Monday, October 31, 2011

Where Are the Markets Headed?

Predictions for yearend 2012 (unless otherwise noted):

1. UP Standard & Poor’s 500-stock index: 1,428 Current: 1,229

2. UP 10-year Treasury yield: 2.86% Current: 2.14%

3. DOWN Inflation rate: 2.05% Current: 3.9%

4. DOWN Unemployment rate: 8.7% Current: 9.1%

5. UP GDP growth in fourth quarter: 2.5% Second quarter, 2011: 1.3%

6. UP Gold price per ounce on Sept. 30, 2012: $1,835 Current: $1,704

7. UP Value of euro: $1.40 Current: $1.39

8. DOWN S&P/Case-Shiller 20-City Composite Home Price Index: 136.6 Current: 142.8

9. UP Barrel of oil: $95 Current: $92.58

Data: Forecasts are analysts’ consensus compiled by Bloomberg. Current Data as of 10/25

“The best thing an individual investor can do right now is to hold 25 percent of his assets in equities, 25 percent in real estate, 25 percent in gold, and 25 percent in cash. If equities, real estate, or gold drop another 10 percent to 20 percent, put more cash in.” — Marc Faber, founder, Marc Faber Ltd.

“Protect against inflation! While inflation appears tame now, rising government deficit and debt levels combined with aging demographics could reignite inflation in the years ahead. Better to buy inflation protection now.” — Robert Arnott, chairman and founder, Research Affiliates

“Investors should do the same thing now that they should always do: Own a diversified portfolio of low-cost stock index funds and bond index funds, plus cash. If/when a market crashes or soars, they should say ‘thanks for the opportunity’ and rebalance.” — Henry Blodget, CEO and editor-in-chief, Business Insider

“When the world financial markets are in crisis, investors tend to go into cash or safe havens like U.S. Treasuries. This is the worst path. The best way to reduce risk is to ensure your investments are diversified across asset classes domestically and internationally.” — Mark Mobius, executive chairman, Templeton Emerging Markets Group

View the original article here

Darth Faber - Wall Street Journal (blog)

Bloomberg NewsMarc Faber in 2009

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.”

— Liam Denning

View the original article here

Sunday, October 30, 2011

CNBC's Hobbs Ambushes Marc Faber - Beacon Equity Research

By Dominique de Kevelioc de Bailleul

In a more sober manner from his appearances in Montreal and London, speaking from Zurich, a few hours prior to a formal announcement to the conclusion of the latest and endless emergency EU summits, Marc Faber told CNBC Thusday he expects the ECB and the Fed to make inflation a permanent feature of monetary policy in response to the global financial crisis.

“. . . What I think will happen eventually . . . the same will happen as in the United States, the ECB will print money one way or the other,” he told CNBC's Carl Quintanilla. “And, the debts that should be essentially written down to realistic value will continue to be carried on the books of banks at unrealistic values.”

“So the end crisis will be postponed until the sovereigns go bankrupt,” he said with Cheshire Cat smile.

And, of course, Faber, was right when the matter comes to a push-and-shove. Hours later, Associated Press release the following headline: EU official: Eurozone reaches deal for private creditors to take 50 pct cut on Greek bonds

When CNBC's David Faber asked Marc Faber (no relation) to elaborate, he said, “Well, before they [sovereigns] go bankrupt they'll print money, and they can print endless money, and as long as we have Ben Bernanke and Janet Yellen at the Fed, they will also print money, and they can postpone the endgame endlessly, endlessly not, but say for another five to 10 years.”

And of course, money printing translates to higher food and energy costs, as the result of the EU agreement prompted monstrous moves in oil, precious metals (especially the silver price) along with stocks on all global exchanges—with bank stocks soaring across the board somewhere in the five percent bracket. Oil was up more than $3 per barrel, while silver nearly rose $2.

In response to David Faber, Marc Faber noted an article he just read that indicated that education costs in the US rose 8 percent this year, serving as an example of the “unintended consequences” of money printing at the Fed and ECB. If central banks continue layering debt onto debt, the average American household won't be able to service the debt, he said.

That's when the “hour of truth” approaches, Faber added, bumbling another metaphor on top of a previous misstated metaphor, “the closets are bare”, a few years back in another CNBC interview. It's all in good fun and is half the reason for catching a Faber interview. But CNBC's Simon Hobbs was in one of his nasty moods as he reminded Faber of his 'Faber Shocker' at the World Commodities Conference in London on Tuesday, when the Swiss money manager end his presentation with another 'Faber Shocker', as reported by the Wall Street Journal:

“You should not only diversify your asset holdings, but also diversify where you hold those assets, in case they’re seized by politicians as the welfare state enters its death throes. The governments, they’re going to f— you all, that’s for sure.”

Hobbs asked Faber in a his characteristic stoic posture, “That's quite an negative view, don't you think?” Faber, still laughing from hearing his quote read back to him, said, “I said it differently.” How disappointing, if true.

Faber went on to explain that the US and EU governments are not looking out for its constituencies, but, instead, politicians are increasingly only looking out for themselves.

Hobbs then issued the zinger question to the Gloom Boom Doom publisher, turning the interview into the subject of Marc Faber.

“In Steve Jobs' new autobiography, Walt Isaacson talks about a conversation he had with Rupert Murdoch, and Steve Jobs says, 'For commentary and analysis today, the axis today is not liberal or conservative, the axis now is constructive versus destructive.' Which side of that line do you think you fall on?” asked the steely-eyed Hobbs.

“Well, I think I'm very constructive and I'm a great optimist in life, otherwise I would commit suicide in view of the kinds of governments we have now-a-days,” Faber retorted. “Because, for sure, they will take wealth away from the well-to-do people one way or the other, and from the middle class, they will take it away through inflating the economy and lowering the standard of living.”

In that environment, Marc Faber added, “I rather own equities than government bonds for the next 10 years,”

Carl Quintanilla, then, wraps up the interview by thanking Faber for his appearance. Faber responds, “It's my pleasure. It's my pleasure to be so optimistic,” beaming for having the last word with the sourpuss Hobbs.

Jason Bond's Free Stock Market Alerts and Analysis

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Stocks Beat Bonds Over 'Next 10 Years': Marc Faber -

Describing himself as an optimist despite his Dr. Doom reputation, Marc Faber told CNBC Wednesday that stocks will be a better investment than safe-haven bonds for the next 10 years.

Marc FarberThe author of the Gloom, Boom & Doom newsletter, in a CNBC interview, said "money-printing" central banks such as the US Federal Reserve will keep prices elevated for risky assets like stocks.

"When you print money everything goes up at different times, different asset classes," Faber said in a live interview. "I think that stocks may still continue to go up, and I would rather own equities than government bonds for the next 10 years."

Printing money is the way global governments will evade debt crises such as the one that is gripping Europe now, he said.

European ministers are convening to devise a way for Greece to get out of its debt jam, with a likely large bailout fund on the way for nations in similar distress as well as a separate allocation toward recapitalizing banks holding the bad debt.

Policymakers are facing criticism, though, for forestalling the crisis rather than solving it.

"The end crisis will be postponed until the sovereigns go bankrupt," Faber said. "They can postpone the end-game endlessly...say another five to 10 years. Each money-printing exercise brings about unintended consequences. These unintended consequences are higher inflation rates than had no money been printed."

The Fed, for one, has expanded its balance sheet to nearly $2.9 trillion in an effort to boost the economy through buying various forms of government debt. Faber has been a frequent critic of the quantitative easing practices, which he thinks will continue.

But he said he's trying to maintain a positive outlook despite the dim view he takes of the policy approaches thus far.

"I think I'm very constructive and I'm a great optimist in life. Otherwise I would commit suicide in view of the kind of governments we have nowadays," Faber said. "For sure they will take wealth away from the well-to-do people one way or the other, and from the middle class they will take it away through inflating the economy and lowering the standard of living."

The injections of new money supply also are harming the global economy and causing bubbles, one of which is in Chinese real estate, he added.

"If the Chinese bubble bursts one day, which inevitably will happen — maybe not tomorrow, maybe in three months, maybe in three years — when it happens it will have devastating consequences for the global economy," he said.

View the original article here

Tuesday, October 25, 2011

Marc Faber: Governments will “F— You All, that’s for Sure.”

By Dominique de Kevelioc de Bailleul

The never-ending quotable publisher of the Gloom Boom Doom Report Marc Faber moves the setting of his recent spate of 'Faber Shockers' to London, where he warned his audience there that governments' response to the debt crisis of the West will be to “f—You All, that's for sure.”

The 65-year-old Swiss money manager, Thailand resident, collector of Mao memorabilia, and investor of farmland, including land particularly suitable for an unmentionable crop that, he once said, “makes you very happy,” told Americans on a CNBC video hookup to his location in Montreal for the Oct. 12 interview, “Listen you lazy bugger, you need to tighten your belts, you need to save more, you need to work more for lower salaries.”

Faber, then, suggested American's need a strong leader like former Singaporean President Lee Kwan Yew—the man who institute public canning for a variety of crimes, as well as a ban on chewing gum because it ended up sticking onto the sidewalks.

