Monday, October 31, 2011

Darth Faber - Wall Street Journal (blog)

Fans of Hollywood endings should avoid Marc Faber, publisher of the “Gloom, Boom & Doom Report.” The contrarian and outspoken investment adviser kicked off proceedings at World Commodities Week in London on Tuesday morning, just round the corner from the Occupy London protest.

In a presentation that touched on World War III, drug abuse and the failure of the welfare state, Mr. Faber said:
1) U.S. monetary policy focuses too much on boosting consumption. This is a short-term fix, but benefits often accrue elsewhere, namely in China, which provides the goods to feed American consumerism. The negative real interest rates and boost to Chinese incomes and investment also push up commodities prices, which then counteracts the stimulative effect for U.S. consumers by acting as a tax on income. Mr. Faber calculates the world’s bill for oil went from $250 billion in 1998 to $2 trillion in 2006 before doubling again by 2008 as the Fed started cutting rates towards zero.
2) It took the U.S. 200 years to get to a federal debt of $1 trillion in 1980, another six years to get to $2 trillion, and now it’s north of $15 trillion. Referring to a chart showing the ballooning debt-to-GDP ratio, Faber says adding in the unfunded liabilities of Medicare et al. would mean extending the chart up to “the fifth floor of this building”. The conference is being held in the basement. The gap between federal spending (more than 70% of it mandatory) and taxation means the U.S. government’s debt will double in the next five to 10 years.
3) Rising living standards in the emerging world will support demand for commodities — and keep us paying through the nose. Faber observes that if you double someone’s income from $1 million to $2 million, their spending on raw materials “except maybe cocaine” doesn’t rise. Not so for someone on a few thousand dollars a year. They buy cars and the other trappings of middle-class living.
4) China’s rise has been fueled since 2007 by a bubble in credit there. Faber was vague on when it would burst — now or in three years? — but it’s unsustainable. What’s more, foreigners should beware investing in China’s ongoing construction boom. Faber pointed to virtually all U.S. canal and railroad companies going bust in the 19th century, ruining many a foreign investor but leaving North America with an enviable set of infrastructure. He said the Chinese don’t issue shares in companies to “enrich foreigners” but to “impoverish foreigners.” If a foreigner wants to make money in China, Faber said, they should go work there. He does.
5) Faber doesn’t expect the West to simply accept China’s rise. One way Western powers will seek leverage over China will be to gain greater control over the Middle East, which supplies the bulk of China’s oil imports. Faber sees conflicts like NATO’s Libya intervention as part of a broader strategy to do this. Meanwhile, with western governments due to go bust at some point, World War III beckons along with “the complete breakdown of society.” Makes you wonder whether attending a conference on commodities or indeed anything is worthwhile if that’s our future.
6) Besides diversifying asset holdings, Faber advises diversifying where you hold those assets, in case they’re seized by politicians as the welfare state enters its death throes. Faber ends on an arresting prediction: “The governments, they’re going to f— you all, that’s for sure.”