It was back in late 1999 that I first contacted Dr. Marc Faber in Hong Kong and sought his advice on investments. I had come across him on a website and bought a book about his past predictions. He was not as well known then outside Asia.

But what I had noticed was that he agreed with me that stock markets looked way overvalued as the Millennium approached and were heading for a crash. We met in his dingy office in Central in Hong Kong and I have been a fan ever since.

Yet a decade later and in my book not much has changed. I was perfectly right not to buy equities in 1999. They have moved sideways only, with some enormous fluctuations, and still look significantly overvalued. Today the S&P is in the mid-80s on price-to-earnings and actually much higher than in 1999.

Miracles do not happen

In March this year global stock markets crashed to a low point. Since then we have seen an almost miraculous recovery in financial markets, and a stabilization of global trade and industrial output at lower levels after a bigger and faster fall than in 1929.

But I don’t believe in miracles. What caused this recovery in financial markets is the aggressive printing of money, particularly in the US and UK via so-called quantitative easing. Equities have risen on this tidal wave of liquidity and currencies have devalued.

The result is a monstrous bubble in financial markets, bigger than in 1999 before the dot-com collapse. Dr. Faber has also noticed this phenomenon but appears convinced that money printing will continue to pump up the bubble on each correction, until a final collapse on some distant day.

I remain overly cautious perhaps, although I have made several great investments in the past decade unlike those who invested in the stock market in 1999. I think when you can identify an obvious bubble then it is best to be humble and stand aside, and not hope that you will be closest to the exit door when it blows up.

Having faith in the Fed

My faith in the ability of the Fed and US government to permanently deny gravity is also limited. I am a non-believer. Dr. Faber also heaps scorn on Mr. Bernanke and yet appears blinded by his charisma into thinking he can always make black turn into white.

What if the rally since March turns out to be part of the phase four down cycle described by Dr. Faber in his own investment classic ‘Tomorrow’s Gold’? Then it is a false recovery based on false optimism about a coming recovery, when in reality a further downturn is coming as the stimulus package and low interest rates become unsustainable.

Liquidity fueled rallies are notoriously fickle. Like J.P. Morgan’s taxi on a rainy Friday night in New York it tends not to be there when you need it most.

So if you put money into equities for 2010 then you are investing in a market completely miss-valued on fundamentals and prompt up by a liquidity bubble that is bound to ultimately pop.

The cunning plan of the banks is apparently to shift their bad debts into equity before the market crashes, thereby finally dumping their bad debts on to shareholders. If Marc Faber is right about the Fed’s ability to keep the bubble going, they might pull it off.

Cash and gold

Cash or gold sound a better investment, for in equities you risk losing a great deal of money and the upside will be limited. As in late 1999 I would sooner play safe and invest to make real money when asset prices are very much cheaper. That opportunity will occur again but only after the equity bubble has blown up.

Is it not odd that equity markets are leveraging up again just as business around the world is de-leveraging? That alone ought to keep you out of equities. For it means real business is still contracting. And do you want to buy shares in a contracting business? Why no of course not, and yet that is exactly what you are doing if you buy equities now, so why do it?

Stock markets around the world also still look highly valued by historical standards, even that bubble of 1999 has never fully deflated. In the past stock markets have faced long periods of much lower price-to-earnings ratios, and that is not where you will want to be invested for future capital gains.

About Peter Cooper:
Oxford University educated financial journalist Peter Cooper found himself made redundant by Emap plc in London in the mid-1990s and decided to rebuild his career in Dubai as launch editor of the pioneering magazine Gulf Business. He returned briefly to London in 1999 to complete his first book, a history of the Bovis construction group.

He remains a lively commentator and columnist as a freelance journalist based in Dubai and travels extensively each summer with his wife Svetlana. His financial blog www.arabianmoney.net is attracting increasing attention with its focus on investment in gold and silver as a means of prospering during a time of great consumer price inflation and asset price deflation.

Ben S. Bernanke doesn’t know how lucky he is. Tongue-lashings from Bernie Sanders, the populist senator from Vermont, are one thing. The hangman’s noose is another. Section 19 of this country’s founding monetary legislation, the Coinage Act of 1792, prescribed the death penalty for any official who fraudulently debased the people’s money. Was the massive printing of dollar bills to lift Wall Street (and the rest of us, too) off the rocks last year a kind of fraud? If the U.S. Senate so determines, it may send Mr. Bernanke back home to Princeton. But not even Ron Paul, the Texas Republican sponsor of a bill to subject the Fed to periodic congressional audits, is calling for the Federal Reserve chairman’s head.