As an example of how fun and entertaining commentary of financial markets can truly be, Faber is a refreshing counter weight to the not-funny Paul Krugman and his legion of Quixotic lemmings.

According to a Wall Street reporter covering the World Commodities Week conference in London, Faber said that Fed policy of negative real interest rates has encouraged consumerism in the U.S. as well as stacked credit surpluses with the U.S.'s major trading partner, China.  No kidding.  But there's more—that critical conclusion, that was left out in the 'analysis' of Faber's thinking on the matter.

“U.S. monetary policy focuses too much on boosting consumption,” The Journal wrote. “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.”

What's the implication here? It's China's fault for rising commodities prices? For those familiar with Marc Faber and his umpteenth explanation for the bulk of the cause of rising commodities prices has much less to do with China's consumption and has much more to do with U.S. policy (going as far back to NAFTA and GATT) of moving onto the next step of maintaining Dollar Hegemony through the policy adoption of imported goods from lower cost structure countries, especially Asian countries, to hide profligate monetary policy of the Fed. The flow of capital to the U.S., while the dollar was perceived as sound, now flows out as the props to the dollar collapse.

This game is nothing new, and the Chinese know it. A case in point:

As former Head of Princeton Economics Ltd. Martin Armstrong recently stated in a FinancialSense Newshour interview last week, the cause of the 1987 stock market crash was precipitated by the Plaza Accord—a G-5 meeting to coordinate a devaluation of the U.S. dollar against the Japanese yen and German mark, the currencies of the two major exporters to the U.S. at that time. The idea was that lowering the value of the U.S. dollar relative to the yen and mark would create more manufacturing jobs in the U.S. Instead, investors of U.S. dollar-denominated securities fled like a mob from a burning building, creating stresses on an already overstretched S&P to collapse.

Armstrong explains today's flight from the dollar this way: Say “you had bought a lot of assets in Mexico, and Mexico stands up and says, 'by the way, we're going to devalue the Mexican peso by 50 percent next week.' Don't you think you'd shout and get out of there?”

Back to the Journal article: “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,” the Journal added, implying, again, that China's oil consumption (admittedly grown rapidly) is responsible for a nearly 10-fold increase in the price of oil since 1999.

The flight from the world's premiere currency has taken refuge in gold, silver, commodities producing currencies, targeted equities markets and commodities—with the mother of all commodities, oil, the deepest and most liquid of all commodities markets as the preferred market for deep pockets heading the list of flight destinations.

While the U.S. dollar began its fall from the USDX 120 level, following the stock market bubble pop of 2000, the proxy of a gold standard, you guessed it, oil, has negatively correlated the USDX ever since.

Now that the Dollar Hegemony game is over, Faber knows it's time for the creator and enabler of the mess to “F—you all,” isn't it?  That little detail was left out of the Journal article.

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Preferred Stock Investing: A Simple Guide To 7% Yield - Seeking Alpha

At a time when the Federal Reserve’s policies have decimated savings accounts, savvy preferred stock investors continue to earn 7% yields from the highest quality preferred stocks at what many agree is acceptable risk.

The Fed’s low rate policy has pushed the interest rate on savings (bank CD and money market deposits) down to a point where inflation and taxes entirely consume any gains and then some. With inflation now at 3.87% and 24-month bank CDs only yielding an average of 1.28%, savers are losing almost 2.6% per year on that bank CD before paying taxes on the interest.

Lower Risk, A Broad Selection of Issues

Many companies issue two types of stock: common, which we are all familiar with, and preferred. Both can be purchased on the New York Stock Exchange, typically using a unique trading symbol. Over time, a given company can issue several “series” of preferred stock (series A, B, etc.) in order to raise cash for various projects. Those owning a company’s preferred stock are always paid its dividends (usually quarterly) first before those owning the same company’s common stock, hence the name “preferred,” so preferred stock investors have less risk of an unpaid dividend.

This feature of preferred stocks can make those issued by real estate investment trusts (REITs) particularly attractive. By law, REITs are required to distribute at least 90% of their taxable profits to shareholders. They do so starting with their preferred stock shareholders.

There are about 1,100 preferred stocks currently trading on U.S. stock exchanges. While that might seem like a lot, most are issues that, for a variety of reasons, risk-averse preferred stock investors will have no interest in. Preferred stock investors are generally more drawn to the security of the “highest quality” preferreds (those with the highest ratings and risk lowering provisions built in). Today, the highest quality preferred stocks are providing investors with an average annual dividend yield of 7% (equaling their long-term average).

Three Criteria Eliminate The Pretenders

The complexity of preferred stocks largely appears with a group of issues that most risk-averse investors would never consider investing in. Applying three simple criteria eliminates these issues and the risk and complexity that come with them.

Criteria #1 - Investment Grade: By limiting the choices to those preferred stocks with a Moody’s investment grade rating, we cut the list almost in half in one shot, down to about 600 issues (you can use S&P ratings if you wish; the result will be about the same). With 600 investment-grade issues to pick from, most risk-averse investors would rather not fool around with “speculative grade” alternatives.

For example, Kimco Realty (KIM) develops neighborhood shopping centers and its Series G preferred stock (KIM.PG) is rated investment grade; Baa2 by Moody’s* and BBB- by Standard and Poor’s. Not the top of the scale, but KIM.PG offers a 7.75% annual dividend to its shareholders.

Criteria #2 – Cumulative Dividends: With common stocks, if the company decides not to pay a dividend, you’re out the money. But many preferred stocks have a “cumulative” dividend provision, meaning that if the issuing company misses a dividend payment to you, it still owes you the money downstream (its obligation to pay you accumulates). Limiting our choices to just cumulative dividend preferred stocks eliminates another 200 pretenders.

Self-storage company Public Storage (PSA) provides several examples of high quality preferred stocks such as its Series W with a 6.5% coupon rate (PSA.PW on Yahoo Finance). PSA.PW is an investment-grade rated traditional preferred stock that offers a cumulative 6.5% annual dividend.

These two criteria (investment grade and cumulative dividends) are pretty easy for most risk-averse investors to warm up to. We are down to about 400 remaining candidates.

Criteria #3 – Minimum Rate of 6.5%: Historically, the highest quality preferred stocks carry annual coupon rates between 6% and 9%. Not too bad compared to that 1.28% being paid by bank CDs. But rates go up and down over time and you want to be sure that you always have some breathing room if rates fall too far. A 6% preferred stock (i.e., the bottom of the barrel) can become hard to sell once rates start rising again and higher paying alternatives are introduced. Preferred stock investors can avoid this pitfall by simply sticking with preferreds that offer a fixed dividend rate of at least 6.5%, giving you time to sell once rates bounce off of 6% and begin heading back up.

By eliminating candidates that offer less than a 6.5% annual dividend, we are left with about 150 extremely high quality preferred stocks to pick from and now have additional principal protection at the low end as rates rise and fall over time.

Less Exposed To Quarterly Profit Fluctuations

A common stock dividend is a distribution of a company’s profits, assuming there are any. Common stock dividends are therefore subject to change or cancellation at any time.

Conversely, preferred stock dividends are set upon issuance, committed to and planned for in advance and are therefore considered more reliable than the common dividend, which tends to reflect the long-term growth of quarterly profits. Consequently, the income earned by preferred stock shareholders tends to be much more stable.

Add A Capital Gain From Your “Built-In Buyer”

Usually, the issuing company of a high quality preferred stock is allowed to retire (“call”) the shares five years after introduction. They may or may not do so depending on conditions at the time. But knowing this provides preferred stock investors with an enormous double benefit.

In the event of a call, shareholders will receive the “par” value (usually $25) per share in cash from the issuing company. So if you always purchase your shares for less than $25 each you (a) add another layer of principal protection to your investment, plus (b) position yourself for a future capital gain in the event of a call. The issuing company, in that event, becomes your “built-in buyer.”

There are always plenty of high quality preferred stocks available to pick from for less than par (on October 21, 2011 there were 28 such issues). I'll share more information in Part Two of this article on Tuesday.

* Moody’s investment-grade ratings range from (highest to lowest): Aaa, Aa1, Aa2, Aa3, A1, A2, A3, Baa1, Baa2 and Baa3.

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Monday, October 24, 2011

Goldmoney's James Turk, $11000 Gold Price - Beacon Equity Research

By Dominique de Kevelioc de Bailleul

The result is in! At the end of the rainbow, the world will see a five-digit gold price, $11,000 per ounce as the 'fair value' of gold—for now—as the printing presses have yet to stop, in which case, more money printing translates to even a higher gold price down the road, according to Goldmoney President James Turk.

“Having filled the role of international money for 5,000 years, gold has been supplanted by fiat currency for the past 40 years because of government force,” Turk stated in an exclusive KWN report. “However, this nascent experiment with fiat currencies is not going well, as evidenced by growing global imbalances, unchecked increases in debt and financial derivatives, ongoing debasement of currency purchasing power and worsening monetary turmoil.”

So how does Turk assess a 'fair value' of $11,000 per ounce for gold, an asset which pays no dividends or interest?

