Replies to post #10946 on Mostly: Classical

[amarksp]

Comrade Faber Speaks: The Method In the Madness or Two Bucks in the Hand is Worth a Bush
from http://worldmarket.blogspot.com/
Friday, September 17, 2004

FABER: Thank you very much for the very kindly introduction and thank you very much for coming here to this presentation. I just mention that as a comparison, of course, it's very negative to have a large audience.

The most important thing now that you totally forget once at you are at the CLSA conference you are now all members of the central committee of the Communist Party and is getting together today for the first time in a year.

I am Comrade Faber, comrades. It is very clear that if our government's economic growth rate continues at the pace of the last few years, we are on a collision course with the United States. Increasingly we will challenge the American political and economic and this will lead to (inaudible) in the world geopolitical tensions, economic sanctions and divorce.

It is also clear that in time of military might the U.S. is far superior to our nation, but there's a chance that we can beat them economically. And in order to expand our to implement this plan I'd like you to consider some of the (inaudible) of the global economy.

First of all, we have to realize that the last 20 years have been years of deflation in commodity markets we have always had in the commodity price cycles. You can see on page two of your handout at prices have really fluctuated and for the last 20 years they have been declining.

But recently, over the last three-four years, the incremental demand coming from our nations has begun to boost prices in some sectors of the commodity markets. They probably mean that we are in an inflationary environment because the way the Americans entered the global economy at the end of the 19th century. Our entry into the global economy has a somewhat deflationary impact.

You can see on page three that the when America entered the global economy that it's been able to produce agricultural products at much lower costs than the Europeans. They (inaudible) additional supplies. And thoroughly we today, we have the impact of product prices around the world because our manufacturing is producing goods at much lower costs than the Americans or the Europeans.

Similarly, as more and more service have become tradable there is a pressure on service prices around the world from our neighbors. So whereas the entry of Americans in the global economy deflates agricultural prices and has a very negative impact on the European economy, the European agriculture which at the time was the largest sector in the economy, our entry is essentially undermining the manufacturing sector of the way and the entry of our (inaudible) is undermining the service sector of the West.

Some people, of course, are afraid that deflation will be bad. I'd like to emphasize that in our country we have a deflationary boom. It is not that our nominal wages are rising but because prices of goods are declining continuously. We will combine with the nominal farming increases in real income growth that is very strong.

And (inaudible) page four the entire 19th century U.S. expansion was characterized by falling prices, in other words, deflation. And economic growth is entirely impossible.

There is only one problem when deflation occurs and this is when your debt level is very high and this is the vulnerability of our American friends. You can see on page five that between 1950 and 1980 total credit markets expanded at about the same pace as nominal GDP. But after 1980 we began to grow at a much faster pace and since 2000 the U.S. nominal GDP, the economy has expanded by $1.6 trillion but total credit market expanded by 7.6 trillion. In other words, more and more debt has to be created in order to maintain the American economic plane at the high altitude. And in this situation, a very large debt as a percentage of the economy's deflation occurred now. Then, obviously, bad loans would escalate and you would have defaults in the system.

Now Mr. Greenspan was aware of the problems he, incidentally, created himself because since he has been the chairman of the Fed you can see the Fed expanded at a very rapid pace as a result of his easy monetary policies. Being aware of the problem he created after 2001, he cut interest rates massively. In other words, he manipulated the American economy the way we manipulate our economy.

Besides the fact of this manipulation work, that credit move into the real estate market, it led to the refinancing boom - see page seven. And the refinancing boom that allowed people to take larger and larger mortgages on their homes, led to increased consumption combined with the tax cuts the administration implemented.

As a result of tax cuts and the credit boom, 80 percent of which went into real estate financing, led to consumption - see page eight - expanding as a percentage of the economy to the highest level in the last century. In other words, what we have we have commodity growth in the U.S. economy but the quality has deteriorated. The growth came from additional debt that led to asset inflation but allowed people to take equity out of their homes and spending.

Capital spending in the meantime is still lower in the United States than in the year 2000. And as you can see on the following page nine, the employment gains in America have been very disappointed - disappointing. Had employment increased at the same rate than in post-war recovery employment in the United States would be eight million people higher.

Real wages are, in fact, declining, even with the techniques the government is preparing in the United States. We should actually sue them for infringement of intellectual property rights. And as the average earnings are growing at the lowest rate in the last 40 years. So we can say the vulnerability of the U.S. economy is that growth has come from a debt bubble that stimulates consumption, always consumption, and not growing actual production which they said at the same level than in '99 and from capital spending which has declined over the last four years.

