does not understand that and they continue to pursue the wrong policies to this day.

Chris: So do they really not understand? I understand being caught short once. Twice, and we’re starting to wonder about your mental faculties. Three or four times I mean – they’ve been serial bubble blowers for as long as I’ve been around in the investing world. What’s going on there? Do you have a unique insight to their culture? Is it their institution? What’s going on there?

Bill: Well, I think it’s a couple of different things. First of all, they believe in the infallibility of the Fed. I think it’s probably what draws you to the place and gets inculcated in your viewpoint. Bernanke has been very, very clear that – I’m not going to get his quote exactly right - but he said a few years back that Anna Schwartz and Milton Friedman were right and the Fed caused the Depression and he wasn’t going to let it happen again. Except that they all think the Fed caused the Depression by not pushing the right buttons after all hell broke loose. They do not understand that the reason we had the Depression was partly because of the easy money policies. You know, it was much harder to have easy money policies in those days because we were still on the gold standard, but nonetheless you could do that to some degree. And Benjamin Strong in ’26, ’27 and ’28 – they were trying to boost the economy. And the other thing people don’t understand is when you have a bubble it changes people’s attitudes and the way they behave. In the ‘20s they got leveraged up in bucket shops and we had lots of leverage. In both of our bubbles people abandoned good paying jobs to do something kooky and took on debt. So it’s not just the price action of the bubble that does the damage. It’s the way it modifies people’s behavior when you get misallocation of capital. And that’s part of why bubbles have such long clean up periods. So these guys don’t understand that. They simply do not and it’s not debatable that they don’t. Why they don’t, I can’t get into their heads that far, but they don’t. And thus, their policy response is the same thing. You got hungover by drinking too much alcohol – let’s give you some more.

Chris: Well you know, it’s mysterious to me though. It’s not a central banking defect, let’s be clear. During the housing bubble run up, the head of the New Zealand Central Bank was famous to me for noting that they were having a property price bubble – he called it as such, undertook policies to limit it because they saw asset inflation as a form of inflation. They saw bubbles developing. So this is, I think, something that was unique potentially to the Greenspan Fed and maybe that’s been continued along. But I remember being shocked: there was a paper that came out in 2007. It was from a couple of Fed staffers, very bright gentleman, PhDs both – and they basically asked the question “Is housing in a bubble?” and said “no”. And they’d compared it to income and all kinds of things. And I was just wondering - at that point in time I was one of the people that was writing pretty caustically about the housing bubble. - it seemed so obvious to me. How did they miss that?

Bill: That’s one of the things about bubbles and human nature is that they grow to the point where everyone thinks that it can’t possibly be a bubble. Hell, Greenspan made a speech and said real estate specifically couldn’t experience a bubble because it wasn’t fungible and you couldn’t arbitrage: Portland, Maine isn’t Portland, Oregon. They had a whole bunch of reasons all of which I debunked in my book, but it’s just – they start with a false premise, I believe, and that is "We can’t create a problem of this nature and thus it has to come about some other way." And let’s be clear: psychology has an important role to play. The individual has some culpability here. But when you have these back-to-back bubbles and you have the appearance of free money and people thought they learned a long lesson from the equity bubble they decided, “Oh geez, we shouldn’t have bought those crazy dot coms. We won’t do that again.” And then real estate came around and they didn’t realize anything; they just thought it was peculiar to the dot com stocks and they forgot all the other crazy things that they did. And then they did they did the same sorts of crazy things only this time they used leverage . How anyone could miss the real estate bubble, Chris, I don’t know. In fact, I think any supposed investment professional that did not see that coming and act to protect their clients shouldn’t be allowed to practice the art of managing money. I mean, how could you miss anything so huge?

Chris: Well you know: a flood of liquidity, bailouts, backstops, Greenspan puts, bubbles, all of that – it creates this overly-optimistic atmosphere, which you described using your words here: “Psychology gets deranged and nonsense passes for knowledge.” So I think we did have a lot of that derangement. The visible manifestation of that is we saw – “Okay, we can all identify the malinvestment in housing”: okay there are strip malls we shouldn’t have, maybe too many square feet of retail. We’ve got all these developments were maybe we shouldn’t have them. That’s all the obvious stuff. Can you talk to me about what’s unseen in a bubble? What else gets mispriced out there?