Turk released his much-referenced 'Gold Money Index' calculation, a simple formula, really, in response to inquiries from his followers who'd like to follow his Index for estimating fair value of gold for themselves.

Turk demonstrates that by graphing the result of dividing total central bank foreign exchange reserves by total gold holdings of said central banks yields a trend line 'fair prices' versus the market prices for gold plotted over time.

Between the years 1971 and 1984, the correlation between the 'fair price' and actual market price appears uncannily close to 1.0, according to his graph. In other words, as central banks increased fiat foreign reserves, the market adjusted the gold price up to reflect the increased monetary level during that 16-year period.

For those who remember, back in the 1970s and for much of the early 1980s, the most watched statistic besides the BLS employment report and US Commerce Department's CPI and PPI, was the Fed's release of money supplies M1, M2 and M3, released each Thursday. Back then, everyone was tuned into the connection between money supply and gold.

Since 1984, however, Turk's chart shows the gold price in relation to money supply leveling off as sharply declining CPI numbers and interest rates set off the end of the 15-year bear market in stocks. The demand for stocks was greatly enhanced and encouraged by the passage of the tax code 401(k) in 1978 by Congress, which didn't go into effect until Jan. 1, 1980, further fueling stocks as most plans offered only stocks as a means for investing for retirement. Stocks were in, and gold was out of favor!

Early on, only eight million taxpayers utilized the tax-deferred law more commonly referred to as just 401k. But by 2005, more than 70 million participated in the government sanctioned plan as a way to defer taxes on earned income until after retirement, which ignited steady and voluminous amounts of cash into stocks—the gas tank, if you will, for the bull market in stocks. Few plans offered gold as an option throughout that time period, and may explain a good part of the divergence of retirement money going into stocks and away from gold on a relative basis during the stock bull market of 1984 through 1999.

As if on queue, the gold price took an additional beating from another method by which the spread between the price of gold and its fair value widened. UK's Chancellor of the Exchequer Gordon Brown's infamous sale of 60 percent of Britain's gold, unloaded at the very bottom of the market between the years 1999 and 2002, put additional pressure on the gold price for another three years. From its peak of approximately $850, set in Jan. 1980, the gold price reached a low of $255 in 1999.

But since the year 2002, the gold price has mirrored central bank holdings of foreign reserves, but the level at which the yellow metal started to mirror those reserves began at a much lower level than it otherwise would have, thanks to Brown's absolute bottom prices received for so much of UK gold reserves—a truly disastrous trade by the former superpower.

“Despite this remarkable rise in the gold price, it is clear from the above chart that gold’s undervaluation has barely budged for more than a decade,” Turk explained. “The reason of course is the growth in the quantity of national currencies held by central banks (the numerator in the Gold Money Index) is rising about the same rate as the weight of gold held by central banks (the denominator in the Gold Money Index). So gold remains tremendously undervalued.”

Turk's analysis dovetails quite nicely with another studied man of the markets, Swiss money manager Marc Faber of the Gloom Boom Doom Report, who told NewsMax in mid-September that, though the gold price has risen to above $1,800 per ounce (at that time), it still remained grossly undervalued within the context of historical relationships with similar and other metrics used by Turk.

“In fact, I could make an analysis to show that the price of gold today is probably cheaper than when it was $300 per ounce based on the increase in government debt, based on the increase in monetary base in the United States and based on the expansion of wealth in Asia,” said Faber when ask of his opinion regarding the gold price.

Mr. Gold Jim Sinclair, 20-year veteran bond trader Paul Brodsky, Sprott Asset Mangement's Eric Sprott, prolific financial author Steven Leeb, and former Head of Princeton Economics Limited, Martin Armstrong, to name just several, all hold price targets of $10,000, or above, for the price of gold when the day that all fiat money finally squares itself with central bank reserve levels. Sounds preposterous?

Sinclair was laughed at by outsiders of the gold community in 1999 following his prediction of $1,650 for gold by 2010. Fewer pundits dare belittle him today for his $12,500 gold price forecast.

Especially after the gold price broke $1,000 per ounce in Mar. 2008, many pieces offering methods of value for an ounce of real money have littered the web, with all, save a few, calculating the long-term gold price to five-digits—at least! So far, Richard Russell won't budge from his call for $6,000 for the yellow metal. But more time is all the 50-year veteran of the markets may need to come around to the thinking of Turk and the gang.

A final note about the Goldmoney president, James Turk: it can safely be said that Turk is a cautious, conservative and measured communicator with with his wide audience. He neither gets too excited nor despondent during the volatile moves in the gold price.

Of all people, if James Turk can demonstrate a $11,000 value to gold and confidently make the call, that estimate could turn out to be a bare minimum appraisal. But from time to time, he'll be out with another adjustment to his target price as he's done on several occasion already during this bull market.

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The Gold Price Fundamental In 2012 - Seeking Alpha

If the fundamental value of gold measured in US-Dollars wasn’t a mystery before; then the past few weeks have added another dimension to the confusion.

Supposedly gold is a “safe haven,” so when the rumors of Armageddon started circulating about the euro, the price ought to have gone up? It didn’t, it went down…by much for that theory. Is the latest story that the euro-refugees figured the 10-Year Treasury was a better bet than gold…even after the downgrade?

So much also for the idea that gold is an inflation hedge; that pretty much went out the window after all of the QE didn’t cause hyper-inflation, but even-so the price of gold as measured in dollars doubled. Marc Faber says he will keep buying gold until Ben Bernanke stops printing; well Ben appears to be saying that he doesn’t think any more QE will help and it’s time US Congress grew up and started doing its job instead of just milking the cow for their own accounts, so is Marc still buying?

OK, the idea that gold is somehow driven by the same thing that drives the price of oil (whatever that is) still sort-of holds. Sort-of…at least on that score the spikes in gold prices do appear to follow spikes in oil prices although by that metric the price should be a lot less than now, as in about $1,000 based on historical trend-line correlations between gold prices and oil. There again, the dramatic decoupling of WTI from Brent starting in 2009 is confusing, as in which one should we be tracking now, if either?

Putting aside what’s driving the fundamentals it looks like there might have been a bit of a bubble and bust in gold 2008/9 (or a bust and a bubble in the dollar if you are an Austrian), and the recent events look suspiciously like that too?

If those were indeed bubbles-and-busts, then if the bust was fully expressed, one would expect the “fundamental” at the moment of time between the bubble and the bust, to have been somewhere in-between, as in the square-root of the top multiplied by the bottom?

If that’s right we can draw two “fundamentals,” put a line through them, and Voila!!

(Click charts to expand)

If you buy that logic then the line A-B is the trend, and if indeed “the trend is your friend,” then gold at $1,600 was a wonderful opportunity to exchange some more worthless fiat dollars for some more gold, and then wait contentedly like a fat cat licking milk off your whiskers, for the world to completely disintegrate?

Perhaps, although there are sometimes risks deciding on the direction of a trend from just two points of data. Sure something obviously happened at the start of 2009, and indeed George Soros famously bought gold at that juncture whilst telling everyone it was a bubble; but now according to the reports he has sold, although that may simply be because he liquidated his fund and retired, or perhaps the maestro-bubble-surfer bailed just-in-time?

If so then the line C-D might perhaps express the trend better than A-B, and the “bottom” of $1,600 was in fact, a false-bottom?

That would at least gel with the historical relationship between oil prices (expressed in dollars) and gold prices (expressed in dollars), or if you are an Austrian, oil expressed in ounces of gold.

Does two points of reference trump two points of data?

Going back to the thorny question of the “fundamental,” one irritating thing is that the last time anyone tried really hard to completely destroy the US (and the world) economy by creating uncontrolled credit, which led up to the stock market crash of 1929, the price of the dollar was pegged to the price of gold (the Austrians would have approved of that), and thus there is no clear precedent for what happens to the “real” price of gold after you drip-feed bankers LSD for an extended period of time.

But perhaps the price of gold in dollars has got something to do with the level of recourse debt that the US government has been piling up; “recourse” as in there is no collateral but the borrowers have the option of trashing your credit score if you don’t pay the money back, or even if you joke that you might not?

Outside of writing IOUs to the widows and orphans fund, and municipal debt (not counted as government debt in USA but counted in Europe), there are two important measures of US government debt;

The total value of US Treasuries outstanding; those are mainly owned by Americans (or American-based pension funds and insurance companies, and the Fed)…and those are pretty benign because if no one wants to roll them over you can pay them off simply by printing more dollars.The total outstanding value of US Treasuries bought by foreigners, mainly so as to finance the current account deficit, which is essentially the trade deficit, and in recent years has been largely on account of America buying oil from “aliens” at somewhat unattractive prices (or at least “unattractive” to Daisy). The problem with that sort of debt is if you start printing-to-pay, word gets around so it’s hard to roll it over, and so if there is any suspicion you might do that the aliens might start changing the dollars for something else (gold perhaps), and then you get a run on your currency, and more important, you can’t buy any oil, and so you have to bicycle to work (assuming you got a job).