In the meantime, what this has brought about, the consumption boom in the United States, is an investment boom and industrial production boom in our own country. You can see that in our country until recently industrial production was expanding at 20 percent annual rate. And this imbalance leads, of course, to a growing trading deficit of the United States with our nation. See page 11.

We have continuously growing trade deficits with the United States but with our political agenda we have no interest to buy goods from the United States, we buy them from Asia because we want to strengthen our Asian neighbors and, therefore - see page 11 bottom - we have a growing trade deficit with our Asian neighbors and we made them kind of dependent on our economy.

It is not that we pursue unfair trade practices. You can see on page 12 that over the last 20 years we have imported about as much as we have exported. And, in fact, in the last 18 months our imports have increased at a faster rate than our exports, which led - see page 13 - to a deterioration of our trade service.

But in essence, what this global imbalance leads to borrowings in the United States, higher spendings in the United States, production and investment in Asia and in particular in our nation leads to deterioration of the American net asset balance.

You can see on the following page, 14, that until 1987 the United States has a positive net asset balance. But after 1987, as a result of the growing current account deficit, the net asset balance deteriorated and today foreigner's own approximately $9 trillion of assets in the U.S. GDP in the U.S. is $11.2 trillion, and Americans own approximately $6 trillion worth of assets overseas. In other words, the negative net asset balance is over $3 trillion or close to 30 percent of the American GDP.

And now this negative net investment balance is, of course, drawing analysts by the current account deficit of the United States, which in the second quarter was running at approximately $650 billion or close to six percent of the American GDP.

Now my esteemed comrades will ask me why we at the Central Bank are so stupid and continue to buy U.S. dollars and U.S. assets because it is clear that there is a crisis looming sometime in the future. But let me outline my plan.

My plan is to keep the U.S. dollar very, very strong. First of all, this forces our neighbors in Asia to also buy U.S.-dollar assets because our Asian neighbors do not wish to lose their competitive position against our nation. So if all of Asia is buying U.S. dollars and by doing so we keep the U.S. dollar at the high level, it's continuously undermines and hollows out the manufacturing sector in the United States and our brands they gradually destroy the service sector that is sizable in the United States. So we have a strong interest to keep the dollar at the very high levels.

At the same time we are buying U.S. bonds and by doing so we keep interest rates artificially low. This has the following impact. The same way the Western power has addicted our population to opium century, we are addicting America to (inaudible). And I can assure you that the withdrawal symptoms effects are far worse than the withdrawal symptoms of opium.

So we keep a feel-good factor going in the United States and continuously shift manufacturing and services to Asia and boost the economic trade of Asia.

Also, Mr. Bush is our greatest friend. He and his administration with the continuous human rights abuses have made our central committee look like Cinderella.

Finally, if we look at the quality of the two presidential candidates I do not think that anybody in China will ever want to have democracy.

Now my esteemed comrades will ask one day disaster will strike and we will lose a lot of money on our bonds and dollar positions. This is a small penalty to pay for the transfer of technology and manufacturing and investments into our country.

Moreover, we have recently, quietly, began to buy gold. Of course, we will never (inaudible) the gold reserves in our Central Bank reserve because we do not wish to alert the international market that we are buying gold. But by keeping the dollar very strong we (inaudible) the gold price and can accumulate it. So when the crisis will hit when we pull the plug on the dollar and on U.S. bonds we will have some losses on our dollar position but we will make it back on our gold positions.

What this imbalance in the world means, this transfer of wealth from the United States to Asia via the current account deficit, what it means is that wealth is accumulating at the very rapid pace in the Asian region and in particularly now in Asia and the Americans are regularly impoverished. In this environment we can also ensure that even in a crisis our nation will continue to grow and we have identified several sectors which will not be affected by an international crisis.

First of all, you can see on page 16 that there is the largest migration in the history of mankind occurring right now in our nation. Our organization rate has increased over the last five years from 27 percent to 37 percent. Every year 16 million people have moved to the cities since 1996 and we anticipate that in the years to come every year 20 million people will move to the cities. This will have a huge impact on the real estate market and, therefore, housing, the need for construction, for infrastructure will continue to be very high and support our economy with economic growth.

