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Dr. Marc Faber Market Commentary March 1, 2011

www.gloomboomdoom.com Page 1 of 27 © Copyright 2011 by Marc Faber Limited - All rights reserved

There is Nothing more Dangerous than a Powerful Fool

Marc Faber

The Monthly Market Commentary Report

© Copyright 2011 by Marc Faber Limited and www.gloomboomdoom.com- All rights reserved

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The information, tools and material presented herein are provided forinformational purposes only and are not to be used or considered as an offer or asolicitation to sell or an offer or solicitation to buy or subscribe for securities,investment products or other financial instruments, nor to constitute any adviceor recommendation with respect to such securities, investment products or otherfinancial instruments. This research report is prepared for general circulation. Itdoes not have regard to the specific investment objectives, financial situationand the particular needs of any specific person who may receive this report. Youshould independently evaluate particular investments and consult anindependent financial adviser before making any investments or entering into.

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There is Nothing more Dangerous than a Powerful Fool

"In Aristotelian terms, the good leader must have ethos,pathos and logos. The ethos is his moral character, thesource of his ability to persuade. The pathos is his abilityto touch feelings, to move people emotionally. The logosis his ability to give solid reasons for an action, to movepeople intellectually."

Mortimer J. Adler

"Outstanding leaders go out of the way to boost the self-

esteem of their personnel. If people believe in themselves,it's amazing what they can accomplish."

Sam Walton

"There is suffering in life, and there are defeats. No onecan avoid them. But it's better to lose some of the battlesin the struggles for your dreams than to be defeatedwithout ever knowing what you're fighting for."

Paulo Coelho

"I would never wish anyone a life of prosperity andsecurity. These are bound to betray. I would wish insteadfor adventure, struggle and challenge."

Dr. Marion Hilliard

A reader of this report recently asked me: “How do you find meaning in life, because I get the feeling that you have done that.” Well, I find this to be a verydifficult question to answer satisfactorily. The late Malcolm Forbes, notnecessarily one of my favorite personalities (I always felt that his private Jetnamed “Capitalist Tool” and his fleet of big Harleys embodied some arrogance),once observed that, “The biggest mistake people make in life is not trying tomake a living at doing what they like best.” I think that it is very important for





you to make an effort that your job is interesting and challenging. I ampurposely not saying that you should make a living at doing what you like bestbut that whatever you do, you grow into liking it a lot. To achieve “likin gtoward your work” requires developing a keen interest in your profession,further education or training through contacts and interactions with moreknowledgeable or better skilled people than you are and through further reading,etc. Once you really enjoy what you are doing, you will become better at whatyou do and some financial reward will almost certainly follow. At that time, youwill have the opportunity to help others develop their own skills and this iswhere I see some meaning in life . In private life, I am a believer that onespends one’s time with what one enjoys the best. If playing golf, attendingdinner parties where boring couples dish out the latest gossip and socialclimbing is of any interest to you, this is how you should spend your time.However if economic and social life interests you, then spending time traveling,going out and mixing with people from all kinds of lifestyles is advisable. I ambringing up some of these issues because I recently participated at a seminarhosted by Tony Robbins about financial independence. I always had secondthoughts about preachers, prophets, gurus and motivational speakers becausemost of them convey their messages with some ulterior motives. As ThomasPaine observed, "All national institutions of churches, whether Jewish, Christianor Turkish, appear to me no other than human inventions set up to terrify andenslave mankind, and monopolize power and profit." Still, I have to admit that Iwas very impressed by the show Tony put up. He is truly an outstandingspeaker and communicator. With energy and charisma, he has the ability tomove people into feeling better and enthusiastic about their own potential andabout how they can improve their lives. Some people will of course considerhim to be some kind of a snake oil salesman with a huge talent for self promotion. However, I was very impressed by how well he organized hisseminar, his knowledge and how well he had prepared himself for askingrelevant questions (if you never heard him speak before you can Google him).In fact, should you ever have the opportunity to attend one of his events youshould go (with a critical mind) because you will find him to be a master atenthusiastically communicating his ideas to the audience. I also believe thataside from his work having made him a very well to do person (which somepeople will find objectionable), his seminars have helped many people help