Putting aside whether or not the price of oil expressed in terms of gold might have anything to do with the pathological aversion of average Americans to walk anywhere except on a treadmill or to go bicycling, or even to take public transport, what happened since gold in dollars was $250 in 2000 was that both those numbers went up dramatically:

For ten-years up to early 2010 all three lines moved sweetly in tandem with a correlation of over 90%, and then gold and total US Treasuries shot up, but America started to sell fewer Treasuries to foreigners (mainly because the trade deficit went down so they didn’t need to borrow so much to pay their oil-bill).

So which is the right line? If indeed the cumulative collective incompetence of the US Government, as measured by how far it trashes its fiat currency by getting into debt that can only be paid back by printing (as opposed to the traditional approach of collecting taxes), which is the main driver for the price of gold, then which element of that is the real “fundamental” driver?

If it’s total US Treasuries outstanding then gold is priced correctly now, and line A-B is probably the trend; if not and the real driver is simply America’s dependence on foreigners to borrow money so it can buy oil, then gold looks pricy now, as in a bubble compared with the dollar.

And (now) we all know what happens when reality hits.

Either way the trend-line of US Treasuries outstanding appears to be flattening off; that might be good for America, but it may not be good for gold.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

View the original article here

Thursday, October 20, 2011

Occupy DC and the Fed

Marc Faber Says Americans Need To Tighten Their Belts, Save More and Work More for Lower Salaries

Business Intelligence Middle East

Marc Faber the Swiss fund manager and Gloom Boom & Doom editor spoke Tuesday about the Occupy Wall Street protests, blaming lobbyist and Washington for the current economic stagnation and characterizing Wall Street as a "minority" that is only "using the system."

He suggested protesters should instead go after the real culprits in Washington and "also occupy the Federal Reserve on the way."

Speaking in an interview with CNBC from Montreal, Faber blamed "Keynesians and US Democrats for their interventionist policies.

"There has been too much intervention in the Western World where the share of the total economy that goes to the government and is government sponsored has grown," he said.

"That essentially makes it very difficult for the Western World to grow substantially...I don't see how the Western World, including the US, Japan, and Western Europe can actually grow. They're going to stagnate," Faber predicted.

Stagnation, in turn, leads "people to ask questions and to go after minorities," he said.

"Wall Street is a minority, anyone else would have done the same, they use the system but they didn't create the system. The system was created by the lobbyists and by Washington. So they [the protesters] should actually go to Washington and also occupy the Federal Reserve on the way," Faber suggested.

The protesters say the Wall Street bank bailouts in 2008 left banks enjoying huge profits while average Americans suffered under high unemployment and job insecurity with little help from Washington. They contend that the richest 1% of Americans have amassed vast fortunes while being taxed at a lower rate than most people.

What America needs

Faber blamed an excessive regulatory environment in the US for curtailing initiatives by businesses, leading to a drop in net investments.

Businesses no longer employ and invest capital in the US, he said, preferring instead to invest in china or somewhere else in the world where the regulatory environment is more favorable.

"If you look at net investments in the US, it has gone down for the last 20 years, and it's now negative. In other words, basically the capital stock of America is not being replenished...althought it's being replenished somewhere else in the world. At the same time, the policies of the Keynesians have always encouraged spending," the renowned investor noted.

"We're not going to get out of a recession by saying spend, spend, spend. That is wrong!"

"The lack of saving is the problem of the United States."

In one of his most memorable recent rants, Faber then went to explain what the US [really] needs to do: "I tell you what the US needs. The US needs Lee Kwan Yew [Singapore's first Prime Minister] who stands in front of the US and tells them: Listen you lazy buggers, you have to tighten your belts, you have to save more, work more for lower salaries and only through that will we get out of the current dilemma, that essentially prevents the economy from growing."

Markets and the Dollar

Faber, who predicted the stock market crash in 1987, turned bearish shortly before the 2007-2009 bear market and called the March 2009 level a major low which is not going to be broken any time soon, expects market volatility to continue for a long period of time and sees global liquidity tightening.

He is quite positive about the Dollar because whenever global liquidity is tightening "it's bad for asset prices but good for the US Dollar as was the case in 2008."

Tyranny of the masses

In an interview with Tom Keene and Ken Prewitt on Bloomberg Surveillance on Thursday, Faber was asked about one of the themes in the current issue of the Gloom Boom & Doom Report regarding alleged widespread corruption in many US institutions, including the political and corporate systems.

"The problem with government is that the original intention of, especially a democracy, is very good," he started by saying.

View the original article here

Wednesday, October 19, 2011

Ackman Thinks Housing Recovery Is In The Works - Forbes

NEW YORK - OCTOBER 01: Pershing Square Capita...Bill Ackman

Bill Ackman and Pershing Square Capital Management think the housing market will recover within the next five years – and they think Fortune Brands Home and Security is the investment to take advantage of that rebound. FBHS, a Fortune Brands spin-off that manufactures faucets, cabinets and security products, is poised to explode if the housing market chews through its excess inventory begins to recover.

“In order for this to be a good investment, it assumes a partial recovery in the housing market in the next 5 years,” says Ackman. “I think that’s a very conservative assumption.”

He’s not the only one. When Ali Namvar, a Senior Analyst at Ackman’s Pershing Square, presented a bullish case for FBHS at the Value Investing Congress today, he quoted Warren Buffett; “I don’t know exactly when [excess housing inventory] hits equilibrium but it isn’t 5 years from now,” said Buffett earlier this year. “I think it happens actually reasonably soon.”

Fortune Brands Home and Security, which spun off from Fortune Brands just two weeks ago (read about the spinoffs here) is poised to capitalize on a housing recovery. But it isn’t exposed to the downside risk of the sector, argue Namvar and Ackman.

“We like this one because it’s very low risk. We think if we’re wrong they’re still going to grow in a very slow housing market,” says Namvar. “It may not have the upside of some of the very-levered companies right now, but I like the safety of it.”

50% of FBHS’ business is in segments that are doing very well. Moen and MasterLock, two of FBHS’ strongest brands, are thriving in the plumbing and security sectors. The rest of company’s revenue comes from areas tied more to construction – things like cabinets, windows and doors. Despite providing 50% of revenues, though, the latter half only accounts for 20% of the company’s earnings before interest and taxes.

“This is where the explosion can happen if the housing market recovers,” says Namvar.

Tuesday, October 18, 2011

Another Marc Faber Shocker - Beacon Equity Research

The always-entertaining Marc Faber has done it again.  Speaking with CNBC’s Joe Kernen yesterday, the eclectic Swiss-born money manager from Chiang Mai, Thailand, blasted the American people for its whining, tantrums and bellyaching now that six decades of dollar hegemony has left a tab too enormous to pay.

The message to Americans who saw his appearance on CNBC, which, by the way, has quickly spread throughout the Web is: “Listen you lazy bugger, you need to tighten your belts, you need to save more, you need to work more for lower salaries.” A truly vintage Faber shocker.

Another guest, who was in studio, chimed in following the Faber rant, “Well, that’s essentially what David Cameron is saying in the United Kingdom and it doesn’t seem to be working too well, so far.”

“Yes, because no one wants to work in the UK,” Faber chuckled.

Looking a tad puffy in the eyes, Faber originally began the Kernen interview by noting that he had just been chatting with some “chums” with his “blonde” in Montreal, where he was telecast for the early-morning appearance at CNBC’s studio in New York.  So those familiar with Faber’s moods just knew several more quotable Faberisms were in the offing.

In between the colorful rhetoric, Faber said the present gyrations in the markets can be traced to a tightening of global liquidity brought about by European banks front-running the scheduled debt maturities time bombs in Greece and Italy (among other countries not evident on the radar due to transparency issues, bogus accounting and stress tests).  And when liquidity becomes tight, as happened in 2008, the risk-on trade comes off and the dollar trade comes back on—the knee-jerk reaction among traders that commodities guru Jim Rogers alluded to in his interview with Russia Today on Oct. 4.

“As far the dollar is concerned, the reason I’m actually quite positive is that global liquidity, despite of the fact that the ECB and the European governments will flood the market with liquidity to pay the sales out, that global liquidity is tightening,” said Faber.  “And whenever global liquidity is tightening, it’s bad for asset prices but good for the U.S. dollar as was the case in 2008.”

Faber blames policymakers and lobbyists for U.S. debt woes, suggesting to Occupy Wall Street protesters, without mentioning them by name, that attacking the free market system is misguided, but going after the architects of a failed crony capitalism system, instead, is understandable.

“As to that huge level of debts, I don’t see how the Western world, including the U.S., Japan and Western Europe can actually grow,” Faber explained.  “They’re going to stagnate. And when you have stagnation over a longer period of time, people start to ask questions and then they go after minorities. And Wall Street is a minority – they are a minority and anyone else would have done the same. They use the system. But they didn’t create the system. The system was created by the lobbyists and by Washington. So they should actually go to Washington and also occupy the Federal Reserve on the way.”

What the U.S. really lacks, according to Faber, is an iron-fisted ‘leader’ such as Singapore’s first prime minister, Lee Kwan Yew—the man who believed public caning was appropriate punishment for 40-listed criminal offenses.

“I’ll tell you what the U.S. needs,” Faber began to rant, as only he can.  “The U.S. needs a Lee Kwan Yew who stands in front of the U.S. and tells them, ‘Listen you lazy bugger, you need to tighten your belts, you need to save more, you need to work more for lower salaries’”

View the original article here

Monday, October 17, 2011

The Lessons of History - (blog)

While we use historical cycles to help guide our analytical process, today I'm going to discuss some other historical tendencies that appear to be unfolding in textbook fashion. Marc Faber is a Swiss born economist and investor who has lived in Asia for over 30 years. As I like to say, he wrote the insightful version of Tom Friedman's "The World is Flat" about 5 years before Mr. Friedman. Faber's book, "Tomorrow's Gold", is one of the most educational books I've ever read about economics, politics and the financial markets. It is how these intersect that is the strength of the book, in my opinion. In reviewing the book, which was published in late 2002, it is still shocking to see how Faber "predicted" much of what has occurred over the past decade by examining history and applying the lessons to present times.

One major lesson of history is that when countries become as indebted as most western countries are, there are a variety of societal and political trends that begin to develop. First, currencies are systematically debased/devalued in order to inflate the debt away. This practice has been relied upon from the Romans to the 18th century French. The 20th century included many examples, with the German Weimar Republic being the most prominent and ultimately tragic. As we've seen in the past decade, the US is now firmly on a path of currency debasement, with the British, Swiss, Japanese and now broader Europe joining the printing party.

Once excessive levels of debt result in economic stagnation and the evisceration of the middle class, several other things typically develop. Bankers/speculators are typically blamed for causing all the financial and economic ills. Anti-immigrant and anti-semetic movements usually blossom, and ultimately war becomes a rallying point for politicians to deflect the attention of voters. The US has certainly seen its share of these kinds of issues developing.

Grassroots political movements in each major political party are now deeply entrenched as anti-immigration and anti-banker/Wall Street. This crystalized for me personally this week, as I had an NYPD policewoman recommend as I left the New York Stock Exchange building Wednesday that I remove the NYSE security badge I had innocently left on my lapel. While I don't consider myself a banker or "of Wall Street", obviously a protestor may think otherwise! And as was seen with a lady in the Coast Guard being spit on by protestors in Boston, the acrimony appears to be growing.

The other big news this week related to an alleged Iranian plot to murder a Saudi diplomat on US soil and highlights other "playbook" and growing risks. I've seen all kinds of US politicians saber rattling on TV and even the President has had very stern words. While I used to discount that OUR politicians could be so cynical, I no longer think so. While I am certainly not accusing anyone at this point, I believe an honest assessment of history suggests that politicians facing the kind of economy and electorate we have in the US (i.e. VERY anti-incumbent) may be more motivated than usual to be hawkish when it comes to foreign policy.

View the original article here

Silverman: Investing strategies will carry some risk - Times Record News

There are many ways to invest your money. There are different investment types, different ways to invest in those types, different strategies for managing the investments, and different tactics for moving things around. For my discussion, I'm going to consider two viable ways to handle your investments: buy-and-hold and rebalancing.

Buy-and-hold is pretty self-explanatory. You buy an investment and you keep it until you need to turn it into cash to spend. This is a lazy person's dream. It also works out pretty well. After all, if you don't do anything between buying and selling, it's hard to make many mistakes.

There are really two main problems with buy-and-hold. The first one is that companies change, and many don't last 30 years. This is rather easily solved. Instead of investing in individual companies, you invest in mutual funds. That way you get a mix of securities in one nice wrapper and if something needs to be replaced, someone else does it for you.

The other problem with buy-and-hold is that the portfolio can get out of balance. For example, let's say you put half of your money in a mutual fund that invests in stocks and it earns an average of 10 percent a year. You put the other half of your money in a mutual fund that invests in bonds and it earns 6 percent a year. So at the start you have a 50-50 stock-bond split. Thirty years go by. You're now approaching retirement. Looking at your portfolio, you find that you have less than a quarter of your money in bonds. Your 50-50 split became 77-23, stocks are now over three-quarters of your portfolio. Over the years stocks grew more than bonds, so your portfolio got riskier — the opposite of what most retirees want.

Rebalancing, well, rebalances things. You might rebalance once a year, once a quarter, or even every day. Rebalancing gets rid of the biggest problem that buy-and-hold has: your portfolio getting unbalanced. In the previous example, the portfolio would have been driven back to its original 50-50 split by rebalancing.

However, there is a psychological problem with rebalancing. If you were rebalancing once a year back in the late '90s you would have been selling off stocks during a bull market. Many people in that position would say to themselves, "Self, why would I want to sell down my stocks which are doing well and buy bonds with the proceeds? I should sell some bonds and buy stocks with the money."

Or, if you rebalanced at the start of every year, in 2009 you would have just experienced half of your stock holdings getting wiped out. How likely are you to sell off some of your nice, safe bonds and buy some of those evil risky stocks? If you're normal, not likely at all.

There are many variations to this theme, each promising to fix the problems in either strategy. But I've outlined the main differences and problems that I've noted most people have with them. With either, you can be successful. Just don't think either one is problem-free.

View the original article here

Marc Faber: Go Long The Dollar, But Occupy The Federal Reserve

Faber expects volatility to continue (not necessarily means a downside to the markets), but dollar should be a long trade as whenever there's a bubble, e.g. tech bubble, housing bubble, stocks bubble, and commodities bubble, usually after the bubble bursts, there typically will be a 10-15 years of volatility before markets settle down to reignite an uptrend.

"Despite the fact that the [European Central Bank] and the European government will flood the market with liquidity to bail themselves out, global liquidity is tightening.....Whenever global liquidity is tightening it is bad for asset prices but good for the U.S. dollar, as was the case in 2008."

He thinks there had been far too many "interventions" by the Western governments, where the total share of the economy that's government owned or sponsored have grown tremendously,.  Add to that, the high levels of debt, it is almost impossible for the developed countries including Japan, the U.S. and Western Europe to grow.  

When the economy stagnates over a long period of time, people ("the 99%) seeking answers start to go after the "top 1%" minority like Wall Street, which took advantage of the system for profits.  However, it was Washington and the lobbyists who created the system to begin with.  So from that perspective, Occupy Wall Street should move to DC and Occupy the Federal Reserve on the way, Faber laments.

His solution for the U.S. economy - Flat tax on everybody "would be a good measure", and reducing the restrictive regulatory environment to encourage business to start investing again.  Moreover, the lack of savings is the biggest problem of the U.S.  Essentially, the U.S. will have to work more, and get paid less to get out of this mess.

EconMatters Commentary 

Dollar, despite the Federal Reserve's continuous QEs and twist, is still holing up well attesting to the dangerous state of the world's finance and economy.  So in the near term, dollar could be still king, but with a high degree of uncertainty longer term, depending on how the Euro, the closest competing currency, will come out from this seemingly ever expanding EU sovereign debt crisis.

As to the economic and fiscal state of the U.S., we are not as pessimistic as Faber, but have written many times that the U.S. has many structural issues in the labor market, and the vital decisions of the country are  and will be made based on politics, and by politicians who can't walk the talk.  If the U.S. does not start to make some fundamental changes, it could eventually prove Faber right.  

Towards the end of the interview, Faber made reference to Lee Kuan Yew, the first Prime Minister of the Republic of Singapore for three decades.  Lee Kuan Yew retired in May 2011, but has remained one of the most influential political figures in South-East Asia.

In the three decades during Lee's tenure as PM, the country has been transformed from a developing economy to one that's the most developed in Asia.  However, the "Singapore Model" is based partly on a socialistic structure (e.g., single political party, state planning, and state-owned enterprises).

As to the current economic and fiscal state of the U.S., we are not as pessimistic as Faber, but have written many times that America has many structural issues within the labor market and too many of the country's vital decisions are and will be made based on politics and by politicians who can't walk the talk.  If the country does not start to make some fundamental changes, it could prove Faber right.  

Dr. Doom Roubini, in an interview with Business Day less than a month ago, also noted Singapore could be one country that he was not averse to state involvement in the economy and held up Singapore as an economy that might be shielded from global shocks.

So we find it quite interesting that as a result of the global financial crisis, more and more Western economists are now moving towards socialism, while the more socialist countries such as China are becoming more capitalistic.  Could this be the New World Order underway? .

View the original article here

Nowhere To Hide - Forbes

The Economist  cover line gets the mood perfectly, just as it did two weeks ago with “Be Afraid,” about the bad prospects for the economy. “Nowhere To Hide” refers to the dangers of investing today. It suggests cash is king, as this blog has done in recent weeks. It reminds us just how much money was lost by those who sat in Japanese shares in 1989– before that deluge– as it sniffs out a Japanese-style stagnation for the US and possibly the rest of the world.

Treasuries are a risk because the current rate of inflation is 3.8%– more than the coupon on 30 year bonds(3.10%) or 10 year notes(2.10%) Equities look expensive especially if  corporate profits are about to drop off.  In short, it’s a bloody predicament that has got a great many people holding tons of cash until they  see if Europe stabilizes without a sovereign  crash and a bank solvency crisis– and what that would portend for the US.