Secondly, as we become richer, we will have more time for leisure and for traveling. Our outbound travelers are growing very rapidly. As a result of this outbound traveling, which will not be interrupted by any infectious disease because we have far more infectious diseases in our country than in others - the growth will have a beneficial impact on our standing with our neighbors.

Equally, in India we have the development of tourism that is growing very rapidly as a result, as we do, of the introduction of discount airlines. And so this sector will lead to Asia traveling far more among each other and benefit the economy.

Lastly, I have explained at the beginning that at the end of the 19th century America has a deflationary boom whereby prices were declining but not always remaining at the same level. We have the same in our nation. If a TV set costs $2000 then we have maybe three million families that can buy a TV set. But if the price drops like now to two to $300 we have 100 million families that can buy it. So our wealth and our growth does not come from wage increases but it comes from product prices declining which boosts the size of the baskets people can buy. And, therefore, our markets have been expanding very rapidly and in many sectors of the economy we are today far larger than the United States.

We have a population of motorcycles that has risen in seven years from 50 million units to 90 million units. We sell every day 82 million newspapers, while as our barbaric friends they only read 55 million newspapers. And so our markets are today much larger than other markets and certainly larger than the markets in the United States.

On page 19 you can see that our steel production is growing very rapidly. We produce more steel than the U.S. and Japan combined and we produce five times more cement than the United States. So whereas officially the U.S. has a GDP of $11.2 trillion and we only have a GDP of $1.3 trillion, in fact, in physical units our economy is much larger than that. We have probably already reaching about 60 percent of the American GDP.

And because of our huge productivity improvements, the U.S. always brags about their productivity increasing by two to three percent. Our productivity is increasing by approximately 15 percent per annum. So despite price pressure that could develop in this environment of rapid growth, our product prices will continue to deflate.

Now my policy's of course, not with some risks. One of the risks I alluded to earlier is that our incremental demand has lifted commodity prices, in particular the oil price. On page 21 you can see that until 1994 our country - which is incidentally one of the largest oil producers with a daily production of 3.8 million barrels compared to say the member of the OPEC countries being that produces now less than one million barrels.

Despite this large production we have, our oil imports have been soaring in the first six months of this year by 40 percent. And we have become the world's second largest oil importer. However, the dangerous part of this is the following and it is visible on page 22. While America industrialized between 1900 and 1970, its per capita oil consumption per annum rose from one barrel to approximately 28 barrels before it leveled off.

In the case of the Japanese economy, when it industrialized between 1950 and 1970, and South Korea when it industrialized between 1965 and 1990, per capita consumption increased from one barrel to 17 barrels. Our per capita consumption is still at 1.7 barrels and the Indian per capita consumption is at 0.7 barrels. In other words, the whole of Asia with 3.6 billion people consumes less oil, 20 million barrels per day, than the U.S. that has a population of 290 million people that consumes more than 22 million barrels a day.

So as our demand in Asia will increase - and I can assure you that our demand in Asia will double in the next who knows, 50 years-12 years. But we will certainly go to around the per capita consumption of three to four barrels. Latin America has a per capita consumption of four barrels and Mexico has seven barrels. If we just went to the level of Mexico we would take up 30 percent of world oil production, our nation alone.

So the oil demand in Asia will rise - will double - we may debate six years or 12 years. But that will put continued pressure on prices on the upside, granted, and as we have to see very clearly, it is possible that the policies of the present administration strategic reserve of 630 million will put oil from the strategic reserves onto the market. It could be two million barrels a day in order to ensure combined with our buying of U.S. dollars the history of Mr. Bush and that will, of course, temporary balancing prices in the oil market.

But if you look at the demand and especially the supply, it is clear that in some areas of the world the supply of oil is diminishing. In America - see page 24 the oil production began to decline in 1971 and has been declined every year, year in year out. And all the major fields - see page 25 where it ranks (inaudible) reached peak production right at the oil production declines.

Now one peculiarity of the oil market is visible on page 26. 20 percent of oil production of the 80 million barrels (inaudible) daily comes from 14 oil fields. All these oil fields are categorized as large fields because they produce over 500 million - 500,000 barrels a day and they were all discovered before 1965. Since 1965 no major discoveries have been made. And six of those 14 oil fields are in Saudi Arabia where one field Cabar produces - or produced until recently more than five million barrels a day.