themselves . Sam Walton said that, "Outstanding leaders go out of the way toboost the self-esteem of their personnel. “ I think Tony Robbins does boost theself-esteem of his followers and once they believe in themselves, it is, as SamWalton noted, “a mazing what they can accomplish ”. This takes me back to thequestion of the meaning of life. I truly believe that whatever we do we shouldtry to do it to the best of our abilities. Should we be fortunate in acquiringspecial knowledge and skills, we should try to help others improve their lives bycounseling and teaching them with our expertise, experience and mostimportantly with tolerance, kindness and compassion. Believe me, I am not asocialist and a “world improver” . However, I believe that we can make adifference to the people around us at the office, at home and in ourneighborhood that are at the beginning of their careers, have some problems orare simply less privileged than we are. This takes me to the purpose of aninvestment commentary. I cannot emphasize enough that anyone who thinksthat by reading investment reports he will become rich is an incorrigibledreamer. When I started to work on Wall Street, now precisely 40 years ago, Iwas very much attracted to technical analysis and market timers. I am still amember of several technical analyst societies and I have met most of the greattechnicians such as Joe Granville, William Scheinman, Bob Farrell, RalphAcampora, Alan Shaw, John Mendelson, Robert Prechter, Tom McClellan, StanWeinstein, Ian McAvity, etc. I also know countless strategists, analysts,economists and portfolio managers all over the world. All I can say is thateverybody in the forecasting business has had for some time his place in the sun,but also encountered periods when everything went wrong. In the 1970s, JoeGranville had a perfect record at identifying peaks and lows in the US stock market and he became world famous. Then in 1982, he missed the August lowand remained bearish until 1987. Nobody paid any attention to him anymorealthough he correctly called the October 1987 low. Therefore I think that thebest way of approaching reports by strategists, market timers, economists andindustry analysts is to use them as a source of market intelligence andinspiration . By inspiration I mean that a newsletter or report should provide theinvestor with investment ideas and guide him on his journey toward capitalpreservation. However, what reports (including this one) cannot do for investorsis to make money for them because that will largely depend on investorsallocating their capital wisely. Meaning each investor lives under different





economic, social and financial conditions and therefore, only he himself canknow how much capital he should risk in a single investment or a particularstrategy. As an example, I have repeatedly written about the attractiveness of energy related investments in recent months under either a very positive or avery negative economic and political environment. On many occasions Ihighlighted stocks like Exxon, Suncor and Chesapeake Energy (see Figure 1and report of January 1). Fortunately, the investment idea about buying energyworked out but it could also have gone the other way. Therefore, an investorshould always first consider how much money he could risk to lose and nomatter how good an investment idea sounds – never forget to be prudent andhold a diversified portfolio of assets.

Figure 1: Chesapeake Energy, 2010 – 2011

Source: www.decisionpoint.com

http://www.decisionpoint.com/








Above I talked about allocating capital “wisely”. The investor who boughtenergy related stocks and the investor who has not yet bought energy relatedshares currently need to consider whether energy is still a good bet. Shouldpositions be increased or initiated? Without going into all the intricacies of thespread of unrest in North Africa and in the Middle East it appears to me thattensions will more likely increase than decrease and that unrest is likely goingto spread to other oil producing countries such as Iran, Saudi Arabia, Nigeria,Angola and Venezuela. If this nightmare scenario were about to unfold oilprices could really spike up (see Figure 2).

Figure 2: Crude Oil Price, 2008 – 2011










An American journalist recently wrote that it is remarkable that the “revolution”in Egypt occurred with “no foreign involvement” (so far it has been a faileduprising since the army is still in charge). However, what this journalist (anAmerican of course) failed to address is that the uprising was as much againstMr. Mubarak, as it was against US support for Mr. Mubarak and againstAmerican interference in Egyptian affairs (notably in its foreign policy and inits complicity in suppressing the opposition). All of us don’t know what theeventual outcome of the spreading unrest in oil producing nations is likely to bebut it should be clear that relations with Western Powers, which supported therepressive regimes we find in most oil producing nations, can only deteriorate.

