Marc Faber sees interest rates going up within three months
Posted on 13 October 2010 with 11 comments from readers
One of the wisest and most trusted investment advisors in the world, Dr Marc Faber says that interest rates will be going up within three months after the bond market passes ‘an important inflection point’.
This is exactly the opposite of what the US Federal Reserve is promising, and is bound to turn global financial markets upside down. Higher interest rates will strengthen the dollar rather than weaken it, while the value of bond holdings all over the globe will be decimated.
Stock market impact
Stocks look to be a winner until you consider the impact of higher interest rates on an already weakened global economy, particularly the US, Japan and Europe. For one thing real estate prices will fall sharply and bank balance sheets will be once again seriously impaired. Stock markets will therefore come down. Rising interest rates are not good news for equities.
A rise in the cost of money is the last thing that the US central bank wants to achieve right now. However, interest rates can only be artificially held at record lows for so long. Eventually the weight of new money entering the system becomes too much for it to bear any longer and there is a tipping point for bonds.
Professor Niall Ferguson, the celebrity historian is another leading financial pundit to take this view, and it is no surprise that Dr Marc Faber is also an ardent student of history. For this bond market reaction is nothing new. It has happened many, many times before.
Basically money creation will always eventually overwhelm the very instrument used to create it. The pattern that follows is first a very sharp deflation of real asset prices and then later a hyperinflation of asset prices which in extreme scenarios – like Weimar Germany – requires the issuing of a new currency.
Faber’s usually right
Dr Marc Faber’s track record for calling such major market moves has been outstanding in the decade that he has been known to ArabianMoney. Sometimes he is like the boy in the parable of the emperor with no clothes, and what he says should be blinding obvious but nobody will admit it.
Today the bond market is an obvious bubble. Interest rates are perilously low and this completely distorts the investment world leaving savers with little income. But this sort of financial conjuring trick only works for so long and the saucerer’s plates eventually all come tumbling down.
Then savers get their interest again. Real estate, stocks and bonds take a big hit from higher interest rates. The dollar at first will surge in value, probably depressing precious metal prices too in the process, although they are increasingly just another currency, albeit one that pays no interest.
Fed response
But the Fed response to this crisis will be to learn nothing and print even more money, and that will finally result in runaway inflation. Only then will you want to be invested in stocks to rise with this tide.
This looks like being a very tough phase to be invested in any major asset class so the main advice seems to be to stay liquid, ironically being long the dollar seems the best defense against Fed action specifically designed to weaken the greenback.
But you would want to convert that cash back into real assets like gold, silver, houses and stocks before the great inflation. In any case that is ArabianMoney’s interpretation of how rising interest rates will play out, assuming that Marc Faber is right again.
However, for the record Dr Marc Faber has stock markets correcting in October/November in his latest newsletter and does not see stocks as a good investment now as suggested in an inaccurate Bloomberg report yesterday.
11 Comments posted by readers:
What about this article ?
Marc Faber Says Cash, Bonds Will Be ‘Very Dangerous’
http://www.businessweek.com/news/2010-06-09/marc-faber-says-cash-bonds-will-be-very-dangerous-update1-.html
Ed Note: He is most worried about bonds in the short term and only after that cash is a problem because of the inflation that follows next. The problem is that reporters do not fully get what he is saying – I have been over this with him on several occasions recently and I think this is the correct interpretation.
As I’ve said before on this blog, when Dr. Faber speaks, we “little people” (… and that includes folks with fat retirement plans!) had better listen.
I’ve followed Faber closely for over 15 years; his macro-economic forecasts have almost always been right.
The only times when he has been wrong was when, back in the mid 1990s, he was a panelist on the Barron’s Roundtable. Panelists would make recommendations on a bunch of specific investments. His track record back then on stocks, bonds, commodities was correct about half the time!
Whether rates go up or down, inflation is a comin! What’s crazy is silver’s been skying even while inflation has been going down. And now the Fed WANTS inflation…Wow.
Great stuff, love your points.
http://www.youtube.com/watch?v=oSANXDp13Xc
http://joshuagamen.wordpress.com/2010/10/13/competition-towards-disaster/
I dont think interest rates will go up soon. If they do, this could mean that US authorities (FED, US government etc) will admit that we have inflation instead of deflation (surprise surprise
).
The US economy will be smashed again, and then, if the USD does not go up (e.g. go down), it will make the road for hyperinflation.
From the other side, some day soon or later , interest rates need to go up. but I do not see this day in next 3 mo. At least not until 1 EUR = 2 – 2.5 USD
…but I am usually wrong with macro economics
Dr. Faber’s interpretation is certainly logical and probably right, but there are a lot of unforseen intangibles that can be game changers!!!
And don’t forget that the only way the U.S can ever get their arms around their humongous deficit is to ‘inflate’ their way out of it and depreciate the dollar. The FED is in the tightest corner that it’s ever been and is going to fight like hell….
What is certain is that a lot of folks, big banks and little people are going to get hurt very badly.