Savers in cash are waiting to see if the politicians can straighten out the world. They are plainly anxious about the prospects for 0% GDP by the developing world going forward. A hard landing by China wouldn’t help matters. “Investing  during a time of crisis,” the Economist theme catches the notion of the immediate future not looking promising.. We are “confronting the next leg of the most intense deleveraging  cycle in modern history,” says David A. Rosenberg, the proverbial bear at Gluskin, Sheff in Toronto, who has been absolutely correct in his predictions.

We are in a global recession scenario that is going to get worse before it gets better. It is a time of utter discontent.

Sunday, October 16, 2011

Gloom, Boom & Doom Publisher M. Faber on Bloomberg Surveillance - (press release)

TOM KEENE, BLOOMBERG SURVEILLANCE: The Gloom, Boom and Doom Report, one of our more popular guests, Marc Faber. Good morning.

MARC FABER, PUBLISHER, GLOOM, BOOM & DOOM REPORT: Yes, good morning. How are you?

KEENE: Well, I think I'm good. We've got the Volcker Rule out and banks under siege. Do you care if we have a new banking structure? Do you care that our financial system needs to become more conservative?

FABER: I think it is a very good move that banks become far more conservative because banks, when you think of it, your salary is probably paid into a bank account and you expect that money to be available to you at any time. So the bank has a fiduciary function, and it has a certain social function. And with your deposit, the banks should not go and speculate.

So my proposal is basically to ring fence the depositors, and the domestic operation that is the traditional bank, and then farm out into separate entity what the bank does with money in terms of hedge fund activity. There are a lot of banks they are just like hedge funds. They take huge positions here and there, and then we have losses - as occurred for UBS in London, that basically should not be your concern as a depositor.

KEN PREWITT, BLOOMBERG SURVEILLANCE: Well, Marc, we've had more than one complaint here from guests on Bloomberg Surveillance that they won't invest in banks because the financial reports are not transparent enough. You cannot figure out what is going on in there.

FABER: Well, basically, we had the stress test in Europe and out of 90 banks, only six or seven were deemed to be unsafe. The safe banks, including Dexia, are not safe because the stress test was not properly conducted.

PREWITT: Well, is that the case here in the U.S., too?

FABER: Well, it is very difficult to really assess the quality of earnings of banks. But I am told by experts here in the U.S. that the auditors have become very, very tough and that banks basically are at their lows recently. JPMorgan was at less than $27. That $27 now is $32.

And at their lows, basically the banks were selling below book value. So some people say that American banks are actually a very good investment opportunity at the present depressed level.

KEENE: Marc Faber with us, the Gloom, Boom & Doom Report. Marc, I want to switch gears here. You have a fabulous chart courtesy of the Financial Times, which really describes the gilded age, the plutocracy that we are in now. It is the ratio of income of the top one percent, -


KEENE: - to the bottom 90 percent going back pre-Depression. It is absolutely stunning. Historically, with you being such a great student of our economic history, is it normal where we are now? Or is it normal where we were in the fifties, the sixties and the seventies?

FABER: I think normal is very difficult to define, but very clearly it is not normal where we are now. But we cannot blame Wall Street and well-to-do people for the mishap, for this ratio to have exploded on the upside. We have to blame essentially expansionary monetary policies that favor assets. So you have low consumer price inflation, you have no wage inflation.

In fact, the problem in America is that real wages, real compensation has been down since the 1970s. But at the same time, asset prices, equities, real estate and so forth have gone up dramatically, and that favors people who have these assets. And so the ratio expanded and you have now a record wealth, inequality, and income inequality.

KEENE: Let's come back.

View the original article here

Wednesday, October 12, 2011

3 investing lessons from Steve Jobs - The Motley Fool

The business and technology worlds lost one of their brightest with the passing of Steve Jobs last week. The man who created – and recreated – Apple (Nasdaq: AAPL) was clearly both the driving force and marketing genius behind one of the world’s favourite consumer electronics brands.

Jobs, with partner Steve Wozniak, started Apple in the fabled garage, before famously being sacked by the Apple board some years later, only to return triumphantly to steer Apple through its second act.

In between, Jobs put his immense energy and creativity into the Pixar movie studio he bought from George Lucas for a relative pittance (around US$10 million including a cash injection into the business) in 1986. He later sold Pixar to Disney for US$7.4 billion!

The life of Steve Jobs has lessons for technologists and leaders, and I believe there are some key lessons to be learned by investors to improve the quality of our company analysis.

Passion Matters

Steve Jobs retained perspective throughout his life. His writings and videos of his speeches (of which his Stanford commencement address is the best known) show a man who was able to separate himself from the crowd – avoiding ‘groupthink’ and keeping a relentless focus on excellence.

In today’s sanitised business (and political) world, there is an abundance of market research. Many businesses and political parties continually research new ideas by asking groups of people in the ‘target market’ for their views on a new idea or a new product.

Steve Jobs may well have tested his new ideas in market research, I don’t know. What we do know is that he took a very single-minded approach to new products. He chose to be innovative and he chose to be creative. Jobs said “You can’t just ask customers what they want and then try to give that to them. By the time you get it built, they’ll want something new”.

Focus on the user

Jobs – and by extension Apple – had a very specific product development approach. They took a ‘Field of Dreams’ approach; if you build it, they will come. To that end, the team at Apple simply focussed on making a great product. They wanted to create something they were proud of; something they themselves wanted to use.

It takes a degree of guts (and perhaps arrogance) to assume that your own desires can be translated into a mass-market offering but for Apple, it worked. Importantly, Apple didn’t compromise on passion or quality, instead believing that excellence would bring its own rewards:

“A lot of companies have chosen to downsize, and maybe that was the right thing for them. We chose a different path. Our belief was that if we kept putting great products in front of customers, they would continue to open their wallets.”

‘The Vision Thing’

The business career of Steve Jobs was one of a visionary who knew what he wanted to create, a leader who could variously inspire and drive a team of like-minded individuals, and a marketer who built one of the most powerful brands of our time – twice.

Commentators (and investors themselves) tend to lump investors into groups – value vs. growth and technical vs. fundamental most common amongst them. I’m sure investors have bought and sold Apple over the years quite happily as members of the groups in this paradigm.

What none of these artificial divisions tend to prioritise highly enough is the organisation itself. Not the business or the brands – though these are important – but the leadership and culture.

Foolish take-away

Warren Buffett was right when he said “When a management with a reputation for brilliance tackles a business with a reputation for bad economics, it is the reputation of the business that remains intact.”

However, as long as the business economics are attractive, management quality – and the culture it creates – can add immense value to an investor’s returns. Steve Jobs is likely to be an extreme example, but when you dig into the truly impressive organisations, the best of the best, you find management and a culture that is unusually strong.

Next time you go to the balance sheet, the growth numbers or the share price chart, take a minute (or more) to ask yourself whether you know enough about the company’s management and culture. You’ll almost certainly make a better decision when you can answer that question in the affirmative.

Are you looking for some top quality stock ideas? Motley Fool readers can click here to request a new free Motley Fool report titled 2 Safe Ways To Play The Commodities Boom.

The Motley Fool’s disclosure policy is bite-sized. This article authorised by Bruce Jackson.

View the original article here

Copper Thieves Persist; Lawmakers Respond - Copper Investing News

By Gerelyn Terzo – Exclusive to Copper Investing News

Copper entered the danger zone in September when it resumed bear market territory and staged a frightening drop of 25 percent. Adding insult to injury, scrap metal thieves are attempting to marginalize the value of the commodity by swiping wires and materials in the most brazen fashion.

Copper theft has risen across continents as robbers seek to liquidate assets in a hurry. In the US city of Memphis, Tennessee, for instance, the occurrence of scrap-metal theft via air conditioning units skyrocketed some 515 percent this year in comparison with 2005 levels, according to The New York Times. Market participants are responding with heightened awareness and supporting ramped-up legislation that could turn the tables on criminals.

Today’s copper

Considering copper’s recent descent to market-crash levels, wavering demand and credit fears stemming from Europe, it is fair to question the near-term fate of this commodity. If prices remain under pressure, the incentive for criminal activity could diminish. Although there is no crystal ball, the only direction that copper appears poised to take is up.

Traders who are cautiously optimistic about prices are drawing a distinction between copper’s most recent plight and the market crash of three years ago. Today’s market fundamentals appear to be on the side of the raw material.

“Different to 2008, we have no sharp cancellations of orders but more a cautious approach with companies still not too negative about prospects for next year,” Herwig Schmidt, Head of Sales at Triland Metals in  London, told Copper Investing News.

While strength and stability in copper’s price are cheered, these characteristics seem to serve as an inspiration to criminal activity. Without the proper controls in place, a commodity rebound could be tainted by crime.

Copper’s paradigm shift

Historically, commodity thieves emerge when both the price and demand for raw materials and natural resources are peaking. Despite the recent market sell-off that left copper traders nervous, however, desperate times continue to bring out the worst in otherwise unsuspecting residents.