Another issue relates to the “Curse of Oil ” . In most countries where oilproduction and therefore revenues from oil increased rapidly, other industriesare either atrophied or never developed. Well-documented examples of agriculture wasting away are countries such as Nigeria and Egypt. In the MiddleEast, governments seldom used their enormous oil revenues for developingother economically competitive sectors with the result that employmentopportunities remain extremely limited for the region ’s exploding population(see Figure 3).

Figure 3: MENA per Capita GDP and Exports (ex energy)

Source: Michael Cembalest, J.P. Morgan





What is stunning is that according to Michael Cembalest of J.P. Morgan, thenon-energy exports of the MENA countries (Middle East/North Africa) were inaggregate lower than Finland, a country with 5% of the Middle Easternpopulation! Above I mentioned that when oil production and therefore revenuesfrom oil increase rapidly other industries are atrophied or they never develop.Another problem is that in major oil producing countries the ruling families(royals or dictators) can easily steal money on a massive scale. Finally, when oilproduction declines after other sectors of the economy have been atrophied, therulers simply cannot satisfy the aspirations and expectations of the rapidlygrowing population of young people (as a friend of mine said, no jobs, no sexand no hope) and unrest follows (see Figure 4).

Figure 4: Egypt Oil Production (millions of barrels per day), 1995 -2011

Source: Ed Yardeni, www.yardeni.com

http://www.yardeni.com/








Therefore only an impermutable optimist such as my friend Abby Cohen wouldthink that anything but calamitous would come out of the current wave of unrestin MENA countries. I believe it’s only a matter of time (possibly another yearor so) until the situation in the Middle East will become very ugly (aside fromAfghanistan and Pakistan) and push oil prices higher. Further oil price increaseswill naturally lead to higher food prices (fertilizer prices will increase), higherinflation rates and diminish discretionary consumption as households will haveto spend a higher portion of their income on food and energy (see Figure 5).

Figure 5: Rising Energy Prices are an Additional Tax on the US Consumer:Spending on Energy Goods and Services as Percentage of DisposablePersonal Income, 1970 -2011

Source: Ed Yardeni, www.yardeni.com

I should add that according to the Federal Reserve Bank of St. Louis, foodprices are a very reliable indicator of future inflation rates (see Figure 6).









Figure 6: Food Prices and Personal Consumption Expenditure Price Index(PCEPI) ex Energy, 1983 - 2001

Federal Reserve Bank of St Louis, The Regional Economist, January 2002.www.stls.frb.org , courtesy of Bill King [email protected]

With rising energy and food prices, it should therefore come as no surprise thatWal-Mart Stores (WMT) posted its seventh straight sales decline at its USstores. US same store sales declined by 1.8% in the quarter ended January 28,2011. Naturally, Wal- Mart’s stock reacted to the downside (see Figure 7).

However, what is interesting about the performance of WMT’s stock is that itbottomed out already on February 6, 2009 and served as a leading indicator forthe stock market’s explosive rise after March 6, 2009. Can therefore now, Wal-Mart also lead the market lower?

http://www.stls.frb.org/


mailto:[email protected]









Figure 7: Wal-Mart, 2007 -2011


Also no teworthy is that WMT’s stock is no higher than it was a year ago and atthe same level it was in April 2009. I think this tells us more about the state of the US economy than the glowing statistics published by the Ministry of Truth.

However, there is another reason why oil prices could increase further. Usuallyinvestors will refer to Mr. Bernanke as a “money pri nter”, which undoubtedlyhe is, but, other central bankers around the world are not much better since they









have kept real interest rates significantly below the cost of living increases (seeFigure 8). I should mention that the cost of living increases everywhere in theworld are far higher than those Government published inflation rates.

Figure 8: Real Interest Rates in Asia

David Cohen, Action Economics LLC, Bloomberg

Now consider two scenarios: Energy and food prices continue to increase. Doesanyone really believe that the central banks of India, China, Vietnam and

Singapore will lift short-term interest rates above the rate of cost of livingincreases?I am betting they won’t take such an action, which will lead to even higher priceincreases. What if the Global and in particular the Chinese economy weakenagain? Isn’t it likely that central banks around the world will be quic k to lowerinterest rates in order to stimulate economic growth? Consequently, I wouldexpect money supply growth around the world to remain high under anyscenario (see Figure 9).





Figure 9: China: M2 Money Supply, 2000 - 2010

Source: www.theeconomiccollapseblog.com

Money supply is also increasing rapidly in India (see Figure 10). Even in Japan,monetization is in full swing (see Figure 11).

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Figure 10: India M2 Money Supply, 1980 – 2010

Figure 11: Japan M2 Money Supply, 1980 - 2010

Source: www.theeconomiccollapseblog.com









Therefore given the likelihood for an escalation of unrest in MENA countries,an explosive situation in Pakistan (a country with nuclear weapons and apopulation of 170 million) and central banks around the world with a strongpenchant for printing money, I find it difficult to make a case for a sharp drop inoil prices. Naturally, oil prices and energy related equities could correct but aslong light sweet crude oil prices do not decline below $90, the uptrend shouldremain intact (see Figure 2).Still, in the near term I am slightly concerned that so many analysts are callingfor $200 per barrel oil. At the same time, oil shares had a good move and nowthey are due for a correction (see Figure 1 and Figure 12).

Figure 12: Suncor Energy, 2006 - 2011










I should mention that the favorable factors for oil – discussed above – alsoapply for precious metals. In addition, as my friend Dhabalia Zak who runs theprecious metal trading desk at Goldman Sachs (yes, there are some very nicepeople at Goldman Sachs) recently noted, gold demand in China is exploding.Zak : “What is more interesting is the geographical nature of gold demand.India and China alone are absorbing over 50% of global mine productionin 2010 . Their current gold demand seems to be increasing at an even faster rate.The introduction of Gold accumulation accounts for depositors in China lastApril by ICBC has had tremendous take up and significant potential to befollowed by other commercial banks. In contrast to real rate concerns inUS/Europe, it ’s possible that Asian investors are purchasing gold as policytightening is falling behind inflationary pressures. The small size of the silvermarket suggests it will outperform if this monetary demand continues. Inaddition further acceptance of gold as a legitimate monetary asset is seepinginto the marketplace following the JP Morgan news that gold will be deemed asacceptable collateral in repo transactions” (emphasis added).

I should add that whereas unrest in the Middle East is not favorable forequities (except for energy, gold and silver mining companies), reckless moneyprinting and negative interest rates are likely to push equity prices higher (seeFigure 13).

Figure 13: Israeli All Share Index, 1972 - 1987

Source: Dylan Grice, SG Cross Asset Research





As Dylan Grice noted Israeli stocks rose by a factor of 6,500 during Israel’shyperinflation between 1984 and 1987. (At the end of this report underAddendum, I am reprinting part of the May 2010 report, which provides a moredetailed analysis of the performance of equities and the foreign exchange rate

during high monetary inflation).In the February report, I concluded: “.... investors should prepare for somedownside volatility. ” I pointed out that emerging markets could correct, “bybetween 20% and 30% from their recent highs and that, for a while at least, theywould underperform the US stock market ” (see Figure 14).

Figure 14: Performance of Emerging Markets Relative to S&P 500, 2006 -2011










Since then many stocks in the emerging markets, (even of the highest quality)are down by around 30% from their recent highs, downside risk has diminished.Nevertheless, my sense is that the correction has further to run becausesuddenly every Tom, Dick and Harry believes that the US stock market willoutperform emerging and Asian stock markets (see Figure 15).

Figure 15: Hang Seng Index, 2006 – 2011










Therefore international funds are selling Asian and emerging stock markets, andbuying US equities. The problem I have with this strategy is that most emerging

markets would appear to be better value than US equities (see Figure 16).

Figure 16: Forward PE Ratios by Country

Source: Nicholas Smithie, www.ubs.com/investmentresearch

Moreover, there has been a significant deterioration in the US stock market’stechnical position. The number of 52-week new highs has been contracting

sharply and an increasing number of stocks are breaking down (see Figure 17).More so, when the shares of Wal-Mart with annual US sales of $258 billion arebreaking down (see Figure 7) then something is not quite right.

http://www.ubs.com/investmentresearch








Figure 17: Hewlett Packard, 2009 - 2011


Recently investors’ sentiment has also been far too optimistic and mutual fundcash positions are at historical lows. Finally, what really bothers me is therelentless selling by corporate insiders across the board. Referring to financialstocks, Alan Newmann (www.cross-currents.net ) notes “imagine our shoc k when we found only 4 buyers and a huge expansion in the number of thoseselling, 68 in all. The ratio of shares sold to shares purchased was 855 to 1.Whatever impetus the Feds have provided has clearly had the desired effect.Bankers can sell to their h eart’s content” (see Figure 18 ).




http://www.cross-currents.net/









Figure 18: Financial Insider Transactions

Alan Newmann (www.cross-currents.net )

There are other reasons why I would not necessarily sell emerging markets andbuy US equities. About 30% of US corporate profits come from outside the USand their growth depends largely on expanding emerging economies (inparticular China where as an example GM sells more cars than in the US).Therefore, if there were really problems in emerging economies, profits of UScorporations (also of European multinationals) would likely disappoint sincethere is hardly any growth in the US and in Europe. Lastly as I explained above,I expect central banks in emerging markets to keep interest rates below the truerate of inflation (negative real interest rates). Therefore, I would think that onfurther weakness investors would rather opt for equities than for cash and bonds.This would be particularly true for equities, which have a higher dividend yieldthan cash and bond yields (Singapore, Thailand, Malaysia, Hong Kong andJapan).








For now, I am postponing increasing my positions, which as I explained inearlier reports, I reduced in the last six months. I believe all asset markets couldcorrect further on the downside (except government bonds which could reboundfurther). Moreover in the back of my mind, I would not rule out that we aredealing with something more serious than just a minor correction. Usually thereis seasonal strength from the middle of March until late April. However, if theS&P 500 failed to make a new high during this period (above the February 18high at 1344), stock markets could have formed a more significant top.Aggressive traders (only) could consider shorting the Retail Holders ETF (RTH)with a stop loss order at $110 (ideally on a minor rebound - see Figure 19).

Figure 19: Retail Holders, 2010 – 2011










As always, I recommend the gradual accumulation of physical gold and silver. Ibelieve that precious metals may also correct somewhat more. However, if youread Darryl Robert Schoon’s report (www.drschoon.com), which I am enclosingwith his permission, the risk for investors is not to own any precious metals. AsI said before, I am still a buyer and I shall never sell any gold as long as wehave powerful fools running our central banks.

Due to a heavy travel schedule, I shall not be able to answer any emailsbetween March 7 and April 3.

My regular readers will know about my great love for government officials. Infact my favorites are US immigration officers and staff of the TransportSecurity Administration (TSA). My friend Laura Stein, a very intelligent andperceptive lady who also happens to read my reports, sent me the story below,which explains far better than I could do how efficiently the governmentfunctions.

At the end of the tax year, the IRS office sent an inspector to audit thebooks of a local hospital. While the IRS agent was checking the books heturned to the CFO of the hospital and said, "I notice you buy a lot of bandages. What do you do with the end of the roll when there's too littleleft to be of any use?"

"Good question," noted the CFO. "We save them up and send them backto the bandage company and every now and then they send us a free box of bandages."

"Oh," replied the auditor, somewhat disappointed that his unusualquestion had a practical answer. But on he went, in his obnoxious way."What about all these plaster purchases? What do you do with what's leftover after setting a cast on a patient?"

"Ah, yes," replied the CFO, realizing that the inspector was trying to traphim with an unanswerable question. "We save it and send it back to the





manufacturer, and every now and then they send us a free package of plaster."

"I see," replied the auditor, thinking hard about how he could fluster theknow-it-all CFO. "Well," he went on, "What do you do with all the leftoverforeskins from the circumcisions you perform?"

"Here, too, we do not waste," answered the CFO. "What we do is save allthe little foreskins and send them to the IRS Office, and about once a yearthey send us a complete dick."