In hindsight, Dr. Greenspan, was the 16 years of growth really worth this kind of pain?????
@ Jag:
Well said, but I wouldn’t bet against Faber. The US government KNOWS that the only trick left in their book is to inflate their way out of this terrible mess that they, themselves, have created (along with the fraudulent banks!).
Secretly, they plan to devalue the US dollar by 50% between now and 2015; and then by another 50% between 2015 and 2020.
So yeah, many millions of people in the US and hundreds of millions around the world will be badly hurt by this . . . especially older retired folk, who live on a fixed income.
@ obewon :
>> Secretly, they plan to devalue the US dollar by 50% between now and 2015; and then by another 50% between 2015 and 2020.
where you know the numbers from
. Also devalue against what? Other currencies or “stuff”? I don’t think there will be 50% loss against other currencies.
I don’t want to sound ignorant, but I am, so please help me out here: I have a substantial amount of money invested in state and federal bonds. Are they somehow in danger? Is the value of my portfolio in danger? I thought these bonds were safe, unless there is a default. Now I seem to read that they are not?
Please explain.
Ed Note: If interest rates go up then the value of your bonds goes down. Interest rates are at record lows now so your bonds are at record highs. The risk is very clearly to the downside, and the idea that the value of these bonds is safe is absurd. Cash would also be at risk from devaluation but it is not as immediatey exposed to interest rate changes as your bonds. But seek expert advice, I cannot advise as I do not know your financial circumstances and do not work as a financial consultant.
@ Nikolay:
Rapid Fiat Currency Debasement is in Vogue:
Years ago, all governments manipulated their own currencies to a small extent; and all currencies are constantly fluctuating against each other. Fast forward to today: Now all currencies in the western developed countries (and Japan) are being debased rapidly, as each country tries to gain a competitive advantage over its trading partners and adjust their own balance of payments accounts. In the US, the US government has a double problem, namely a) how to get rid of their massive debts/obligations that now are in the hundreds of trillions, and growing, and b) how to gain some advantage over its trading partners, notably China (Hint: and the only way that the US can do that is to massively devalue the USD!).
Debasement Against What?
Simply stated, almost all fiat currencies are being debased. So the ultimate question is: “debased against what?” Before answering that question, it is appropriate to ask what currency in the world represents a constant store of value that can not be debased? The answer is gold, since gold can’t be printed or debased by central banks. And the answer to your question lies in a simple but profound statement by Ambrose Evans-Pritchard (UK Telegraph), who said recently: ”Gold is the final refuge against universal currency debasement.” In other words, gold is the ultimate “barometer” of a nation’s economic health, while fiat currencies are only fancy paper that is declared to be “money” by fiat. So in reality, this continuing global currency debasement is the driving force that is propelling gold relentlessly higher.
Extent of Debasement Since 2001:
On this blog, I am unable to insert an excellent graphic that illustrates this point; it’s a graphic of all the world’s major currencies, when plotted against the price of gold. Since 2001, all of these fiat currencies have dropped precipitously; one or two of them (e.g. the Swiss Franc) have gone down a lot, but nowhere near the significant drop that the USD and the Euro have dropped.
Let’s Use the USD as an Example:
Here are the statistical facts:
Fact # 1: the USD has declined 80% in value against gold since 1999
Fact # 2: the Dow Jones (and many world stock markets) has declined over 80% against gold since 1999.
Fact # 3: the USD and most other currencies have gone down 98-99% against gold since 1913 (the year that the corrupt Federal Reserve Bank and FED system was created).
If you google “currency devaluation”, you’ll have lots of reading material. Here’s a few worthwhile links:
http://www.zerohedge.com/article/matterhorn-asset-management-sets-three-gold-price-targets-6000-%E2%80%93-7000-%E2%80%93-10000
Congressman Ron Paul in April 2008: http://www.youtube.com/watch?v=_GcP_Lw4BCc
http://www.infowars.com/the-risk-of-currency-devaluation/
@ Maurice:
The editor’s response to your question was excellent; he gave you very sound and very practical advice. Bonds are now at near the end of their nadir (the 30 year may drop a little more, from 4% to 3.5%). This means that holding long term or intermediate term bonds are very risky. Seek expert advice!
I have a question ? i have all my retirement in rental homes,,,,as you know the market fell thru the floor,,however,,i am renting them at a 10 percent of the value which have them invested in realestate,,,do you think the only avenue i have is to leave all monines in the realestate,,,,,or take the hit and cash out at the bottom of this market,,,but what to do with the money if i cash out,,no,,gold bad,,,stocks,,,,???? i only think the rental houses are the way,,postive cash flow ,,have long term tentants,,,,please give me your opionon
Ed Note: Sorry we are not allowed to advise on individual cases. This is an information website and only you know your own circumstances fully.
Wow!
Another one of Peter’s old commentaries rears it’s head again . . .
nice to see so much life in old, but still very useful material!
@ Ed: this reminds me of that old saying:
“An old pair of shoes is like a good friend; never get rid of either.”