Now Cabar was discovered in 1949, started production in 1951, and it is likely that the production of Cabar will gradually decline in future and it will be very difficult for other oil producing areas to effect the decline of Cabar that supplies more than have the oil supplies coming from the Arabian kingdom.

At the same time, we have to be aware that the population in the Middle East and other oil producing countries - you can see on page 27 - that in Saudi Arabia the population has grown from three million people to now 23 million people. And what it means is that many oil producing countries have own oil requirements that are rising very rapidly. This year for the first time since OPEC was formed, Indonesia has actually become a net importer of oil because their production has slipped below one million barrels a day and their demand has been escalating. So they are actually no longer an oil exporting country.

In fact, it is not only on the oil market that our incremental demand has had a huge impact. On page 28 you can see that after we really started to have an impact on the world economy all commodity prices were boosted by our buying. The problem that I'm seeing is that the time of the recent rising commodity prices - commodities up 53 milo and our per capita consumption in China and also around Asia and Japan is still very low.

So if you look at page 29 we have three milo commodity prices in the last couple of years and now we've just started to grow. In particular, aside from the supplies of oil, I am very concerned about the supply of food because in our country, as a result of de- organization, land that is available for agriculture will have declined by 25 percent by the year 2020. And so what this means is that we increasingly have to buy food from other countries.

You can see on page 31 that over the last two years we had to buy increasing quantities of soybeans, in particular from Argentina and Brazil. And what is the following. We're buying soybeans and, of course, the hedge fund community - and today everybody is a hedge fund in the world - they began to see that we are buying so they pushed prices up and we have to pay continuously higher prices.

However, we are the largest hedge fund in the world because we also control the physical markets. So when we saw prices soaring in February and March, I instructed my staff to sell soybeans very aggressively. And then starting in March we stopped buying and negated some contracts and then tried the hedge funds got their margin call, and now we have covered our short positions and can buy soybeans much cheaper than before.

So you can see that whereas the hedge fund community in America only trades in future, we have the physical and we can influence the markets for physical, in particular for industrial commodities such as copper. We can buy copper accumulating interest and announce very high industrial production growth figures. And the price of copper shoots up, then the next month we short it and then we announce that industrial production has been disappointing in the price of copper.

Now some commodities are still very low, as I mentioned food prices, and we are continuously accumulating it.

Now the reason I mention so much commodities is the following. First of all, when commodity prices go up it creates an unfavorable environment for financial assets. The most favorable environment is when commodity prices decline, margins of corporations can expand as well and profits grow and interest rates fall, and financial assets rise. If we believe that commodity prices are beginning on the same uptrend - and as I mentioned, we have the price cycles that last quite some time - then, obviously, it will be more difficult for financial assets to perform well.

In addition, and this is the most important, the way we communists have business cycles historians have war cycles. And whenever commodity prices go up and shortages develop they can urge to secure resources and this leads to increased global tensions. The Americans have repeatedly tried to prevent us from acquiring oil reserves. We have now acquired some oil reserves in Sudan. We even protecting them with our Army. And increasingly we have to become very friendly with the Iranians and that may lead next year with a Bush victory to some serious political tensions as the agenda is probably to attack Iran.

So this is a concern but I'd like to emphasize that whatever happens, we, our nation, is better prepared to weather the storm and to avoid any serious crisis because our population is used to hardship. And it is good for the central committee to continue from time to time to impose hardship on our population so they remain brutal and hardworking.

In addition to that, whereas deflation would be a catastrophe in America because of the high debt level - and we also have deflation in Japan since 1990 and it proved to be very negative for the Japanese economy because of their high debt level as they went into recession in 1990. Financial assets in Japan declined throughout the deflationary period and so a wisp of inflation in Japan would boost the economic strength and their financial markets because it will shift money that is now under the mattresses of individuals, and in bank's deposit, and in bonds held by financial institutions. It would push these liquid assets into the equities market.

As you can see on page 35 that interest rates in Japan have bottomed out in 2003. My colleagues from the central committee will never again in their lifetimes see Japanese interest rates on long-term bonds below 0.5 percent. From here on we have a rising inflation rates in Japan and it will move bonds out of bonds into equity.

In fact, if we talk about the forthcoming crisis in the world which will undoubtedly happen one day, we in Asia are better prepared because our economy is much larger compared to the financial markets say in the United States. In the United States you can see as a percentage of total global market capitalists 52 percent are U.S. equities whereas including Japan and Asia our market weight is just around 12-and-a-half percent.

