Marc Faber of the “Gloom, Boom & Doom” report spoke at the Ira Sohn Conference yesterday, and talked about the destructive nature of U.S. monetary and fiscal policy, and a way to play it.

Faber said that U.S. monetary and fiscal policy has created more volatility, and we can expect more of that going forward. Faber mentioned the Long Term Capital bailout, the liquidity that rushed in during Y2K, and the end result. The NASDAQ crashed, falling some 50%, and it still has not come close to those levels.

….read more HERE

Michael: Danielle, what are you sensing from clients and the people you do a lot of speaking engagements? What are they saying to you right now?

Danielle: It’s been a hell of a ride. There’s something bizarre going on in the world right now. In my view that’s a good thing to be aware of, because it really has been an anomalous cycle. People were largely unprepared for the big downturn in 2008/2009 and they lost half of their money. Some people lost more depending on their exposure and their leverage, and then just when they were in the deepest moments of despair we had the worldwide phenomenon of governments pumping liquidity which lifted the system in record time. First of all they thought they’d made a bunch of mistakes on their risk exposure, and in the last couple of years they suddenly thought maybe we didn’t.  Maybe that was just an anomaly and maybe we are okay again.

But I think in the back of their mind they have some sort of a nagging voice or a thought that there’s something bizarre going on in the world right now. In my view that’s a good thing to be aware of, because it really has been an anomalous cycle. It hasn’t been a normal recovery in the last couple of years backed by all this stimulus, so when you get that kind of a dramatic ramp up in such a short a time, I think you really do have to sit back and think “now just a minute what’s the likelihood of this continuing at this pace, and what’s the likelihood of us not suffering another sharp down period again while prices are this over valued?” I think that’s where we are today. I’ve met some people who are still not back to where they were at the peak of ’07 and they are thinking I don’t want to sell anything because I’m still not back to where I was. In my view that’s a horrendous way to look at this. What you should be thinking is “what gift have I been given by this really crazy amount of government stimulus  and what should I do now about my risk exposure if we are going into another soft patch, downturn or full on recession?”

Michael: Do you have your people heavily in cash right now?

Danielle: Bonds cash and the US dollar, so basically we’re positioned right now like we were coming into the downturn in 2008. I’m just amazed at how quickly we’re back. Normally I’ve understood just from a very humble study of history that we are in a secular bear market and we have been for over 10 years. I know that during those periods recessions come about every three years and the downturn in the stock market tends to be about 45% or so. So they are very serious,  and I think we’ve probably truncated this cycle in terms of front loading all that stimulus in the first two years. I think we’re at risk of being closer to the next downturn than we might otherwise have been. Our money flow indicators and our technical work suggests that risk is way over priced again. There’s big distribution, low volume and all the hallmarks of a late cycle even though it’s only two years into the expansion.

Michael: The amazing, mind boggling almost incomprehensible amounts of money that have been printed is very difficult for people to comprehend and maybe that’s why it’s tough to understand how fast we’ve come out of this. But there’s always something fundamentally,  intuitively wrong with saying “I’m curing my debt problem by taking on more debt.”

Danielle: You know what else? Canada has been in its own little bubble the last couple of years. What I don’t think they understand is that in Canada we have continued in that bubble because the government’s just took on the debt of the banking system, so no real deleveraging happened in the system in the last couple of years. Consumers in many countries,  not Canada, many countries have been paying down debt, moving through bankruptcy, spending less and saving more.  Other governments have just ramped it up, I mean the US alone put in about $4 trillion of money they didn’t have  into the financial system over the last couple of years, and China did even more on a relative basis.

So those two countries are what I call basically centrally planned economies at this point. We know that China demands a certain growth rate based on government investment, but really that’s what the US has done as well in dictating a growth rate.  Saying we have to get growth so we are going to throw money in, and what did they get back? They got not even a trillion dollars of GDP growth for $4 trillion of money they pumped in. So it’s not a good investment scenario, it doesn’t make any real sense, and that’s why I think people should listen to their own voice.  In ’08 they were way too risk exposed, too in love with commodities as an asset class on this idea that China will grow perpetually. Now China’s slowing, Japan’s in a recession, the UK is in a recession, and there is a global slow down in industrial production already taking place. All those things suggest to me that we are way over done on the stock and commodity markets at this point.   

Michael: What is the biggest lesson that comes to mind that we should have learned about handling our own money?

Danielle: Risk is not always our friend, the risk sellers are not our friends because they are not worried about the down side. Risk sellers are always telling us to buy for potential up side regardless of price valuation, regardless of the type of climate we’re in. Things like modern portfolio theory are an absolute waste of time in this kind of environment. This idea that you can diversify by holding a basket of different stocks and commodities when we are living in a world of almost perfect correlation between global asset classes. The only negative correlation that you can find are things that are either on the short side, in cash, as well as some high quality bonds. As I say I have described this before the US dollar is calling the shots in the world. 