Bill: That’s a very good point. So behavior gets modified. So let’s say that your housing is always going to appreciate in price. You’ll always be able to take your money out, so you don’t really have to worry about saving money. And therefore you buy a third car, a ski boat, maybe a vacation spot – and you start to take more vacation. And everyone seems affluent so somebody else starts a business that walks dogs and plans parties. And there’s an incrementally extra number of restaurants and those people have employees and they get to go to things. So the knock-on effect and the piling up of jobs and things like that that really wouldn’t exist were it not for the bubble is why the job creation mechanism - we haven’t been able to really create any this time - because we had a illusionary economic recovery last time in that it was fueled by debt and equity extraction and the creation of jobs that would never exist but in a fairy-tale-like economic environment. So those are some of the things that occurred and they’re not readily obvious, but if you stop and think about it for a second and say, “Oh gee that makes sense.” So those are some of the consequences of having a bubble. In my view I have always believed that to call something a ‘bubble’ you really need that market to get so crazy that people modify their behavior such as I just described. In the equity bubble people quit jobs to day trade and do other things. The word ‘bubble’ gets tossed around all the time now. Bonds are a bubble, gold’s a bubble. This is not true. It’s the people – and the people that are using the word are the ones who tend to be the people who missed the really big bubbles. They say that pejoratively because the big price gains are in commodities and they don’t like that fact. It doesn’t fit with their bullishness on paper assets. That’s part of the reason why I think they say that.

Chris: Right. So a bubble then is technically something I’m not personally invested in.

Bill: Exactly, exactly.

Chris: I understand. I think I’ve seen that quite a bit. I’ll tell you – one of the things that I’ve been noticing looking across the world of investments is just how frighteningly correlated everything has become. I mean, especially for people who are looking for safe harbor. You want to have some money that you can put in places where it’s not all going to go up or down in the same stroke. Unless you’re playing the short side, it really feels like most of the risk assets out there are highly positively correlated. They’re trading off of dollar/Yen/Euro. They’re trading off of paper, flicking around kind of maddeningly. Where do you fall in that? I mean – those are my thoughts. I would say investing is out. I think we’re speculating. So what do you think?

Bill: I would agree with you. I think most investment specialists would agree that there seems to be – well in fact, Jim Bianco of Bianco Research was here in town and he and I had dinner. And he had done some research and it is actually a fact that the correlation between the average stock and the market is at the highest it’s been in about sixty years. It kind of fluctuates between twenty, twenty-five percent of the return is correlated with the market, and say eighty percent now. And so it’s very, very high now. I can’t say exactly why that is. My sort of lame answer is in a money printing environment – who knows what sort of relationships will take hold especially when you’re printing money as brazenly as we are now or have been and still are? The other part of it probably has something to do with the proliferation of quantitative investment techniques – computer-driven this, that, and the other thing - some combination of the two. I don’t think it’s a trend that will be with us forever. I think it’s a mindless thing that will end in tears and a debacle. Sort of like the flash crash with maybe a wake up call. I wouldn’t be a bit surprised to some variation on that theme again somewhere down the road. Don’t know when. Don’t know what would cause it, but I think it’s probably a high probability we would see something like that again.

Chris: Well that high frequency trading possibly being the culprit for that flash crash – I’ve been really disturbed with what I’ve seen. Not just in the HFT algos that are outrunning and doing these little penny pinching routines in front of all the orders, but the fact that the SEC has chosen to essentially look the other way. They need to gather information. They’re not really biting down on it. As far as I read the rules and laws – as far as I understand – maybe this is incorrect  - but it’s kind of not legal to put a quote in that you have no intention of filling. And so these guys are trading on non-public information using quote streams that seem to bend the rules, if not break them.

Bill: Yes. I haven’t really paid close attention to the gory details because I don’t care that much. But it doesn’t seem quite right. Having said that, about the SEC: they were sound asleep at the switch for a very long time. Post the 2008 catastrophe – finally, they seem to be getting after all manners of things, so perhaps they’ll address that. They have a pretty full plate I think and I’m glad they’ve finally woken up. I hope they don’t take it too far and create witch hunts. But basically it was almost as if we had no SEC for fifteen years so things got really carried away and I don’t really understand this whole purpose of high frequency trading. To me it seems like portfolio insurance did. Can’t possibly work in the end, but in the meantime it all it seems to. And I look at all of these high frequency quant trading strategies as something that will work for a moment in time – or appear to work for a moment in time - but won’t over time.

Chris: Yeah it feels like it’s not really a strategy that adds a whole lot of value to the situation. In fact, it just scoops money off the trades. I think the ultimate payees on that are probably the pension funds and the retail investors and other people who are getting front run.

Bill:  Well either that or the HFT guys all picking each other’s pockets - who knows?

Chris: Yeah that could be true too. All right, so let me shift back to the Fed a second. It feels like a lot of what we’re expecting about the future hinges on us sort of tossing a coin and guessing what the Fed’s going to do next. Luckily we know what they’re going to do for the next six to seven months and that is they’re going to monetize a hundred percent of all new incremental federal debt. Can they keep doing that? I’ve been surprised that they’ve been able to get away with it this long without the world rebelling, but they have. And our custody account keeps growing by leaps and bounds. So where do you see this going? How long can this go on?

Bill: You know, Chris, I wish I knew. I am just like you. I know it can’t go on forever. I’m a little surprised that we’ve been able to continue along this path as far as we have. And I don’t really know when it will stop – and it will stop. And I expect at some point the bond market or the currency market will revolt and we’ll have a weak dollar and bond rates will back up despite what the Fed wants. My nickname for that is the funding crisis – kind of like what the Greeks went through, but on a slightly different scale and for slightly different reasons. A lot of people may not know this, but in the late seventies we were forced to issue a bit of debt in yen and also in deutschemarks. I wouldn’t be a bit surprised if we get to that point. I mean – there’s obviously no way that you can print your way to prosperity like we’re trying to do. It’s mind-boggling that so many people seem to think that it’s okay and it’s going to work and the Fed is ever going to exit any of these strategies.

So – I mean, it’s similarly mind-boggling that people discuss deflation when you look at the prices of most everything with the exception of housing really – increasing in price. And yet, people still talk about deflation as though it was an imminent threat. But we saw in the housing bubble – people were delusional for years – same with the equity bubble. The collective crowd – once they get a silly idea in their head - seem capable of rationalizing it for a very long time. And thus, we just can’t know. I think we can know with the same degree of certainty that the equity bubble would burst and be a big problem, and that the real estate bubble would burst and be a big problem. This printing money is going to lead to huge trouble. It’s going to lead to higher interest rates. It’s going to lead to more inflation and at some point there is going to be a train wreck an the currency and the bond market, I think.

Chris: Right. So how did Herb Stein put it?

Bill: If something can’t continue it won’t? Except he forgot to say to say, “But it might go on a hell of a lot longer than you think possible.”

Chris: Which is absolutely true. I’ve been absolutely shocked watching. If you took me three years ago and said, “Chris is there any chance that the Fed could – and then you showed me a mock up of their current balance sheet - I would have said no way, no way, not a chance. The dollar is going to be toast.

Bill: And that. was my thought. At the end of the equity bubble if we had talked about it I would have said, “Well gosh take me here back here in time.” I would have said it couldn’t go here. But what was really surprising even more so was how long the real estate/credit bubble continued on. And I used to keep wondering who the suckers were that were buying all this bad paper. Little did I know it was Merrill and Lehman and all the big banks and brokerage houses buying this ridiculously worthless paper simply because the rating agencies were dumb enough to think housing prices would always go up.

Chris: These are the smartest guys in the room you’re talking about.

Bill: Yeah, those guys.

Chris: Those guys, right. I remember I was in the uncomfortable position at one point of being short a mortgage insurer at the same time that Merrill was buying it. We saw things very differently.

Bill: Yeah. I was short them also when that occurred. And it was just madness. It was utter madness. I mean – and so, but if you look back then you know what you knew, which is why you were short those things. And then you saw Merrill buying them. You think about the disconnect that had to take place. That was really monstrous. So for the currency markets to be a little slow on the uptake to get after disciplining the Fed and all that is not surprising given the level of disconnect before that got overlooked, if you see what I mean. And I think also one thing that has helped the dollar is: there’s a lot of people that think the Euro is binary in that they might wake up one morning and it might not exist or some variation of that theme. I don’t think that is going to be the outcome. But they’re probably going to up the size of the bailouts to get all the pigs at the trough past this point. Well if people can conclude the Euro won’t cease to exist or will exist in a way that is similar to what it is now then you can start to restart the race to the bottom between these two pieces of paper, i.e. the Euro and the dollar. And I think that just because of the way they are in Europe and the fact that they’ve got different countries not wanting to do this, but being dragged into it – they are being more disciplined. So if we just said okay, “Which one of these two currencies is going to race to the bottom the fastest”, I think would be the dollar. But what gets the dollar bid up is people say, “Well, God, the Euro might not exist.” So once we get past that point in time, Chris, then we might have to start thinking about, “Okay maybe the dollar is really going to come under pressure.” That’s my theory. I don’t know if it will work out that way.

