Excellent Marc Faber interview www.ft.com/vftm
For a number of years I have subscribed to Marc Faber’s lugubriously-titled, “Gloom, Boom, and Doom Report.” I also listen to extended interviews with him any chance I can get.
Today on line at http://www.ft.com/vftm is a very good Faber interview in Hong Kong [where his office is] by Financial Times, to which I also subscribe [I begin to shake with withdrawal symptoms if I don’t get my FT]. However, you do not have to be an FT subscriber to get to this interview [today at least–which is why I am tagging it as “Important” b/ of the time value]. I do not know how long it remains available for free.
An example of a GBDR gem [an example of why this expensive monthly paper newsletter is worth the price] is attached from exactly three years ago, showing an extremely simple analysis that anyone can do using the publicly available data from the Fed. It is a graph going back 40+years of delta-Nominal GDP versus delta-Total-US-Market-Debt. How much bang in terms of economic activity did we get for every dollar of borrowing? The graph shows the annual data points and runs a linear regression line through them. As you can see, the data have waves in them related to the business cycle, but the linear regression line tells a striking and scary story.
[An aside about nominal versus real GDP: Remember that all debts are paid in NOMINAL dollars, unless they have been indexed. That is why deflation is such a killer of businesses, because they default on bank and bond debt. Who was it–the late, and much-missed Kurt Richebacher? I am sure that Antal Fekete also says this–who pointed out that the constant up and down of interest rates is like one of those reciprocating pumps that cleared the bilges of sailing ships: When interest rates go up, it steals from savers. When interest rates go down, it steals from producers (by increasing the net present value of their balance sheet debt).? My impression is that the big international banks have figured out how to make money on both strokes of this pump–hence their love of central banking, which is constantly fiddling with the interest rates. Fekete never tires of pointing out that during the gold-standard era, long-term interest rates were dead flat and there was little scope for bond speculation.]
A half-century ago we got about a buck of nominal GDP for every buck of borrowing, and [give or take the confidence level around a linear regression line]* we now get ZERO!!! The fiscal and monetary authorities who are expanding debt in order to expand economic activity are not going to get the result they want.
Another source I read is John Doody’s Gold Stock Analyst. He has made a very convincing case that as long as REAL SHORT-TERM INTEREST RATES are, on average, negative, the US$ price of gold will continue to increase. The maddening thing about using these data to make investment decisions on is that the time-series is very noisy and full of time-lags. Faber alludes to real short-term interest rates in his interview in connection with gold, to emphasize that they promise to remain strongly NEGATIVE in the near term. [Discussing all this can get wildly confusing, because the same is not necessarily true of the long end of the yield curve, which is now at an historically “steep” level, meaning that the arithmetic difference between the 10 and 2-year Treasury Note yields is a higher positive number than ever in modern history.]
I have heard that von Mises spoke of a “crack-up boom.” Is this what he meant by it?
Warmest regards to all,
*Having done a lot of linear regressions when I was in the laboratory, I want to remind my financial friends, who are used to seeing linear regressions drawn with 1- and 2- standard deviation lines drawn above and below the regression line, THAT THE CONFIDENCE BAND AROUND A LINEAR REGRESSION IS HYPERBOLIC IN SHAPE, NOT LINEAR! The waist of this wasp-waisted zone lies opposite the center of mass of all the data. So by eye, my seat of the pants WAG about the one-SD intercept of Faber’s linear regression with the abcissa, the zero-point, is around 2005. In Chris’s words, THE FUTURE IS HERE.
This is an excellent post, Jonathon. Keep them coming. Faber’s chart comes out a little clearer at
Also, here is an older post by Denninger with the same chart and a detailed explanation: