Transcription
We're approaching a major top. I think it will be a disaster, quite frankly. I think a complete disaster. Their highest risk is that financial assets and other assets are grossly inflated. The economy has been financialized. And in my view, the US is heading towards a fiscal crisis.
Hello and welcome to Wealthion. Maggie Lake joining me to discuss the outlook for the global economy is Marc Faber, editor of the Gloom, Boom, and Doom Report. Hi Marc, it's lovely to see you again.
Well, thank you for having me on your program and uh good day to all your viewers and listeners.
So Marc, when we spoke at the start of the year, you were last on here at Wealthion, you thought US stocks looked expensive and you sensed some doom and trouble ahead. You uh I mean, a lot of happened between then and now. We've had US and Iran at war. We saw oil spike, markets sold off, but then they rallied back up to records. We have trillion-dollar IPOs. How are you feeling now? What are you seeing now?
Well, we're even closer to a top in the market. I'm just writing about major tops. Uh but I want to stress uh one point, that over the last 12 18 months, the advance of the market has been very narrow. In other words, some stocks made new highs and we have statistics about the new highs, the 12-months new highs. They didn't expand very much on the market going up. And if you look at the number of stocks above the 50-day moving average and above the 200-day moving average. They haven't expanded much. And so it's on the 200 days move moving average about 60% are of stocks are above and 40% below. In a very strong market, 80% should be above the 200-day moving average. And we have statistics that show the performance of the Mac 7 stocks and other words, the Magnificent 7 shares. And they have actually gone down this year. They're not up. But what has been exceptionally strong are anything to do with AI, artificial intelligence, and also space-related companies and so forth. And that has driven the indices to new highs. And the AI boom is for real. I mean, there is a capital spending going on that is huge. And uh the question is, of course, in the past, whenever you had a sector that expanded dramatically as a percent of the economy of GDP, say railroads or the automobile companies at the beginning of the 19th of the 20th century, or in more recent years, the oil industry in 1978 to 1980 and so forth, these were heavy capital investments that took place. And most of these periods ended in colossal losses for most participants. I'm not saying that there are no winners. Say, out of the dot-com bubble, there were winners. And but but very few. It's like in the mining industry when you have exploration companies, approximately 95% of the exploration companies go under. And 5% are huge winners. And that I would expect in the AI space to happen. That there are a few big winners. And maybe they won't even make much money because if you look at the 19th century, none of the canal companies made money eventually. Even the Erie Canal went bust and that is the most successful canal in the history of mankind. But also the railroads by 1895, over 90% of railroads had to be restructured because they were not profitable. And the same can happen now with AI. They they can be very successful, but not profitable.
Profitability is another story. And the capital expenditures are mind-boggling. I mean, this is now really a capital spending boom without precedent in our lifetime. I mean, this is the biggest capital spending boom we've experienced as a percent of the economy. So, my view is that we're approaching a major top or maybe we've seen it already for the typical stock. Because if I look at the major top in 1973, most of the indices had actually peaked out in 1965, some in 1968, and most stocks peaked out in '68. But the Nifty 50, the Kodaks, the Polaroids, the Xeroxes of this world, they all peaked out in '73. Most of them have also faded away or gone bankrupt or disappeared altogether. Uh which is interesting that the most popular stocks didn't do well thereafter. And also in the dot-com bubble, I mean Cisco has now reached a new high, but it took a long time for the new high to manifest itself. So, the question is really for investors, are we approaching a peak in some stocks that will drag down the indices because there is so much indexing going on? The The money in index funds is now larger than in actively managed funds. And if these few stocks that are driving the market higher, including Nvidia and Tesla and Apple and Microsoft and so on, if they go down, they may drag down the S&P and everything.
But in the case of Japan, the bubble in 1989, the Japanese market went down and the Nasdaq in America and the S&P in America went up in the 1990s. So, the money can actually leave one market or one sector of the market and go in another. At the present time, what strikes me in the US is the exceptional strengths of financial stocks and the emerging strengths of home builders, which would say or indicate that the market believes that interest rates will rather trend lower in future. And I'm actually long bonds in the US because everybody else is short.
So, let's unpack a couple of things there. First of all, um it sound Do you Do you have a view as to whether the rolling over of this market is a correction or is it something more serious? Will we see a rotation and just some froth come out of the AI names or is this going to kind of cascade into something that looks more like a crisis?
I think it will be a disaster, quite frankly. I think a complete disaster. Because you see, say in '73, the market capitalization in the US was about 25% of GDP. In other words, the market cap was much, much smaller than the real economy. Now, the global market cap and the global bond market capitalization, in other words, the total financial system as a percent of the economy is a multiple, multiple. So, in former times, you could say, "Oh, the economy is doing this. The housing starts are going up." and so forth. And that had an impact on the market. But nowadays, and Trump is very well aware of that, the market has an impact on the economy. That's why he, in a perfect world, would like to support the market, especially to support his companies and his family's companies. There's, of course, no hope for his companies. I mean, a recipe for investors to make money is to sell short any stock that has to do with a Trump family. That is a recipe, a guaranteed recipe to make money.
Why do you say that?
Because all they all go down. They all go down. The these stable coins are a complete disaster. They enriched the family by roughly 700 million dollars and impoverished the investors who bought this garbage by around 700 million dollars.
Yeah, that doesn't seem to bother anybody though. But so So
This has to be said, it's a transfer of wealth of ordinary people to the Trump family.
Yeah, that and that's made a lot of people uncomfortable. Do Do you um for when you you say this is a disaster and and the and that you know, the market is now so big. Is Is the financial market is it the US economy? Are they one in the same now?
The the economy has been financialized. There's no question about this. Uh about the failure Of course, markets will eventually uh assert themselves. And in my view, the US is heading towards a fiscal crisis because the deficits are very hard to reduce in a democracy. A politician who goes to the people and tell them, "Look, uh we made mistakes in the past, and therefore you have to now tighten your belts. Mhm. You have to work more, pay higher taxes, and uh you will get less benefits." is unlikely to be elected in a million years.
That I guarantee you. The poli- politicians who go and tell, "Oh, we're going to give you this benefit and that benefit, and subsidize your children, and give you free health care, and God knows what." They are going to be elected. And uh
That's not just a US situation, right? We've seen sort of populism on the rise across the globe, wherever any kind of election's held.
Correct. This is not unique or endemic to the US. Europe, in some European countries, it's even worse. But I have to say, in most emerging economies, uh this is not the case because we don't have entitlement programs. You understand? In the US, first First of all, the debt situation is very high. And the interest on the government debt in the US is unlikely to go down because the deficits are large and add to the government debt every year. The interest rates are unlikely to go down because the inflationary pressures, with or without oil going up or staying at the high level, the inflationary pressures are for real. and I would expect food prices to continue to go up. So, the the Fed cannot actually lower interest rates considerably at the present time. I have people like ShadowStats, John Williams, who calculate the inflation rate in May, the consumer price index, at 12.5% per annum. And all your viewers, I guarantee you, they don't live with an inflation of 4% per annum. They live with an inflation of something like between 6% and 12% for sure. For sure.
It's funny because you we we as we are speaking, Kevin Warsh is going to have his first meeting, and a lot of people expect him to come out and say that inflation is he's not going to use transitory, but is is transitory. It's and we already see oil prices coming down, and that they are going to find a way to be able to consider a rate cut. You think that's fantasy?
Well, look, there are two Kevin Warshs. The one is the economist. I have a high regard for him as an economist. And I think he's at heart potentially an outstanding Fed chair. But, he's also working for the Trump administration. And the Trump administration, one of their objectives is to get good election results in the fall, in the midterm elections. And that's why Trump is akin to end the war because the war in Iran is about the most unpopular war in the US. But, people think, rightly, why are we there? What are we actually doing there? And so, Trump he wants to finish the war, but he also wants to do something against inflation because he people see it. The tariffs increased the rate of inflation or increased the price level that the consumer pays in the department store and the supermarket and at drugstores meaningfully. And it increased interest rates where whereas people had expected interest rates to go down. That's why homes and cars are relatively unaffordable because the interest rates have gone up. The mortgage rate is currently still above 6%. So, it's not exactly a bargain. And in my view, Woz is as an economist, he would like to increase rates, but as a politician and in the administration, it will be difficult for him to raise rates. Difficult. But he can do it. He he he should do it because um if he doesn't do it, I think that the price level in America will rather go up further than down.
What's driving Why are we facing an Where do you think the inflation's coming from if we see that as back and forth as it is that they say there's a US-Iran deal that's going to open the strait. We've seen oil prices drop significantly. What's driving the higher inflation that you see?
Well, you see the oil price has gone up before a lot. And now we have a profit-taking phase like in the case of other commodities. But what is driving the inflation? I tell you, the AI boom has an impact on pricing. Because what the AI boom and the data centers require a lot of electricity. They require a lot of water. And so these prices tend to go up. And because it's so gigantic within the economy, it generates additional demand as well as the defense spending. So the demand is there. And then you have the import duties that are also increasing prices. So in my view, you're not going to see much lower inflation rates unless that is the question. Unless the economy tumbles.
You also have you mentioned import and that's I think you're referring to tariffs. And you also have you know, there's talk of Iran imposing some sort of toll on the straight. Some some sort of payment system may be put in place. That's to be seen, but that's that's one of the things that people are talking about. China is expanding its export restrictions from critical minerals to other goods. The US is blocking what Iran can do. Are we in an era of weaponized supply chains? And if so, what does that do to commodity prices?
Well, the peace deal is going to maybe stop the immediate warlike actions. That may be possible, but it's not sure because an important participant is absent, namely Israel. What the Israelis will do, nobody knows. I can't imagine that they will just back down and go home and kind of embrace Hezbollah in Lebanon and that they will give back the Gaza Strip and so forth. So, the hostilities are likely to continue there. And regarding the peace deal with Iran, if I mean, we we we haven't seen the deal yet. That there may not be much of a deal, except a deal to negotiate. So, the results are uncertain. But part of the deal, apparently, is that the US or other countries would sort of invest money. They're talking about $300 billion in Iran. In that case, if that happens, it's not going to happen overnight, but over a few years, it generates additional demand. And this additional demand is rather inflationary than deflationary. But as I said, the capital spending boom is such and the restrictions on immigration into the US is also kind of lifting the cost of labor in the US. Uh therefore, I would expect the level of price increases to continue to increase over time. And number two, the monetary policy is sort of in a straitjacket because uh the debt payments or the interest payments on the debt are such that they're now the largest expenditures. So, if you pay the interest on the debt, but you don't increase the quantity of money, interest rates unquestionably go up. But you can print money, and with the printed money, I mean, you print it electronically, you can buy the bonds or support the bond market to some extent.
I say to some extent, not 200% extent. But that is then inflationary. You understand? It's very difficult to come out of an inflationary spiral. And that's where we are. Also, say the interest rates now I get on my deposits, say 4%. I can buy bonds, some of them yield 5%, some of them yield 6%. Whereas in 2020 I got nothing essentially on my cash. But but the money that I get on my cash, I have this additional money, uh so it's sort of inflationary. Do you understand?
Volcker, he erased inflation. But in '79 increased in one go the discount rate by 250 basis points in one go. Uh ask Walsh, he's not going to increase interest rates by more than a quarter point. They they kill him if he increases it by a half a point or a point.
Well, he can't, right? Because of the debt.
That is exactly the point. The US is now in a straitjacket, where actually it's very difficult to reduce the increase the rate of increase in monetary aggregates. Because when you slow it down, the stock market will get hit. And this is about the last thing Trump and his cronies want that the stock market goes down. And Warsh, as the economist, as I said, he probably would like to increase interest rates. But I can tell you that his father-in-law and his wife, who own SLOUDER, they don't like increase in interest rates.
I What you So
sorry for him because intellectually he's very bright character. He's very well-educated economist that actually understands the economy and has the knowledge of classical economists like Marshall and Keynes and Schumpeter and so on, which Bernanke and even less Yellen never had, never had.
I think that people are hoping that because of that that he will find some way to get out of this straightjacket. It's a very Houdini-like prospect, but I think that that that there's some hope of that. Um It's it's a tough one, for sure.
Well, miracles do happen. As I said, as a Christian, I must believe in miracles.
We're pinning our hopes on that. That's a But you you So you lay out a situation where the the US is got a fragile market that looks like it's going to end going to be a disastrous end when it when it rolls over, and we'll talk about what might have that make that happen. But the the the market looks tenuous. It's in We've got an inflation problem. We have a Fed that should be hiking, but can't. And yet you said you're buying bonds.
Well, I'm not buying anything with great enthusiasm. But you must understand the last few years, we have to realize this. Say you take as a starting point of the current bull market uh March 6 uh 2009. That was the low, 666 on the S&P. And since then, we've gone up a lot, a lot. We had essentially 15 years of rising asset prices and rising uh bond prices until 2020 and increase in art prices, in collectibles, and the whole emergence of cryptocurrencies. This is not very interesting phenomenon. That suddenly these cryptocurrencies a year ago were worth $4 trillion. $4 trillion is not a small amount. But it's the amount the US spent on the Middle Eastern wars over the last few years. Anyway, is a lot of money. And the question is of course also this cryptocurrencies. Did it occur because of excess liquidity? Or did the cryptocurrencies increase the currency in circulation and liquidate the system even further? This is an academic question. I don't have the answer, but I suppose both effects reinforce each other. In any case, we have sufficient liquidity at the present time, but we also have some sectors where liquidity has dried up, namely commercial properties, and in residential, many markets are down 20 to 30% for condos. For homes, less maybe around 20% down.
Is this in the US only the US?
Everywhere.
Everywhere?
Yes, I mean I the and also stocks, I mean you look at software stocks, a lot of them are down almost 50%. You take a stock that was very popular 1 and 1/2 years ago, Oracle, it's down almost 50%.
And others also, I mean the fund and fund-related stocks haven't gone up in 12 months, and the market ex-funds and So, in my view, there is a sort of a not a diminishing liquidity, but liquidity is expanding at the slower rate than before. And in the classical economic theory of say Hayek and of Ludwig von Mises and so forth, it is enough to tighten liquidity by a slow down in in monetary growth. So, I think there is a slow down, and that's why you have a few items that make new highs, like in the art market, some art pieces are making new highs, but the majority of art is down 20-30%, and collectibles like watches and so forth, they're also down a lot. And real estate, commercial, you read it every day. Some buildings, they can't be sold 80% lower than they were 5 years ago. So, there many things that are changing and I tell you, whenever a new technology is introduced like AI at the present time or in 2000, the internet and so forth, most participants actually fail. There are very few companies that remain successful. Amazon and Google are say examples of success. But Google only went public in my opinion in 2003, 2004, not before. Amazon was public already in 1999 or 1998.
So, you're saying you're only seeing bonds as the only It sounds like you're saying that all the capital is getting sucked into this sort of AI race, but it's unclear who the winners are and everything else is laggard, a laggard or underperforming. And so there is no alternative but bonds. Is that what you're saying?
No, I'm not saying there's no alternative to bonds. Of course, I also own stocks, but I'm just saying after very good years, 2010 to 2000 say and 24, I think the orthodox speak was somewhere between 2021 when the meme stocks peaked out.
And then in January 2022, the whole S&P topped out, but not with many stocks. And then we had a bear market and then again a rally. And uh uh uh, during this rally, most stocks didn't make new highs, but some did and drove the index up. And in the process, these stocks became my view, not your view and not some of the investors' view, they became incredibly overvalued. Overvalued. Not a little high value, overvalued. Because during the bull market, the expectations of investors about future earnings goes up and the less visibility you have about earnings, the higher the expectations are because you have no measurement, a true measurement. Say, a paper mill, you can say the profits will be such and such in a year's time.
Uh, because you know roughly the business, it's existing business or steel mill. But with that AI, you don't know. Is Google going to be the winner or Apple or all of them? All of them, unlikely. And the capital expenditures are such that, uh, the reward will be relatively small to the capital expenditures.
Hi, it's Maggie Lake from Wealthion. Many of our guests say the key to a resilient portfolio is owning physical gold and or silver. And many of you have told us you'd like to, but your IRAs don't offer it. Well, there's a solution for that. Go to wealthion.com/goldira and sign up to talk to an IRA specialist about how you can add physical precious metals to your existing IRA. No obligations, just answers.
Yes, that's the that is the worry. So, do do do What is a safe haven here if that is if they're going to be sort of cash?
Cash. But, I as you know, I'm an advocate of people owning gold. Now, I haven't talked much about gold because I think this is my view and I may be wrong and I haven't sold my gold. But, personally, I think that gold is in a correction phase as well as silver and that it may last for a while. Uh because of this reduced liquidity growth.
So, we could have a correction in gold that lasts until, say, September, October. But, maybe not. I'm not selling my gold, but I'm just looking at charts and my sense is that the action of gold is not that great. The market action.
Whereas, as I mentioned before, what strikes me at the present time is the exceptional strength of financial stocks and the emerging strength of home builders. And I observe the strength of home builders not just in the US, but also in emerging markets.
So, it time frame is always important here and so you're what you're watching those two sectors because you think the market is signaling that bond yields are going to move lower.
I think for you know, if I look at the '70s, interest rates on the 10 years started the '70s at 6% and they went up to 15.84% in September 1981, okay? So, we had a sharp increase in interest rates, but in between uh sometimes the 10 years note, uh the interest was cut in half by 50% because there were bond market rallies. Do you understand? When the market goes up, you have correction periods like say in '87 in retrospect, it was a correction in a bull market. And then we had a 1990-91 correction in America. And then we had the '98 correction and then in 2000 the market went down to 2002-2003. Then we had the bull market until 2007-2008 and a steep correction and then the bull market until 2020 again a steep correction and up again. And interest rates are the same. They go up and then they come down and then go up. It's over. They move in long cycles. My view is that the interest cycle peaked out in '81. Interest rates dropped until August 2020. And since August 2020, we are in a upward cycle for inflation and interest rates. But these upward cycles can be interrupted by short-term cycles that reduce the rate of inflation and reduce the interest rates for a while. But the trend is upwards. That is my view. Now you may say, "Mark, you're crazy." Yeah, maybe.
That's what many people think. But you have to have sort of long-term view. And you asked me about my long-term view. I would be very cautious about financial assets at the present time because they're incredibly overvalued. The S&P has never had such a low dividend yield.
And the PEs are in the sky. Nowadays, companies don't measure the price earnings ratio, they measure price to sales.
Exactly. So, but you but shorter term within that, you do like financials and homebuilders. And you do see a short-term move down in yields before it resumes
For next 6 months, I think it's going to go down.
I think the economy the economy is much weaker for the ordinary people than the government claims. I think the rate of cost of living increase is much more than 4%. I think ordinary people struggle, they live paycheck to paycheck. They have large installment credits. They have large margin debts. The margin debt is the largest ever, 1.3 or 1.4 uh trillion dollars. And that has to be paid one day. You You understand? It's It can expand in a bull market that margin debt expands, expands. But when the bear market comes, the margin calls occur. And the leverage You look at the trading activity in ETFs and in single stock ETFs and in futures, it's incredibly big. And this trading activity comes from all over the world. People in Korea, in Taiwan, in China, they buy Micro they buy Micron Technology and Nvidia and Tesla and uh SpaceX.
Yeah. Levered the levered ETFs, the volume on the levered ETFs attached to SpaceX is off the charts. And you know, that that sort of speaks to what you're talking about. If that is the case, uh you mentioned the the US rolling over, and and back when we saw it happen to Japan, the money left Japan and went to the Nasdaq. If the US stock markets roll over, does that money go elsewhere globally, or does it take take the whole global market downwardly?
Well, uh up to now, it's gone into uh value stocks. Value stocks have outperformed the S&P, and they have outperformed growth stocks, and emerging markets, uh funnily, have also begun to outperform the US uh over the last 12 months. So, it's possible that the money will flow into some emerging markets that that have become actually cheap. Say, you look at Indonesia. Of course, not the whole world can invest in Indonesia. Well, there's it but the the stocks in Indonesia are now rather inexpensive. They're also inexpensive in Thailand. In my view, the there's nothing particularly good about Thailand, but there are some aspects that would argue for having investments in Thailand at the present time. So, I think that yes, the money can flow elsewhere, and it can flow into hard assets, such as gold, silver, and platinum, but I wouldn't bet on it right now. I think uh we had a big move in gold and silver last year, and at the beginning of this year until essentially the end of February, and since then, we're in a correction phase, and I think it will go on for a while. But, I'm a believer that the US, and we discussed this about 10 minutes ago does not have much op- options not to print money. Do you understand? There's a uh the the pain on the ordinary American and the pain on the capital market, on the stock market of tight money at the present time would be far larger than the pain that Volcker uh in- inflicted on the US when he increased interest rates to fight inflation. Because at the time the financial market was tiny in comparison to today. So it it had an impact on the economy. Yes, for sure. There was a recession in '80, '81 and '82. But it wasn't as devastat- thing as it would be today. I mean, today uh the tight monetary policies of Volcker would be a complete disaster.
Oh, it would be worse than a depression, I would imagine. You know, which is why I think we haven't seen them be able to pursue, you know, the the policies, as you say, that some would like to see. What do you think is either the risk or opportunity that's most under appreciated by investors right now?
The highest risk is that financial assets and other assets are grossly inflated. I mean you see, the concept of inflation is difficult to understand for ordinary people. Uh because when the stock market goes up, they say it's a bull market. But basically, it's an inflation of asset values of financial asset values. And profits, corporate profits, they of course benefit from monetary monetary inflation, from the increase in the quantity of money. It boosts profits. It boosts it boosts the household net worth. And all these things, they have a positive impact on the economy. But then the consequences of all these comes in the form of price increases at the supermarket, and the price increases for the schools of your children, and health care price increases at hospitals, and so forth, and so on. And that we call consumer price inflation. But it's caused by monetary inflation, also. But it's a different sector of the inflationary environment.
And that people don't like. So they like everything that produces inflation, especially when they get benefits from the government, you know, the subsidies, and child benefits, and social security, all these things. These are inflationary factors. A government deficit The a government deficit is inflationary, period.
And that's the trouble that we're facing. And one that's going to hard be hard to get out of. Um I can't Well, we can't read Wait to read your report, Mark, cuz you're on fire. You have a lot to say, and a lot of good advice for us. So we're looking forward to it. I think you're going to have to stay in tonight and finish writing, cuz it's all it's all top of mind.
I can't go and play pool, you mean?
Maybe not tonight, Mark.
Although somehow I have a feeling you're going to manage to do both. But it's always wonderful it's wonderful to catch up with you as always and really appreciate your sharing your view. We need some of that historical context that you mentioned.
Thank you very much for having me. If I have any good thoughts I'll let you know.
Please do.
No, but you understand the world has expanded dramatically since the introduction of the capitalistic system.
Yes.
We may have now a setback that is a that will reduce the wealth of people that have a trillion dollars. That would be my view and a lot of billionaires will be worth less than they are today once the asset prices deflate. And every inflation whether it's a price of coffee or cocoa or oil and so forth prices go up and in a free market they eventually also go down. Not necessarily to the price level they were before but prices fluctuate and so does the price of your house and the price of the stock market. To sit there and say oh I don't need to have any savings because every year I'm richer because the house has gone up in value and the stock market goes up. No, it's not going to be every year and I can tell you there are statistics in the US uh compiled by say companies like Vanguard and Fidelity and so forth they can see how individuals make money in the market because they can shift between different funds and so forth. And the individuals as a group, all of them, they grossly underperformed index because they buy the stocks that are popular. And when they're popular, they're high. And they sell them when there is despair, like in 2009, they give up because they get the margin calls and so forth and they never want to invest in stocks again and so forth. Uh so, don't believe that individuals have made so much money. Most individuals, their portfolio peaked out in 2021 with stocks like GameStop and AMC and so forth. These stocks are way down. And those that they didn't lose after 2021 lost already a year before in the cannabis stocks. Look at the performance of cannabis stocks. And so, you know, my view would be that there is a big disappointment coming. That both home prices will go down and stocks price will go down. Maybe not so much in nominal terms, but against gold, the market is way down since 2000.
And that's what you have to look at and why we try to work so hard so that people are ready for what's coming and don't get trapped in chasing the shiny thing that seems to be going up at the moment.
Sure. And don't listen to Mr. Trump. I mean, I would have voted for him and I would even vote today compared to what the Democrats produce.
But I think he's a horrible character.
Well, you said the the best short you can see right now is the short term, right?
Okay, thank you very much.
It's such a pleasure. you very much.
Such a pleasure.