Chris: It might not. I share that theory. I’ve heard a lot of people talk about currencies and relative positions. So they – I think it boils down to this statement: the dollar is the best horse in the glue factory. And so they’re looking at the relative proportions and where you want to be. But on an absolute basis it’s pretty clear that the United States is printing like crazy. And what’s been interesting to me is seeing that everybody fights their last battle. So deflation is ours – the thirties. We’re not doing the thirties again.

Bill: Exactly.

Chris: But what’s Germany fighting? Well they really don’t want to repeat the thirties as well. . . 

Bill: Exactly.

Chris: . . .but from an inflationary standpoint. So they’re going to fight that battle. And that’s just going to continue to increase the strain and the stress across those two relative currencies until I think people are going to see the absolute difference between them, which is, “Gosh, one is being created in unlimited quantities. And this other one is being managed – if you want to put. . .

Bill: Right.

Chris:  . . .value term on it: maybe more sanely or rationally.

Bill: Well, I think that’s exactly right. And the perversity of it all is we get rewarded for using a printing press rather quickly and we believe we don’t have to make many changes. Europe is struggling to fix things and raise retirement ages and all that sort of stuff and yet they get penalized. So I totally agree with you. It’s that German mentality versus our mentality. And in the end if the Euro doesn’t facture, which I don’t think that it will, then the race to the bottom is going to won by the dollar, which at some point is going to cause a huge problem.

Chris: Well on that note what I want to do is draw this portion of the podcast to a close and thank you very much for your participation and note that we’re going to continue this conversation in an area for enrolled members because I really want to find out how does that play out and what would that look like knowing that timing is unknowable, but I think that if we at least understand what the breadcrumbs are that we’re going to be looking out for and what you’re looking out for in particular in your head would be a fascinating conversation.

Bill: Great.

In Part 2: Outlook for 2011 (for enrolled members - click here to enroll), Bill gets specific about what he predicts will happen in the bond and currency markets, as well as his specific outlook for 2011. 



William Fleckenstein is author of Greenspan's Bubbles: The Age of Ignorance at the Federal Reserve and the president of Seattle-based Fleckenstein Capital. He also writes a daily Market Rap column and a weekly Contrarian Chronicles column and has his own website. In 1980, he left the computer business to become a stockbroker. He founded a money management firm in 1982, and has been bullish (and bearish) on almost every industry group, commodity, and asset class at one time or another during his investment career. His time horizon as an investor is long-term (three to five years).

Transcript for Bad Medicine: Dr. Marc Faber on Bernanke's Quack Cures

Below is the transcript to Bad Medicine: Dr. Marc Faber on Bernanke's Quack Cures:

Chris Martenson: Hello, and welcome to another podcast. I’m your host Chris Martenson and today we welcome a very special guest: Dr. Marc Faber. Dr. Faber was born in Zurich, Switzerland and now lives in Thailand and has offices in Hong Kong.

Dr. Faber publishes a really, very widely read monthly investment newsletter, The Gloom, Boom and Doom Report, which highlights unusual investment opportunities and is the author of several books including Tommorrow’s Gold: Asia’s Age of Discovery published in 2002, right at the beginning of the age of discovery there. Just fantastic timing. And speaking of timing, in 1987 he warned his clients to cash out before Black Monday on Wall Street. He made them handsome profits by forecasting the burst of the Japanese Bubble in 1990, correctly predicted the collapse in U.S. gaming stocks in 1993 and he’s just been ahead of the curve every step of the way. His company Marc Faber Limited acts as an investment advisor concentrating on value investments with tremendous upside, often based on contrarian investment philosophies. He also invests and acts as a fund manger to private wealth clients, and was former Managing Director of Drexel, Burnham and Lambert. Welcome, Marc.