To place copper theft in perspective, it’s no Pink Panther jewelry heist. Wyatt Redmond, vice president of the Eastern Recyclers Association in Nova Scotia, is cited in CBC as saying that less than three percent of the world’s scrap metals are the object of theft.

Nonetheless, commodity crimes create hardship for many innocent targets. The pain is felt financially by countries, local communities, as well individuals and families who are indirect victims and who may or may not follow the course of commodity prices. And it undermines the market forces that dictate supply, demand and price for commodities.

Unemployment fuels mischief

Since 2008, the global economy has been roiled by a worldwide recession, soaring unemployment and precarious credit markets. A double-dip recession continues to threaten and some argue that — barring results from the formal indicators, primarily gross domestic product — there is little evidence to support that we have avoided this dreadful fate.

Perhaps it is these conditions — combined with generally loosely regulated scrap metal and recycling markets — that have driven otherwise non-assuming people to a life of crime. Copper criminals could soon meet their nemesis, however, as market participants turn their attention toward the escalating problem.

“In some countries it is already illegal for scrap traders to pay for goods in cash from a certain sum. Also some countries require ID of sellers. It is still not resolved but under discussion,” said Schmidt, who also presides as a delegate for Eurometrec, an umbrella organization for metals traders across Europe.

Market participants are calling for harsher penalties for intruders, including severe prison time and greater fines. Legislation is still taking shape across regions, but dialog between industry representatives and lawmakers is occurring. Perhaps more importantly, awareness of the issue is spreading. Law enforcement is engaged and asking for common-sense measures to be taken across receiving yards before transactions are completed.

Characteristics of copper theft

After losing his job in the auto-parts industry earlier this year, a groom-to-be and his fiance’ resorted to unraveling local utility poles to finance their wedding. The pair allegedly swiped copper wires from a small Pennsylvania municipality and proceeded to sell the scrap metal in the recycling market, according to CNBC. Now the couple faces theft charges and the town is left to fix approximately US $7,200 in damages across 18 utility poles.

Copper thieves appear to be equal opportunity criminals who know no borders. South Africa identified commodity theft as a problem of such proportions that officials created an index to monitor activity.  According to CNBC, a spike in commodity thievery beginning at the height of the global economic crisis forced the hand of the country’s Chamber of Commerce to respond.

Now, the agency routinely measures criminal activity in the Copper Theft Barometer. In early 2011, the region was losing millions of dollars each month to copper thieves, although the totals were trending lower by mid-summer.

The act of copper theft appears to transcend age, as well. Earlier this year, a 75-year old Georgia national displaced the nearby country of Armenia from the electrical grid in her attempt to recover scrap metal. The retiree was apparently lured by the preceding run-up in copper prices and cut a fiber-optic line in her haste to pocket some of those profits.

Copper demand

The US is a major exporter of scrap metal. Indeed, a record was set when nearly one-million tons of copper and metal alloys were exported from the country in 2010, according to the Copper Development Association. A surge in demand over the recent decade has been fueled in large part by an industrial revolution unfolding in emerging economies, including China.

In fact, traders peg the recent pullback in copper prices to waning manufacturing activity in the far East. Some suspect that copper’s reversal is not only in response to the credit crisis gripping European countries, but also a sign of contagion to the Asian economy.

Not so, says Jonathan Barratt, Commodity Broking Services managing director, on CNBC Asia. While acknowledging copper’s technical dip into bear-market territory, he insists that consumption will return and the Chinese, for one, are merely playing it shrewd. “China is actually waiting for the market to come to them because of the crisis in Europe and America and is not eager to take on the markets… I still feel that China needs to restock and they’ll be on the bid at any dip,” said Barratt.

Perhaps if  copper thieves had the fortitude to follow China’s example and wait for the price of the raw material to bottom, they too could legally participate in an eventual comeback. Whether scrap metal regulators are ready or not, market signs appear to be pointing toward recovery. “Regarding the direction of copper prices, there were many discussions during LME week which led to a slightly more positive picture as the industry only slowly felt the impact of the financial markets,” said Triland Metals’ Schmidt.

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Tuesday, October 11, 2011

Global Debt Crisis to Help Dollar, But Nothing Else: Faber

Suffocating global debt problems and overreaching intervention programs will be good for the U.S. dollar but bad for asset prices otherwise, investment guru Marc Faber said.

Dr. Marc Faber

The uneasy time for financial markets will lead to an extended period of high volatility—both up and down—for the markets as economies grow slowly, the author of the Gloom Boom and Doom report said in a CNBC interview.

His dollar call is based on the notion that investors will turn to the safety of the U.S. currency even as governments try to inject liquidity into the market to save the ailing financial system.

"Despite the fact that the (European Central Bank) and the European government will flood the market with liquidity to bail themselves out, global liquidity is tightening," Faber said. "Whenever global liquidity is tightening it is bad for asset prices but good for the U.S. dollar, as was the case in 2008."

The dollar has been on the rise recently against global currencies, gaining more than 5 percent since late August. The U.S. currency has posted a nearly 7 percent gain against the euro during the same period as policy makers have struggled to come up with a solution to the Greek debt crisis.

However, a strong dollar for several years has been poison for risk assets, particularly a stock market that has come to depend on a weak currency to boost exports as domestic consumption has lagged.

For Faber, government meddling in the free markets is one of the primary reasons why growth will lag and recession looms.

"We've had far too many interventions in the Western world where the share of total economy that goes to government and is government-sponsored has grown," he said. "That essentially makes it very difficult for the Western world to grow sustainably...I don't see how the Western world including the U.S., Japan and Western Europe can grow. They're going to stagnate."

Faber suggested that Occupy Wall Street protesters "go to Washington and occupy the Federal Reserve along the way."

"We have expansionary fiscal policies, we have expansionary monetary policies but we have restrictive regulatory policies and it curtails any initiative by the small businessman and the large businessman," he said. "He doesn't employ and invest capital in the U.S. He does that in China or somewhere else in the world where the regulatory environment is more favorable."

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Wednesday, October 5, 2011

Gold could fall to $1100, says Marc Faber -

The price of gold, which has fallen in recent weeks as part of a broader market sell-off, has even further to fall, Marc Faber, author of the Gloom Boom, and Doom Report, told CNBC Monday.

"We overshot on the upside when we went over $1,900," said the fund manager, who has 25% of his portfolio in gold.

"We're now close to bottoming at USD 1,500, and if that doesn't hold it could bottom to between USD 1,100-1,200."

Faber, who said that the recent sell-off had come about following nervousness about industrial metals, added that a 40% correction wouldn't surprise him.

US gold suffered its biggest daily drop in more than five years on Friday.

Recent falls in the gold price came after a sustained rally which saw some predict that prices would hit USD 2,000 or even higher.

While he is bearish in the long-term, he forecast a rebound in markets in the short-term.

"Both equity markets and gold markets have become very oversold, and I think a rebound is occurring," he said.

"Following this rebound, which I expect to get underway this week, there will be a longer slowdown."

John Woods, Chief Investment Officer at Citi Private Bank, told CNBC Monday that he believes gold will fall to around USD 1,400 before continuing its long-term rise.

"It was massively over-bought in the last couple of weeks and now it will get over-sold," he said.

"I don't think the long-term trend is broken."

The markets started off Monday in jittery mode after the failure of the weekend's International Monetary Fund (IMF) meeting to announce any new action on the euro zone debt crisis.

Faber predicted a short-term rebound when he spoke to CNBC at the start of August. Since then, the S&P 500 has fallen by 50 points.

While the spotlight has been on Greece and the euro zone in recent weeks, Faber believes that the sell-off is actually being prompted by a slowdown in China.

"Asian markets are weak, Asian currencies are weak and economically sensitive stocks are weak because there's a more meaningful slowdown in China," he said.

"You have a capital goods level where capital spending increases dramatically and companies keep spending to a high level, but because of the acceleration, it can lead to recession simply by the economy growing at a steady rate, and I think we are at this point in China."

Some observers have warned that the true scale of China's debt is much larger than official statistics suggest, as much is held at the local government level after a huge stimulus following the post-Lehman slowdown.

However, Faber said that long-term investors who "believe in the Asian economic growth story" should not be spooked.

"In China at least deficits and government intervention is leading to infrastructure spending. There are overcapacities but ultimately these will be used," he said.

Faber also maintained that "it would be a huge disaster if banks weren't able to speculate," after the resignation of UBS chief executive Oswald Gruebel Saturday following the much-publicized failure of internal controls to halt a USD 2.3 billion loss, apparently from one rogue trader.

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Marc Faber's October Outlook: Forget EU Debt Crisis, A China Meltdown Is The Real Threat

Marc Faber is out with the latest issue of his famous Gloom, Boom and Doom Report, which is always a must read for serious investors. Unlike most of the other talking heads, Faber has an excellent track record. He correctly predicted the top in the equity markets in Nov. 2007, and caught the bottom in March 2009, making his subscribers a lot of money. Here is a summary of his October 2011 report:

Stocks--Yes, stocks are very oversold, but that does not mean they cannot go lower. The dreadful price action in both Copper and the Shanghai Composite points to new lows for the equity markets. After US stocks make a new low below 1100 on the S&P 500 (SPY), there could be a year-end rally followed by a more meaningful decline into 2012. Investors should use any bounce in stocks as an opportunity to reduce their equity exposure. At this point, Faber advises no more than 25% of your portfolio be in stocks.