I wonder, though, just how far we have really come in the past 200-odd years. To give modernity its due, the dollar has cut a swath in the world. There’s no greater success story in the long history of money than the common greenback. Of no intrinsic value, collateralized by nothing, it passes from hand to trusting hand the world over. More than half of the $923 billion’s worth of currency in circulation is in the possession of foreigners.

In ancient times, the solidus circulated far and wide. But it was a tangible thing, a gold coin struck by the Byzantine Empire. Between Waterloo and the Great Depression, the pound sterling ruled the roost. But it was convertible into gold—slip your bank notes through a teller’s window and the Bank of England would return the appropriate number of gold sovereigns. The dollar is faith-based. There’s nothing behind it but Congress.

But now the world is losing faith, as well it might. It’s not that the dollar is overvalued—economists at Deutsche Bank estimate it’s 20% too cheap against the euro. The problem lies with its management. The greenback is a glorious old brand that’s looking more and more like General Motors.

You get the strong impression that Mr. Bernanke fails to appreciate the tenuousness of the situation—fails to understand that the pure paper dollar is a contrivance only 38 years old, brand new, really, and that the experiment may yet come to naught. Indeed, history and mathematics agree that it will certainly come to naught. Paper currencies are wasting assets. In time, they lose all their value. Persistent inflation at even seemingly trifling amounts adds up over the course of half a century. Before you know it, that bill in your wallet won’t buy a pack of gum.

For most of this country’s history, the dollar was exchangeable into gold or silver. “Sound” money was the kind that rang when you dropped it on a counter. For a long time, the rate of exchange was an ounce of gold for $20.67. Following the Roosevelt devaluation of 1933, the rate of exchange became an ounce of gold for $35. After 1933, only foreign governments and central banks were privileged to swap unwanted paper for gold, and most of these official institutions refrained from asking (after 1946, it seemed inadvisable to antagonize the very superpower that was standing between them and the Soviet Union). By the late 1960s, however, some of these overseas dollar holders, notably France, began to clamor for gold. They were well-advised to do so, dollars being in demonstrable surplus. President Richard Nixon solved that problem in August 1971 by suspending convertibility altogether. From that day to this, in the words of John Exter, Citibanker and monetary critic, a Federal Reserve “note” has been an “IOU nothing.”

To understand the scrape we are in, it may help, a little, to understand the system we left behind. A proper gold standard was a well-oiled machine. The metal actually moved and, so moving, checked what are politely known today as “imbalances.” Say a certain baseball-loving North American country were running a persistent trade deficit. Under the monetary system we don’t have and which only a few are yet even talking about instituting, the deficit country would remit to its creditors not pieces of easily duplicable paper but scarce gold bars. Gold was money—is, in fact, still money—and the loss would set in train a series of painful but necessary adjustments in the country that had been watching baseball instead of making things to sell. Interest rates would rise in that deficit country. Its prices would fall, its credit would be curtailed, its exports would increase and its imports decrease. At length, the deficit country would be restored to something like competitive trim. The gold would come sailing back to where it started. As it is today, dollars are piled higher and higher in the vaults of America’s Asian creditors. There’s no adjustment mechanism, only recriminations and the first suggestion that, from the creditors’ point of view, enough is enough.

So in 1971, the last remnants of the gold standard were erased. And a good thing, too, some economists maintain. The high starched collar of a gold standard prolonged the Great Depression, they charge; it would likely have deepened our Great Recession, too. Virtue’s the thing for prosperity, they say; in times of trouble, give us the Ben S. Bernanke school of money conjuring. There are many troubles with this notion. For one thing, there is no single gold standard. The version in place in the 1920s, known as the gold-exchange standard, was almost as deeply flawed as the post-1971 paper-dollar system. As for the Great Recession, the Bernanke method itself was a leading cause of our troubles. Constrained by the discipline of a convertible currency, the U.S. would have had to undergo the salutary, unpleasant process described above to cure its trade deficit. But that process of correction would—I am going to speculate—have saved us from the near-death financial experience of 2008. Under a properly functioning gold standard, the U.S. would not have been able to borrow itself to the threshold of the poorhouse.

Anyway, starting in the early 1970s, American monetary policy came to resemble a game of tennis without the net. Relieved of the irksome inhibition of gold convertibility, the Fed could stop worrying about the French. To be sure, it still had Congress to answer to, and the financial markets, as well. But no more could foreigners come calling for the collateral behind the dollar, because there was none. The nets came down on Wall Street, too. As the idea took hold that the Fed could meet any serious crisis by carpeting the nation with dollar bills, bankers and brokers took more risks. New forms of business organization encouraged more borrowing. New inflationary vistas opened.

….read more HERE. (start just below the images of the coins on the left)