Marc Faber: When Negative Rates End, It Will Be Total and Complete Destruction

Palisade Radio August 16, 2016

Marc Faber has been a student of markets since 1970, and has learned that the stock market is largely distorted and manipulated. The markets are no longer trading on sound fundamentals in a system where the quantity of money is relatively limited. The liquidity bubble created by central banks, paper money, interest rates, and quantitative easing are examples of this manipulation.

He says we are essentially trading in a virtual reality fantasy land that is driven by the insane money-printing professors at central banks. In looking at the trade deficit, and the current account deficit, Marc’s sense is that the US dollar will not continue be a strong currency. The trade balance of goods has been deteriorating continuously.

The US is not very competitive, and many services including accounting, auditing, and software can be provided at a much cheaper cost than in the US. The reasons the market in the US has gone up is due to money printing and stock buy backs, but there is no revenue growth, and no earnings growth.

He recommends staying out of US equities in general, although he feels the gold, mining, coal, and fertilizer sectors in the US are inexpensive. Comparing the price of gold, platinum and silver to all this increased paper money created out of thin air by central banks, precious metals seem inexpensive. Following another correction he thinks precious metals will have further upward moves.

 

Palisade Radio Host, Collin Kettell: Welcome back to another episode of Palisade Radio. This is your host, Collin Kettell. On the show with us today is returning guest and author of The Gloom, Boom and Doom Report, Mark Faber. Mark, welcome back to the program.

Director, Mark Faber Ltd., Mark Faber: Thank you very much for inviting me.

CK: Last year we had you on the program and you claimed that gold and silver shares were the only asset class that was both relatively and absolutely depressed. This year has been a great time for gold investors; gold stocks up over 150%; the actual metal up about 30%. Does that statement still apply today, Mark?

MF: Let us put it this way. If I compare the world’s financial system today to what it was a year ago, we have now in Europe over $12 trillion dollar worth of sovereign bonds that has a negative yield. We are close to record low interest rates on US treasuries and the debt level in the world has grown significantly. We have a colossal credit bubble in China and although the Fed had essentially completed QE3 and they have not yet implemented QE4 we have further asset purchases in Europe, ECB, Bank of England, and also the Bank of Japan.

When I compare the price of gold, platinum, and silver to all these increased paper money that has been created essentially out of thin air by central banks then I do not think that gold and all the precious metals, silver, platinum are particularly expensive. In fact we had a big move as you pointed out. Correction is likely and following the correction I think we will have further upward moves.

CK: Mark, all of the problems that you outlined there that have led to this gold rally were at least in the makings for the past couple of years, and it led people like yourself to identify that gold would ultimately be a good place to invest money in. Were you able to identify just why at the beginning of 2016 things finally started moving in the right direction for gold investors or is it just simply a cure of low prices causing higher prices?

MF: Well, as a student of markets since 1970 I can say you will never know exactly why on a particular day the stock market starts to go down or if on a particular day it starts to go up. It could be a week later. It could be a week earlier. It could be a year later. It could be a year earlier. The markets are grossly distorted by paper money, by the liquidity bubble that basically had been created by central banks and it is grossly distorted by central banks. They call it maybe a quantitative easing, but basically it is a manipulation of market, manipulation of interest rates, and then the central banks monetize also stocks.

In Europe we have the National Bank of Switzerland, in Japan the BOJ that has been actively buying directly. The markets are no longer really trading on what I would call sound fundamentals in a sound economic system where the quantity of money is relatively limited. We are trading essentially in virtual reality in a fantasy land that is driven by this money printing exercises by some- in my view, insane professors at central banks.

CK: Mark, by many measures the US stock market and several stock markets around the world are overvalued. However, with negative rates growing at an exponential rate you have money seeking yield, and while gold pays nothing it is better than being in the bond market which at sometimes can pay you back less than you put in. The stock market at least is still paying above 2%. For that reason one could argue that money will continue to seek out that 2% yield despite the danger involved in having a market crash. Why do you anticipate there being a potential crash?

MF: Basically, the US stock market is now at the most expensive level compared to other markets in the world it has ever been. We have a wide divergence in the performance of the US stock market and other markets in the world. It is true that the dividend yield now on the S&P500 is higher than on the 10-year Treasury. That I agree. But just look at this year, Brazil, in dollar terms, is up more than 60%; Russia around 25%; in Asia, Indonesia is up 24%; Thailand up 21%; and Vietnam is up 10%.

We have to take moves in other markets than the US. I believe other markets will perform better than the US. I think if you look at why the market in the US has gone up, money printing and stock buybacks, but no revenue growth, no earnings growth, then in my view we are in a vulnerable position and I would stay out of US equities. If you turn around to me and say, “Well, Mark, the world is a big place and some sectors in the US are inexpensive,” I say, “Yes, you are right.” As I said the gold sector, the mining sector is very inexpensive. Agricultural companies, fertilizer companies are inexpensive, and coal companies are inexpensive. They are segments in the market that are not particularly expensive. Are they going to move up a lot? I am not so sure.