Addendum about the Performance of Equities under highMonetary Inflation (reprint from May 2010 report)

When I look at the world from an economic, social and geopolitical perspective,I become very depressed and really cannot get excited about investing inequities. Yet, I accept the words of F. Scott Fitzgerald who stressed theimportance of having “the ability to hold two opposed ide as in the mind at thesame time ”. So, when I see that the Fed is determined to keep interest rates atzero for and extended period of time, I become very s keptical about “cash”being the safest investment, which it usually is in a noninflationary environment.In fact, I believe that as far as the eye can see the Fed will keep the fed fund rate

below zero percent. By this I mean that even if the Fed increased in future thefed fund rate it would keep it below the rate of a broad measure of inflation (aswas the case between June 2004 and August 2006 when the Fed increased thefed fund rate from 1% to 5.25%. So we could have a situation where the fedfund rate would be at say 5% and a broad measure of inflation would showprices increasing at an annual rate of 8% or more (negative real interest rates of 3%). Now, when a central bank pursues such an “inflationary” monetary policy





(usually in combination with expansionary fiscal policies) the following occurs:the currency collapses.Following the petrodollar crisis of 1980/81 most Latin American governmentsincluding Mexico followed these detrimental economic policies, which led todepression like conditions amidst soaring inflation rates (see Figure 20 – pleaseenlarge for clearer viewing).

Figure 20: Mexican Peso (Pesos per US$), 1919 – 1999

Source: Ron Griess, www.thechartstore.com

As can be seen highly expansionary fiscal and monetary policies after 1979 ledto a complete collapse of the Mexican peso between 1979 and 1989 (downagainst the US$ by more than 98%). So, what happened to stock prices? In localcurrency terms stocks performed extremely well. From a low of 1066 theMexican Bolsa Index increased to a high of 343,545 in 1987 and closed at year

http://www.thechartstore.com/







end 1988 (following the 1987 global stock market crash at 139,620 (see Tables1, 2, and 3).

Tables 1, 2, and 3: Mexican Stocks in Pesos and US$, 1979 – 1988

Source: The Gloom Boom & Doom Report

In dollar terms the performance was however quite different because of thecollapse in the Mexican peso (see Figure 20). From Table 2, it is visible thatfrom a low of 48 in 1979, Mexican stocks in US$ increased to a high of 220 in1987 and closed at 62 at the end of 1988. So, in local currency stocks had astrongly rising trend, but were (if you bought the index at the 1979 high of 70)largely flat in US$ because the currency depreciation offset the stock marketgains in local currency (or nominal terms). But more important is to analyse thefluctuations that occurred between 1979 and 1989 from a trader’s point of view.As can be seen from Table 2, between 1979 and 1982/83, Mexican stocks in




US$ collapsed from 70 to 5. Why? Because between 1979 and 1982/83, theMexican peso depreciation (see Figure 20) exceeded the appreciation of Mexican stocks in peso terms (see Table 1). But after 1983, Mexican stocksin US$ went ballistic because the stock market gains in Mexican peso termsexceeded the decline in the value of the Mexican peso by a wide margin . Asa result, Mexican stocks in dollar terms increased from 5 in 1982/83 to 220 atthe 1987 peak and closed at 62 in 1988 (see Table 2). A few observations: If acentral bank is determined to print money, asset prices including real estate andstock prices will soar in value in local currency terms . In terms of a strongcurrency (in the 1980s the US dollar – certainly compared to the Mexican peso)stocks will over time more or less maintain money’s purchasing power ( willdepend on the entry point). Moreover, if the entry point is well-timed (in thecase of Mexico in 1982/83) hyper-inflating countries offer investors huge profitopportunities. And what were the worst investments in Mexico between 1979and 1988? Mexican peso cash and Mexican peso bonds!So, with Ben Bernanke and Janet Yellen at the Fed, cash in US dollars and USgovernment bonds may not be as safe as is perceived by investors. Currently acomplication arises because there are no “strong” paper currencies left, exceptmaybe in relative terms. So the best we can do is to measure the value of assetsin gold terms.

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