The US dollar is one the one side and everything else has been forced onto the other side. Everything is priced in US dollars, commodities,  stocks of the world, even the Canadian dollar. So every time the US dollar goes down those things go up, we’ve seen that since March of ’09, so once you get a rebound in that US dollar boy, you have to pay attention because all your nice theories about this company, that sector the management team it’s really irrelevant. When you’re talking about your own risk, your own capital, they all go down together when the US Dollar rises, even the good ones. You really have to keep that in mind and you can’t afford to have these passive ideas and hope it all works out. It’s not good enough in this climate, so I think that’s the biggest lesson and it’s a tough one because the industry in general is still selling us the same old mantras and they just haven’t helped us for a long time here.      

Michael: I think that’s such an important point. What Danielle is saying, and Victor Adair has been saying for ages, is that the markets are all moving against the US Dollar and there is no real diversification when it comes to your risk. The key component, if there is only thing you could know about, it would be the US dollar. Danielle you just emphasized that that cash may give you some diversification in terms of risk, in other words if all the markets can go down it is good to have cash.

Danielle: The masses are routinely wrong and always on one side of the boat or another, so you really have to think more about that. You can’t fall asleep on the sea of complacency because that’s what everyone’s doing.  Here’s an example,  the US dollar is very under loved, everybody knows about all the fiscal problems, the lack of leadership, discipline etcetera. But it doesn’t mean that the US dollar goes from its present level of around 75 on the world’s index to zero in the next week and a half. It’s been falling now for ten years while the wind was at the back of commodities. We’ve had 115 months of a secular run in commodities, and people are extrapolating that into the future as if that will never change, and I think that that’s the most dangerous thing we can do. The US dollar has long term support at 71 – 72 , its hit that point many times in the last 20 years and it did so again recently. So you can get a rally in the US dollar, it that the kind of climate you’re dealing with.

Michael: I don’t want to put words in your mouth Danielle, but blind buy and hold doesn’t work. I mean what if I was Japanese investing in the Nikkei Index I’m, still waiting I’m still holding my breath on the Nasdaq and go on and on. So it takes a lot more active assessment in the way that you’re describing here.

Danielle: It absolutely does, and it takes patience because you have to be able to leave things and understand they may go up a bit more without you. You have to be prepared that the industry in general speaks of active management, that you sell bank in Nova Scotia stock and you buy TD. That’s active management. What I’m talking about is you have to know about asset classes, that there are times to be with certain asset classes and there are times to be largely hedged or out of them. The other thing I think that’s really relevant here is people thought they learned a lesson when they were over leveraged with risk “I get it, I lost half my money, ouch that hurt.” This time though it came back so fast that I think people leverage was fine it, wasn’t a problem. I think the next time that we come back from the next sell off, whether it starts now or whether it happens in the 12 months time, I think we are going to see a lot slower recovery. Because the appetite for throwing more credit at it is just not there anymore, right? Bernanke and company had an experiment, they said we’ll try this and see what happens because frankly we are in dire straits. But I don’t think there’s a lot of appetite to continue these experiments when at best you get a six month rally, a stock market that breaks to a new low and employment is still a major problem etcetera.

There’s been high frequency traders which are active like crazy,  in and out in split second transactions, there’s people that have supposedly been trading and making some money in these crazy markets that way. There’s people who bought like in the spring of ’09 like ourselves at our firm because we had cash and we made some really great returns into 2010.  I look forward to the next secular bull when I can be a little more relaxed and not always looking for the problems. But that is the environment we’re in and I would suggest to you today there’s at least as many,  if not more problems in the world than there was in 2007.  

There are terrible leaders too, there’s an example of a banker who came out of that crisis supposedly smelling like roses I have no idea why. He was one of a team of overpaid executives that blew the system up completely with government help of course, regulations not being followed etcetera. He’s out banging the drum that if you don’t raise the debt ceiling in the United States all hell’s going to break loose. Well guess what, you guys raised the debt ceiling 80 times in the last years, you levered up institutions 50 to 1 and all hell did break loose.

Our thesis really has been that people could be surprised in the latter half of this year at the extent to which the slow down comes in the world. If we look around we so much excess supply and capacity in buildings, cars, commercial real estate, everything. They are still building tons of retail space in my area just north of Toronto. You know the fact is that we have too much of that stuff. So I think we are still in a deflationary environment for a while longer.

Michael: Well obviously that means we are going to keep these low interest rates which explains Danielle why you’re into the bond side of things. I really appreciate you taking the time on the long weekend for us it’s always so stimulating and I think it’s so important for people to hear how a professional manages the money. I hope we can visit again in the near future. That’s Danielle Park and you can reach here at  www.jugglingdynamite.com.

Dow down again – 25 points. Gold up again, $7. And oil still below $100.

Inflation worries up, in other words.

Economy down.

And now it’s official. QE2 is a FLOP! See below…

To hear the papers tell it, US stocks are being weighed down by troubles in Europe. Here’s the report from The New York Times:

Sovereign debt concerns and the prospects for slower growth in Europe and Asia took their toll on global markets.

Analysts said recent news from Europe had not instilled confidence in the Continent’s ability to handle its fiscal challenges. Last week, Fitch Ratings downgraded Greece’s credit ratings by three levels to B+, a rating that is below investment grade. Standard & Poor’s lowered its outlook on Italy’s debt to negative from stable over the weekend, citing a weaker outlook for growth and lower prospects for the country’s ability to trim its debt.

Yeah. The problems are all in Europe. If it weren’t for the Greeks, and Italians, and Spaniards…it would be clear sailing here in the US.

But the main difference is probably that the Europeans don’t cheat as much as we do. For example, unemployment in Spain is terrible, at 17% according to the figures we saw for March.

But wait, Yale economist Robert Shiller says unemployment in the US is miscalculated. It’s really almost 16%. Not much difference with Spain.

Meanwhile, fire off a gun in Las Vegas and you’re going to hit a homeowner who is underwater. Almost 3 out of 4 of them are below the surface. And get this…house prices are dropping at the rate of about 1% per month, according to the aforementioned Mr. Shiller.

The Spaniards also have to own up to their problems. They can’t print money. They’re on the euro, a currency controlled by the European Union…which is to say by France and Germany.

You may say, being on the euro ‘limits Spain’s policy options’. You may say that Spain is in a ‘straitjacket’ put on it by the larger economies of the Union. You may say that Spain would have an easier time of it if it still had the old, more flexible Spanish peseta.

You would be right. But you would be a moron.

The whole point is that there are some things that it is better NOT to have the easy, fun, devil-may-care option. Ask Dominique Strauss Kahn. Ask Arnold Schwarzenegger.

Take DSK, for instance. We’ll bet he wished his wife had accompanied him on his business trip. If so, he might still be head of the IMF…diddling poor countries, rather than poor chambermaids!

Yes, dear reader, there are some options you’re better off without. Printing money – with nothing to back it – is one of those things.

But wait. You say the Fed’s money printing (otherwise known as QE2) has been a success? Think again. We’ve been saying for months that it won’t work. Now, even the mainstream press is catching on. Here’s the latest report from The Wall Street Journal (MarketWatch):

BOSTON (MarketWatch) – It’s cost $600 billion of your money. And it was supposed to rescue the economy. But has Ben Bernanke’s huge financial stimulus package, known as “Quantitative Easing 2,” actually worked as planned? QE2 is being wound down in the next few weeks. Fed Chairman Ben Bernanke has said it has left the economy “moving in the right direction.”

But an analysis of the real numbers tells a very different story.

Turns out the program has created maybe 700,000 full-time jobs – at a cost of around $850,000 each.

House prices are lower than before QE2 was launched. Economic growth is slower. Inflation is higher.

Yes, it’s sparked a massive boom on the stock market. Ordinary investors have started piling back into shares again. And last week we saw the latest example of the return of animal spirits on Wall Street, as stock in new dot-com LinkedIn skyrocketed on its debut.

But even the stock market boom hasn’t been what it appears. An analysis shows that most of the rise in the Standard & Poor’s 500 Index under QE2 has simply been a result of the decline in the dollar in which shares are measured.

The truth? QE2 has created a massive new bubble in dollar-based financial assets, from stocks to gold. Meanwhile, it has had zero visible effect on the real economy.

Take jobs. According to the US Labor Department, since last August the number of full-time workers has gone up by just 700,000, from 111.8 million to 112.5 million.

At a cost of $600 billion, that’s $850,000 a job.

The picture’s even more meager. Over the same period, the number of part-time workers has gone down by 600,000. In other words, we’ve basically shifted 600,000 or 700,000 workers from part-time jobs to full-time jobs.

The percentage of the population in work is actually lower today – 58.4%, compared to 58.5% last August. The percentage of the workforce in actual work, the so-called “participation rate,” has fallen by half a percentage point.

Some recovery.

Right. Some recovery.

Regards,

Bill Bonner
for The Daily Reckoning

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