Marc Faber's 2011 Outlook for Barron's Roundtable

Marc Faber delivered an OUTSTANDING libertarian friendly rant for Barron's 2011 Roundtable.  The moderator, and his fellow panelists, were utterly terrified to ask his opinion on, well, just about anything.

Until Faber weighed in with his usual excellent insights, I found the rest of the panel to be nauseatingly boring and far too friendly to The Establishment.  Most of these guys - like Bill Gross for example - have too much as stake in the preservation of that status quo to state what should be said.  While smart guys, they toe the party line far too much for my liking.

Faber, though, lets it rip here.  He seems to be one of the rare financial gurus with a knowledge of history pre-WWII.  His reference to 19th century prosperous deflation in America is excellent, and one you don't hear enough.

For your enjoyment, here's Faber's take.  If you want to read the full piece, and the link below does not take you to the full article, try typing "Attention, Stockpickers" into Google - that should take you to the full piece, without requiring a user name or password.  Enjoy!

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Source: Barron's 2011 Roundtable

Marc, you have been very quiet. What are you worrying about?

Faber: Have you got an hour? You are all wrong. You say you would do this or that if you were policymakers, but nobody says "I wouldn't do a thing. I would let the market correct itself." The crisis in the U.S. happened largely because of government intervention that began 25 years ago. The government continuously implemented policies to boost consumption, when everyone should know that an economy will grow in a sustainable way through the implementation of policies that foster capital formation—that is, spending on infrastructure, R&D, education and the acquisition of plant and equipment. By fostering more baseball games, more TV shows, more talk shows, you aren't going to create a vibrant, growing economy.

The government didn't create more baseball games.

Faber: But it created policies to borrow more money. Through artificially low interest rates, it created a huge credit bubble, which led to a bubble in consumption, a symptom of which was the growth in the trade and current-account deficit from $150 billion in 1997 to more than $800 billion in 2006. Now it is around $600 billion, but if these policies continue it will remain at this level or grow.

So you're really saying it's the Fed's fault.

Faber: What I am saying is that Archie lives in a dream world. I admire you all but you are all dreamers. The Federal Reserve was founded in 1913. Before that, throughout the 19th century, the U.S. had strong per capita income growth in a deflationary environment.

It also had huge financial panics.

Faber: That refreshes the system. Worldwide, we have two economies. Rich people and resource producers are doing incredibly well. The ordinary people aren't doing all that well. In 1970 the U.S. controlled 28% of world manufacturing output and China had 4%. In 1990 the U.S. still had 22%, but Japan had come up in the ranks and China still had only 4%. Now the U.S. says it has 20%, and China, by its own account, has 19%. In the U.S., not much happened in the past 20 years. But in China, India, Vietnam, Russia and Brazil you can see huge progress. That said, I agree with Archie that U.S. stocks might outperform other stock markets—once in a century.

MacAllaster: At my four-score-plus, I don't have to wait too much longer.

Faber: History has shown that giant countries on the way down are very dangerous because they are desperate. But this year the U.S. has stabilized and is going to grow modestly.

One more thing: Janet Yellen, vice chair of the Federal Reserve, said about a year ago that if it were possible to push interest rates into negative territory, she would vote for that. This is a very important statement because it implies that the Fed will keep real interest rates negative as far as the eye can see. Negative real rates amount to expropriation and destroy one function of money: to be a store of value and a unit of account. If you measure the stock market not in dollars but gold, it is down 80% since 1999. I no longer regard the U.S. dollar as a valid unit of account. People shouldn't value their wealth in dollars because one day, in dollars, everyone will be a billionaire.

Gross: I agree with Marc on many things, though not everything. I don't know if the U.S. has reached a desperate point, but it is employing instruments and vehicles and policies that smack of desperation. We are not looking at a default here, but at years of accelerating inflation, which basically robs investors and labor of their real wages and earnings. We are looking at a currency that almost certainly will depreciate relative to other, stronger currencies in developing countries that have lower levels of debt and higher growth potential. And, on the short end of the yield curve, we are looking at creditors receiving negative real interest rates for a long, long time. That, in effect, is a default. Ultimately creditors and investors are at the behest of a central bank and policymakers that will rob them of their money.

Faber: It is much easier for a government to print money and default in the way Bill just explained than to come out and say "we aren't going to pay half our debts." Also, one of the big debates these days is between the deflationists and the inflationists. The deflationists claim the Dow will drop to 1,000 or less and the economy will contract sharply, and therefore you should be in government bonds, not commodities, equities or real estate. But if China and India continue to grow and car makers do better, as Mario said, commodities will do OK.

In a deflationary environment, tax revenues go down and fiscal policy remains expansionary. Deficits stay high, and even increase. Interest rates on government debt go up, and the quality of that debt declines. In a disaster scenario, I would rather own equities than government bonds. Since I am ultra-bearish, my preferred assets are equities and hard assets: real estate, commodities, precious metals and collectibles.

...

Marc, much as we dread to hear it, what are you thinking?

Faber: When you have short-term rates at zero, it is difficult to value anything. The market could be a lot more volatile in the next five years than has been suggested here. I expect to see the market move up and down at least 20% this year, as it did in 2010. The S&P was at 1219 on April 23. It dropped to 1010, and now we're at 1270. Daily trading hasn't been volatile lately, but there has been a lot of volatility in individual stocks.

The Dhaka Stock Exchange in Bangladesh dropped by 16% in two days. They closed it down and now they have riots. I guarantee you that emerging economies aren't going to tighten. Everywhere in the world, once markets drop by 10% or 15%, QE3, QE4 and QE5 will come.

Gross: How can you compare Bangladesh to tightening in Brazil or China or India?

Faber: The central bankers of the world are hostage to asset markets. They will not let asset markets drop significantly. They would rather let their currencies go. Worldwide, they will print money. In such an environment, I look to corporate bonds, equities, global real estate and precious metals and commodities. I don't want to be in cash and government bonds in the long run.

But where will the market go this year?

Faber: The U.S. market has almost doubled since March 6, 2009. Some emerging markets have gone up much more than that. A correction is overdue. Then we'll have the second leg of the bull market. In the third year of the presidential cycle, you want to be in the most speculative stocks. As we approach the 2012 election, the Fed is going to print like hell. I am bearish about everything, but in my bearishness I'll be better off in stocks than government bonds.

So you're bearish, but you're not.

Faber: I'm very bearish about the ultimate outcome.

Source: Barron's 2011 Roundtable

Hat tip JL for the text heads up on Faber's outstanding rants!