Dr. Marc Faber: Thank you.

Chris Martenson: One of the criticisms of an empire is that, almost by definition, it lacks the ability to see itself clearly. I see you as having the most essential characteristics required to shed light on the United States. You’re a deeply invested insider with an outsider’s perspective. But more than that you’ve demonstrated an incredible ability to think and perceive independently. To see where others are caught up on dangerously profitable groupthink. I want to begin at the center of the story, the United States, before moving out to the rest of the world. And in the very center of the U.S. lies the Federal Reserve itself: the Fed has been expanding its balance sheet by some $1.5 trillion since the crisis began and are now expanding it by a further $75 billion a month for the next six to seven months. So what are your views on these actions? Are they necessary, disruptive, ultimately more toxic than helpful - or something else?

Dr. Marc Faber: Well, basically, first of all thank you for having me on your show. But, secondly, I think that the government’s intervention into the free Market created the problems in the first place and we certainly have to view the Federal Reserve as having intervened into the free markets by keeping interest rates artificially low for far too long between 2000 and 2007. So their intervention at the present time is actually nothing new, it’s just larger in terms of scale and if you go back to the Federal Reserve starting with the early ‘80s, each intervention whether it was flooding the system with liquidity to save the S&L institutions or save Mexico in the Tequila crisis or LTCM in 1998 and so each intervention became larger and larger and created more misallocation of capital. And I think this will also be the case today.

Chris Martenson: So these interventions - we’ve just gotten further and further off the track. So you would say that today’s interventions, I mean are these just par for the course, it’s just a continuation of a trend that began in the ‘80s under Greenspan or do you see these …

Dr. Marc Faber: Yes, I think the Federal Reserve has openly admitted and written on several occasions that they can’t identify bubbles but these bubbles burst, they can intervene with extraordinary monetary measures to support asset markets, to prevent essentially a deflation or a recession from happening and that leads to very asymmetrical monetary policy. In other words, you let bubbles happen like the housing bubble, and you have to say – you have to wonder what the Federal Reserve was thinking about home prices going up so much and about credit between 2000 and 2007, expanding at five times the rate of nominal GDP. They also let the NASDAQ bubble happen. They couldn’t see that it was a bubble when NASDAQ stocks sold at 80 times earnings. They were taking about the huge productivity improvements and support and so on. So if there was one institution in the U.S. that consistently and repeatedly messed up every thing, the Federal Reserve is that institution.

Chris Martenson: So they do, they lie at the center of all of this in my mind as well.

Dr. Marc Faber: To a large extent, yes. I am not saying that everything is due to Federal Reserve’s policies because even under a gold standard you could have a bubble. Say in the 19th centaury when there were the gold discoveries in the mid-west and in California, you had boomtowns and when canals were built there were booms, same for railroads and so forth, but usually under a gold standard you have a bubble under one sector of the economy but you don’t have it across the board globally and that’s really what the Federal Reserve has done over the last couple of years.

Chris Martenson: Well so they’ve exported bubbles and let’s be fair: I think the ECB and other major central banks have gone along with the program.

Dr. Marc Faber: Correct. I mean, I’m not singling out the Federal Reserve as the only central bank that prints money. But certainly they are the leader let’s say. They are the most aggressive in terms of expansionary monetary policies compared to others we could say. In Indonesia if you trade money then the currency collapses, then import prices go up, and you have an automatic essential adjustment that hasn’t really taken place in the United States.

Chris Martenson: Right, right, so there’s one view then that says the Federal Reserve can’t see bubbles that’s the story they like to put out. But there’s another story that might go like this: which says the Federal Reserve is a serial bubble blower. They actually need bubbles, they know exactly what they’re doing, and now we could look at their purchase of assets as just an attempt to keep assets inflated.

Dr. Marc Faber: Yeah, I think to be fair the Federal Reserve, I have to say that this bubble blowing is not just the intention of the Federal Reserve but actually Wall Street was also encouraging bubbles because, remembering 2001, Mr. Krugman was arguing that the housing bubble would actually help the U.S. economy when in fact, thereafter the housing bubble destroyed the U.S. economy. And again in 2009 Mr. Krugman wrote that another bubble would be desirable at the present time and the consequences of which one could see at a later stage. So actually, the Federal Reserve is not the only one that is guilty of easing monetary policies. Everybody enjoyed it because everybody was minting money during the boom market in equities and in bonds.