So in a crisis, obviously, financial assets in the U.S. are much more vulnerable. This vulnerability may come through a currency move or through deflation in financial assets in the United States. Whereas our financial assets may also decline but not so as the U.S. So we expect that this region and our financial markets will significantly outperform the U.S. financial markets.

In particular, the concerns I have is that the debt growth - see page 37 - in the United States is having a lesser and lesser impact on economic growth. In fact - see page 38. For some mysterious reason the growth in the money supply in the United States has decelerated as it states, the money has been contracting in the U.S. in real terms. In the last three months money supply has actually contracted and this will signal that liquidity in the United States is tightening.

We also have had some discomfort in the markets - see page 39 - where we had excess speculation until half a year ago. Now the speculation seems to be cooling down. We also have excesses, as I mentioned, in the market for industrial commodities such as copper. And we have excesses in some currency movement since as the Canadian dollar, the Australian dollar, and (inaudible).

And, obviously, we have not only a housing bubble in the United States but even more so in Australia and the United Kingdom. And because our policy of keeping the comrades strong through the (inaudible) we, obviously, inherit American monetary policy to where the U.S. is crediting and borrowing we have had this huge increase in capital spending, in net capital formation. Where our net capital formation rose until early this year by approximately 60 percent per annum, it has since then declined and opposite this decline in capital spending we'll have some multiplier (inaudible) through the economy. So we expect a slowdown in our economy.

But still, we think that this transfer from the United States to Asia will continue. Our region is not dependent - unlike '97 or before '97 - on foreign capital. We can grow with our own capital. We have the lowest capital dependency every. Our corporate sector has pared down and the valuations in Asia of real estate, financial assets, stocks and also currency such as the Singapore dollar, is significantly lower than in the United States. So I anticipate that for as long as we keep the dollar strong there won't be any problem.

One day, obviously, this relationship of an over valued dollar, vis-…-vis Asia, will break. We will choose the perfect timing when geopolitical tensions are such that they are very conducive to have an economic crisis in the United States. And relatively speaking, we will do better. We will also suffer but far less than the Western world.

I thank you, my comrades of the central committee, for having given me the opportunity to share my views.
Source of Transcript Unknown: Recent Speech to the CLSA. Accuracy Unknown.

[Frank Pembleton]

TECHNICALS - COMEX/NYMEX metals technical indicators

 
  
                  GOLD  SILVER  PLATINUM  PALLADIUM   COPPER  
                   DEC     DEC      OCT      DEC       DEC  
                  <GCZ4>  <SIZ4>  <PLV4>    <PAZ4>    <HGZ4>  
 Close Sept. 21  $410.10  $6.373  $852.00   $210.55  $134.15  
 High             412.00   6.400   856.00    210.70   134.95  
 Low              409.60   6.325   849.00    208.25   133.30  
  
 5-DAY M.A.       407.70   6.312   846.00    210.06   130.75  
 20-DAY M.A.      406.50   6.460   851.70    212.02   127.39  
 50-DAY M.A.      403.20   6.561   840.50    217.92   126.33  
  
 9-DAY R.S.I.      73.04   61.31   61.20      53.21    85.48  
 14-DAY R.S.I.     64.27   50.61   55.20      48.27    77.89  
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 Note: Data calculated from previous close. Previous high and  
 low include ACCESS trading from previous session. Indicators  
 are based on the time periods recommended by their developers  
 or commonly used by technical analysts. Moving averages are  
 simple moving averages. RSI formulas include a smoothing factor  
 utilizing an exponential moving average (EMA), determined to be  
 the industry standard. All calculations can be made using  
 Reuter Graphics or Reuter Technical Analysis products.  
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 Contract High     436.50   8.480    915.00   345.00   132.50  
 Contract Low      290.00   4.440    750.00   203.50    74.20  
 First Notice Day  Nov 30   Nov 30   Oct 01   Dec 01   Nov 30  
 Expiry Date       Dec 29   Dec 29   Oct 26   Dec 27   Dec 29  
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           BULLISH CONSENSUS ON September 14:   24 Month Range  
                                                   Low   Hi  
 Gold           74 from 70 on September 07          13 - 91  
 Silver         47 from 47 on September 07          13 - 89  
 Platinum       66 from 66 on September 07          14 - 95  
 Copper         72 from 71 on September 07          08 - 88  
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 * Bullish Consensus, Copyrighted, Market Vane Corporation