CK: As you pointed out earlier in the interview the baton of money printing has been passed around from one central bank to another.

MF: Correct.

CK: Currently, the ECB and the BOJ are printing, but US has stopped for now. You are claiming that QE4 could be in the cards. What would kick off a situation where the Fed would announce money printing, and would not that really be a reputation killer for the Federal Reserve to go ahead and do a fourth round?

MF: I like when you talk about would it not be a reputation killer. In most people’s view the Fed has no credibility anymore. This is an informed view by many people as well as an informed view about other central banks. They have no credibility. They watched the biggest financial bubble occur in 2008 then they slashed interest rates to zero, and by December 2016 we are having the US next to zero interest rate on the Fed fund rate for eight years. What has it done to the economy? The economy is very soft.

We have today the announcement and I place in quotation marks the “announcement of great job numbers.” Probably they are not as great as they had been made up by the government, but never mind. The fact is the economy compared to other expansions has been performing very poorly and amidst enormous growth in debt. The debt underneath Obama – the government debt – has grown from $8 Trillion to now $19 Trillion.

CK: The negative sovereign bonds have gone from essentially zero just a year ago to already $12 Trillion as an asset class worldwide, and probably by the end of this year could hit up to $25 or $30 Trillion. It is growing in an exponential rate. What are the implications of negative bonds? I do not think a lot of investors, they hear it on TV but they kind of pass it off and brush it off. What does it mean and when does it stop?

MF: What it means is for you personally, if you buy a 10-year, say, JGB or Swiss or German bond at the negative yield, it means that you can only lose money. There is no way you can make money over the duration of the maturity. Now if short term rates or bond rates drop even more into negative territory temporarily you could basically make some money. But in general it means the future returns are going to be very low. It could mean the pension funds are in deep trouble. The insurance industry is in deep trouble. What this means is either they have to print money or the insurance premiums will go up and the pension funds contributions will go up. These are basically the consequences of these artificially low interest rates.

The one thing I can guarantee you and your listeners is that these negative interest rates will not stay negative forever. Something will give and when that gives we do not know exactly what the mess will be, but I would assume that it will be complete. Because in 2007 when the bubble burst; in 2000 when the tech bubble burst interest rates were still relatively high. Now, as you said, they are, around the world, essentially around 0% and in the US, the 10-year Treasury note yields 1.56%. It is also a very low yield. It could still go lower. I am not arguing that 10-year treasuries are attractive. I am arguing if you have the choice to own a 10-year Japanese JGB at a negative yield in a country where the government debt is much higher than in the US and where the currency it could strengthen first, but in the long run I suppose it will weaken or you could own 10-year treasuries at 1.56%. I think compared to cash and to JGBs and to the $12 Trillion of European sovereigns that are trading at negative rate, I think the 10-year Treasury is relatively attractive.

CK: Continuing on that thought process the United States appears to be in a good situation compared to the other large countries of the world. The dollar is performing well over the last year and a half. We still have a positive yield on the bonds. Do you think that the US bonds will go negative and what do you think will finally kind of crack the US dollar? I know that you are not a bull on the US dollar.

MF: To both questions I have to answer I do not know. My sense is at the US dollar is not going to be a strong currency because if you look at the US trade deficit, the current account deficit, it is actually not improving. It has improved somewhat because of the self-sufficiency. But if you look at goods, the trade balance in goods, it has been deteriorating continuously. The US is not very competitive.

I live overseas, to be precise in the north of Thailand, and under these conditions I would say I can see that many services, anything that has to do with legal services, with accounting, with auditing, and with software can be produced or provided overseas at much lower cost than in the US.

CK: Well, Mark, I find you to be quite a comedian at times whether intentional or not. Let us end on a bit of a lighter note, maybe some commentary on the US elections. It is likely you have been asked the question several times, Trump vs. Hillary?

MF: Well, what do you want to know? It is actually not a particularly encouraging fact that either democracy of the super power of the world of over 300 million people, which is not the most affluent country on a per capital GDP, but in total they are still the richest country in the world and you have a lot of intelligent people, you have the best universities, and you have great companies, that all they can produce are the two candidates that are now running for the presidency of the US.

One belongs to the Clinton gang. I would not all them the mafia because the mafia would be insulted that the Clintons would be called a mafia. The Clintons is the devious couple that has been followed everywhere they went by irregularities, lawlesness, dead bodies, and of course corruption, and so forth and so on. The other candidate who I admire to some extent, because against all odds, he became the presidential nominee of the Republican Party and everybody in the Republican Party was basically against him. That by itself is an achievement, so he is not a completely dumb fool. But should he be president? I do not know. Can’t the Republicans find someone more qualified for the job? That is the sad part. I think maybe we have to revisit is democracy really the best possible system? Maybe not.

CK: All right, Mark, lots of questions there. We will have to see who ends up winning the election. It is a close one right now and it is certainly fun to watch from the sidelines. Thank you so much for coming back on the program. It is very insightful.

MF: It is my pleasure.

CK: Hopefully we will get you back here soon.

MF: Okay. Bye.

CK: Thanks Mark.

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