Chris Martenson: Well, I want to ask you then because you’ve got the perspective on this that perhaps few have. My grandfather actually served on the New York Federal Reserve Board under Paul Volcker at one time. And way back when and I can guarantee you - if my grandfather were alive today he would not recognize the decisions that are being made or how the Fed is operating. He came from a very solid staid banking background and so I’m wondering if – am I just romanticizing? Was the Fed engaged in the same policies back then as they are now; or did something shift fundamentally over the past 10 or 20 years?

Dr. Marc Faber: Well, I think to be fair the Federal Reserve after its foundation in 1913 has essentially always pursued relatively expansionary monetary policies with one exception that stands out and that was the period Paul Volcker 1979-1980 when he pushed the discount rate to over 20%. A very courageous move I may add; but in general if you look at the price level in the U.S. in 1900 compared to 1800 and you look at real per capita increases between 1800 and 1900, then I have to say that the economic expansion under a gold standard essentially in the 19th century was stronger than in the 20th century when the Fed was in existence. And what happened is in the 20th century the price level as you well know and as everybody knows has gone up dramatically in terms of how much it costs you to fill the tank of your car. How much a movie ticket costs, how much a pound of bread costs, and so forth and so on. And so really the policies of the Federal Reserve have always been inflationary. And I would say every central bank that essentially has the control of over the quantity of money will in the long-run ensue inflationary policies. Maybe temporary, occasionally, they tighten the monetary policies, but actually in the U.S. we didn’t have tight monetary policies now for 10-20 years.

Chris Martenson: The Fed I think is not quite as firm on this as the Bank of England. Bank of England has a stated target: 2% inflation, so they’ve put it right out on the table. They’ve said, we’re going to for it, we want inflation this much, not more, not less and I think that the Fed is …

Dr. Marc Faber: Yeah, but do you understand it’s very difficult to define inflation. The Federal Reserve essentially targets core inflation. Core inflation has nothing to do with your cost of living increases. And as you know the basket of goods and services that are used to measure inflation can be weighted in such a way that things that go up a lot like health care costs, insurance premiums, energy, in this regard entirely and other items where prices are deflating like a T-shirt are over-weighted.

Chris Martenson:  … yeah, that really …

Dr. Marc Faber: I have a large readership for my newsletter and website and I ask to please send me an email if anyone has the impression that their costs of living increases were less than 5% per annum So far I haven’t received a single email.

Chris Martenson: I don’t think you’d get any emails from anybody who’s listening to this either. And inflation varies, it depends on your circumstances, so if you have a child about to enter or in college …

Dr. Marc Faber: Absolutely, absolutely, every household has a different inflation rate. All I can say is maybe I buy at the wrong places and I travel in the wrong airplanes and stay at the wrong hotels but my costs of living are going up every year.

Chris Martenson: … yeah, they absolutely are and we should also note that the official measure of inflation does not include taxes. The entire cost of government …

Dr. Marc Faber: Yeah, absolutely, and in that – hidden taxes, namely fees that you pay to the government and in any event I don’t believe that any one of your listeners who will have a wife tell them: listen, you can give me less household money because prices are down. That I don’t believe.

Chris Martenson: … we’ll try that sometime. I think you’re right. So we have – the theme then is that we actually have a lot of inflation. I mean if you look at a basket – let’s take the entire continuous commodity index and start in 2002 until today: it’s been going up over double digits on a per annum basis.

Dr. Marc Faber:  Yes, of course, and also a symptom of inflation is when the currency weakens and a symptom of inflation is the explosion in international reserves, which have grown from a trillion dollars in 1997 to now over $9 trillion. These are all symptoms of inflation and we have to define inflation as an increase in credit and in the quantity of money. And everything else are symptoms as inflation can manifest itself in a global economy in Vietnam where prices are going up let’s say 12% to 15% annual rate. In India and China where prices are going up by at least 10% per annum. So when you print in the U.S. it doesn’t necessarily have to inflate the housing market. That shows the futility of U.S. monetary policies. U.S. monetary policies were designed by the ranking basically to lift home prices but this hasn’t gone up. Other things have been inflating, namely, like oil and food prices, which then hurt the consumer when the policies are actually designed to help the consumer.