Gold--At $1900 gold was extremely overbought, and a correction was necessary. However, Faber now believes that gold could undergo a significant correction similar to what happened between 1974-1976, when gold fell 40%. Faber notes that a large decline in gold is now a distinct possibility. The first support level for gold is at the 200 DMA around $1500. Despite the potential for a pullback, Faber still likes gold and believes it will trade significantly higher.

Dollar--It's true that the dollar has no intrinsic value and is being printed into infinity, but the US dollar will be your best friend for the next few months. As global liquidity contracts on EU debt concerns and a possible hard landing in China, Faber advises investors to be long the dollar. Note this is a short-term call; longer term the dollar is going to zero.

Treasuries--Despite being bullish on the US dollar, Faber does not reccomend treasuries, noting that they are overbought and susceptible to a large correction.

China and Copper--If you think the market is falling because of incompetent EU bureaucrats you are behind the curve. According to Faber, the price of copper is signaling a very serious slowdown (if not complete collapse) in China. This is what is really behind the move down in all commodities. A hard landing in China would be devastating for the global economy. The Shanghai composite is making new lows along with copper, which is very bearish. Also stay away from the Australian and Canadian currencies. If China crashes, these markets will get massacred.

Emerging Markets--Stay away from these at all costs. All emerging markets are falling and making new lows. Even though Faber likes these longer term, they could still fall another 20%-30% before they would be good buys. These markets could even fall to their 2009 lows. However, this will represent a good buying opportunity because these markets will be the first to bottom.

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Marc Faber releases Gloom Boom Doom Report - Beacon Equity Research

Hold onto your seats, says Swiss money manager and publisher of the Gloom Boom Doom Report, Marc Faber; it’s going to be a rough ride ahead for investors.

In his latest view on the markets, the quintessential contrarian suggested in his October edition of the Gloom Boom Doom Report that the real threat to global markets is China, not the global financial crisis epicenter of Europe.

China, he stated, may be on the verge of economic collapse, stemming from the dreaded one-two punch of rapidly increased capital goods overcapacity to match significant reductions of global demand for its products.

The recent precipitous decline in the price of cooper tells Faber that China’s rapid GDP growth may have been somewhat of a mirage for a spell.  What was once thought of as a clever means for China to dump U.S. dollars in favor of ramped-up infrastructure spending in the People’s Republic, with numerous reports streaming into the West of newly-built cities erected in anticipation of millions of soon-to-come inhabitants, may, instead, result in another example of a Mao-like central planning scheme gone bust.

In 2010, at a conference in Russia, hedge fund manager Hugh Hendry of Eclectica Asset Management opined about the very same risk he had seen to the Chinese economy, quipping, at that time, “Confucius say: Though shall not invest in overcapacity.”  Hendry proceeded to warn of a surprise economic collapse in China reminiscent of Japan’s meltdown of 1989.

In recent years, massive infrastructure increased as a percent of GDP in China, while consumer spending dropped as a percent of the total output of the Chinese economy, temporarily front-loading stellar growth results that, it appears, now, are unsustainable and at risk of collapsing the Asian juggernaut.

Faber, who’s been spot on, so far, with his prediction for weaker gold prices in the short term (before a next leg up in the metal becomes a play against serial central banking mishaps), stated that this latest correction in gold may last a while longer, still—and might take the precious metal to the $1,100-$1,200 level before the bottom is reached—a la 1974-76.

“We’re now close to bottoming at $1,500, and if that doesn’t hold it could bottom to between $1,100-1,200,” Faber told CNBC’s Steve Sedgwick on Sept. 25. It appears Faber hasn’t backed off his call of the 25th.

As a backdrop to Faber’s thinking at this time, it should be noted, too, legendary currencies strategist John Taylor of FX Concepts suggested a 50% decline from the $1,900 mark was in the cards for gold.  But, more impressively, Taylor told Bloomberg during the summer months of 2011 that gold could touch $1,000 after reaching a new high of $1,900.  Eerily, Taylor made those calls when gold traded at approximately $1,500 per ounce while the gold market was about to enter the seasonally slowest months of the calendar year of July and August.

Faber suggested in his latest report to subscribers that a drop he envisions for gold to the $1,100-1,200 range would mimic the historical performance of the gold price during the 1970s.  In 1974, gold traded as high as $200, up nearly six-fold from the official $35 peg of 1971, then sold off off to $100 by 1976.

But as history shows, the damage to the dollar had already been done following the Nixon Administration’s executive order to decoupled the dollar from its gold backing in 1971.  After the 1974-76 decline of 50% in the gold price, from the $200 high of 1974, back down to $100 in 1976, the gold price never looked back, skyrocketing to $850 per ounce by January 1980—a nearly 85% compounded return during that 42-month period.

Could Faber be right again, or has he gone too with in his prediction in the wake of ongoing fat-tail moves in emerging market currencies and European sovereign bonds?  Conventional wisdom today is Europe is going down and it’s about to get uglier than the Lehman crisis ever got.  But, unlike the Lehman event, everyone’s expecting the worse outcome in Europe this time around.  Has the gold market already priced in a catastrophe in Europe, or not?  We’ll see.

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Tuesday, October 4, 2011

Singapore $, gold only safe havens: Russell Napier - Daily News & Analysis

This is a very pessimistic presentation so I’ll be brief, CLSA strategist Russell Napier said last week, before suggesting that the only two safe havens for investors are Singapore dollars and gold.

Napier’s talk at the CLSA Investors’ Forum on Friday was followed by a lunch presentation by Marc Faber. The contrarian investor, who goes by the nickname of Dr Doom, was only marginally more positive than Napier and ensured that all those attending the final day of the forum went away on a sombre note.

Investors may have been on a high, literally and figuratively, after listening to Christina Aguilera perform several of her hits, including ‘Beautiful’ and a reggae-styled version of ‘What a Girl Wants’, at the CLSA gala on Thursday night. But they were reminded the very next morning that the current environment is presenting few opportunities for cheer.

The primary message that Napier conveyed in his address, which had stolen its apt title ‘Darkness on the Edge of Town’ from another musician, was that the economic environment will get worse, much worse, before it gets better.

“Things in Asia will get better after 12 months,” he said. “The rest of the world will stay bad for 10 to 15 years.”

Napier also argued that the fact that some banks would be eradicated in the next few weeks was a given and beyond debate. “It is amusing when people talk about a double-dip recession,” he said. Napier himself believes the world has been in a recession since the financial crisis started.

In the summer of 2011 the burden of funding the US government shifted to the savers from the printers [of money], Napier said, reinforcing the point with a slide titled ‘Uncle Sam Needs You’.
US Treasuries used to be a safe haven but this year the supply of US government bonds is at a record high. Foreign buyers are still picking up Treasuries, but more slowly. And the onus of funding the deficit is falling on, among others, money market mutual funds, which are dumping corporate bonds and commercial paper in order to do so.

“This represents a structural change, a change in world history,” said Napier. “There is a long, honourable history of running up government debt in the US.” Until 1932 the US government only borrowed money to kill people, he added, but since then it has been not to kill but to keep people alive. I think I should get into advertising, Napier said, noting that an apt slogan for the US Federal Reserve would be: “The Fed: Printing the American dream since 1913”.

“I agree with Churchill who said: ‘America will always do the right thing but only after exhausting all other options’,” Napier said, alluding to the fact that the US is soon going to have to support a generation of baby boomers unless the social contract in the US is renegotiated. Since Napier feels the US is going to be unable to solve the many problems that it is facing, including the social contract, in the near future, he is negative on any investments in US stocks.

He was equally bearish on the prognosis for Europe. Everybody at the conference thinks Europe will deflate, devalue and depreciate, he said, but it is worse than that - Europe will nationalise.

“Get your money into gold and Singapore dollars; keep your powder dry and wait in the next six to 12 months to buy Asian equities,” Napier advised, noting that he expects the Singapore dollar to become the Swiss franc of the 21st century. Napier’s bullishness on the Singapore currency is driven by the fact that the country has a capital account surplus and the government is also unlikely to impose capital controls on inflows and outflows — something he predicts will happen in Europe very soon.

“Wherever Asia is on the spectrum of free-market capitalism and communism will not move much in the next 10 years,” he said as further support of his case that investments in the Singapore dollar and Asian equities are the way forward.

Napier conceded that his suggested investment strategy was inoperable for the majority of CLSA’s clients. The Singapore dollar market is not deep enough and simply investing in gold provides no diversification. But he suggested European and US investors should at least take their money out of existing investments and move it into an Asian currency.

“The biggest risk in Asia is Pakistan,” said Napier in response to a question about whether political instability in Asia could influence his recommendations. “The fact that it is a nuclear state is what keeps me awake at night.”

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