Chris Martenson:  Well is there …

Dr. Marc Faber: I mean Mr. Bernanke often said - and I hate to essentially be outspoken in this way because I think he’s quite a decent fellow - but he’s just ignorant of economics and he’s a victim of his ill-conceived monetary theories.

Chris Martenson: … so he’s running a big experiment and how do you see this experiment playing out? So from my perspective I have – the inflation deflation debate it rages and I’ve written recently that we should, I’m italicizing that word as I speak it, we should be in deflation but we’re not.

Dr. Marc Faber:  We should have been in deflation after 1980 because the Kondratieff peaked out in 1980 or in the mid-seventies to the eighties and then we have a downward wave in commodity prices and declining interest rates. That is the time we should have had deflation. But now that commodity prices are turning up it’s more likely that we are in a very high inflationary environment and the reason I have this debate with the deflation is not so much that they believe in deflation and that I believe in inflation - but their conclusion to buy U.S. government bonds in a deflationary environment is, of course, a disastrous recommendation because if you really have the credit collapse, the deflationists are arguing about, then obviously tax revenues will collapse and the fiscal deficit will go to the moon.

I mean, Tim Geithner just signed the treasury report about the budget deficit about the financing of the U.S. for 2010. The deficit was not $1.4 trillion but $2 trillion signed by him. And so the government debt goes up and up and up and up and then the interest payments from the government go – do go up and the quality of government debt goes down and so eventually you have a junk bond in the U.S.. I believe the U.S. government bonds are junk already today but as long as you have rating agencies that are dreaming and publishing reports that are completely useless, people still buy the government bonds in the U.S.

Chris Martenson: Well, let me play a slight devil’s advocate on this. So right now the Federal Reserve is buying about 100% of all the new Treasury issuances for maybe the next six or seven months.

Dr. Marc Faber: Yes.

Chris Martenson:  Can’t they just keep doing that forever? I mean what would …

Dr. Marc Faber: They can keep doing that forever and obviously then the currency depreciates over time and interest rates go up over time. But they can do it for a very long-time. And at some stage you go into a hyperinflation environment. I’m not saying that hyperinflation is around the corner but with this policy you’re moving a step closer to a danger zone.

Chris Martenson: So they’re increasing the risk, we can’t be certain but obviously the risk is now higher than it was two years ago?

Dr. Marc Faber: Much higher. I would also say that the financial position of the U.S. today - if you look at the unfunded liabilities, if you look at the external liabilities, and so forth and so on, it’s of course much, much worse than 10, 15, or 20 years ago.

Chris Martenson: Well, they actually – I think if we did an accrual basis which we’ve been adding $3, $4 trillion a year to the overall overall negative position on that…

Dr. Marc Faber: Absolutely, absolutely. The government’s debt including Fannie Mae and Freddie Mac, by the way another intervention by the government into the free market that had disastrous consequences. I mean basically everything the government has touched in the U. S. has been a complete failure. From the post office to monetary policies to fiscal policies. You want to have a consistent track record of complete failures? Look at the U.S. government.

Chris Martenson:  … Now tell us how you really feel [laughing]

Dr. Marc Faber:  I beg your pardon?

Chris Martenson:  … I said tell us how you really feel about that one.

Dr. Marc Faber: Well, I think it’s a wonderful experience because it shows that the private sector tends to do things better. They don’t do it perfectly well but at least in the private sector when something goes wrong then an institution or a corporation goes bankrupt then the system is cleaned. The worst part of government intervention is that they don’t let their own failures appear and instead of letting big companies go bust and clean the system, they go and support them and this is unfair to the strong competitors because capitalism is all about the survival of the fittest and about people who make or take wrong decisions being punished through losses.

Chris Martenson: I agree with all of that and I think it’s corrosive to the markets because participants like myself start to look at it and say this is not free, it’s not fair – how is it possible that the bond holders of Citi didn’t take a single penny of losses. This just doesn’t feel right and worse  – investing is about taking your best shot, doing due diligence, figuring out the fundamentals. But we’re all speculators if we have to sort of guess what the government’s going to do next, who they’re going to bail out, how much money the Fed’s going to throw in, because those are unknowable. You can do all the due diligence you want but you can’t predict any of that.

Dr. Marc Faber: Right. In particular it’s unfair because there is a revolving door between some financial institutions and the government. So your access to information is, of course, much, much worse than the access of information of the big financial institutions. And so you have a marketplace that is completely unfair.

Chris Martenson: Right. So let me get to the punchline. So the way that I’ve been analyzing this myself, it sounds like you might agree, is the unfunded liabilities plus the current fiscal structure, the deficit structure, how much mandatory spending is already baked in the cake compared to total economic output which is what tax revenues come in from. There’s this enormous mismatch between revenues and expenditures.

Dr. Marc Faber:  Right.

Chris Martenson: How does this resolve itself?


In  Part 2: Prognosis for 2011 (for enrolled members - click here to enroll), Marc details his thinking on how the engame will play out, as well as his specific outlook for 2011. 



Dr Faber publishes a widely read monthly investment newsletter "The Gloom Boom & Doom Report" report which highlights unusual investment opportunities, and is the author of several books including “TOMORROW'S GOLD – Asia's Age of Discovery” which was first published in 2002 and highlights future investment opportunities around the world. “ TOMORROW'S GOLD ” was for several weeks on Amazon's best seller list and is being translated into Japanese, Chinese, Korean, Thai and German. Dr. Faber is also a regular contributor to several leading financial publications around the world.

Between 1970 and 1978, Dr Faber worked for White Weld & Company Limited in New York, Zurich and Hong Kong. Since 1973, he has lived in Hong Kong. From 1978 to February 1990, he was the Managing Director of Drexel Burnham Lambert (HK) Ltd. In June 1990, he set up his own business, MARC FABER LIMITED which acts as an investment advisor and fund manager.


The Martenson Report - Don't Worry; They'll Just Change the Rules

Wednesday, January 12, 2011

Executive Summary

  • Why the inevitable market correction will be triggered by a forcing event, and which one is most likely
  • Why the US has too much debt
  • Why state bailouts are inevitable despite the Fed's denials
  • Why there's "not enough oil to repay the debt"
  • Why the cost of debt service will drown us, even if interest rates remain low
  • Why the bond market will be the canary in the coal mine
  • The key signs to watch for that will signal the endgame is playing out
  • Recommended investment classes for preserving wealth 
Nichoman's picture

Mish: Simultaneous Games Of Chicken Article

Mish Shedlock has written an outstanding article "Simultaneous Games Of Chicken".

Consider this one of the best posts I've seen of...where were at...why and what possibly will unfold in quite a long time.

WARNING: This is a long, serious post...but delves into many of the subjects discussed here and at other sites.

Offer this thread as an opportunity for information, education discussion and further understanding.

John99's picture

For my children: "The Money Scam (as explained to Grandma)"

This is my effort to awaken the sleeping sheeple. Comments are welcome and if you like it, pass it on.

Thanks to many here at the CM site, especially, "End the Fed - Larry"

investorzzo's picture

Sweden considers cashless society

The game is up if this happens. All those that had the Swiss as being neutral, will no longer be able to hide there wealth there.

Sweden may be a member of the European Union, but to date it has opted not to join the EU’s currency union. If some people in Sweden have their way it may never be necessary to join the currency union, since they would rather see all coins and bank notes replaced with debit and credit cards.


The Martenson Insider - July 15, 2010

In This Newsletter
  • About those bank profits…
  • Debt-Based Money Is The Problem
SagerXX's picture

"The Confusion"

In Neal Stephenson's three-book series "The Baroque Cycle" he weaves a multi-threaded tale -- IMO, an excellent yarn -- the ultimate subject of which is the long-ago creation of the modern banking system (circa the 18th C).  It's not every day that a writer of Mr. Stephenson's brain power writes an enjoyable several thousand pages worth of tale for those that actually might find such a story interesting (much as he did for cryptology in "The Cryptonomicon").  

rickets's picture

Whats Next for the Markets

The market is becoming more volatile again.  Whats next?

A lot of time has passed since the lows of over a year ago.  The magnitude and duration of the equity rally has most surprised.  Even the most bearish or most deflationary slanted minds had given.  As a deflationist, anti-gold bear I was starting to question myself.  Cash has been my holding for a while (since maybe 9500 after the bounce from the low).


It's Not Over - The Collapse in Household Credit Says So


This Martenson Report is a day later than normal.

Your faithful information scout,
Chris Martenson