Tag Archives: Marc Faber

Investors Beware: Crucial Week Coming Up

The coming week will be a kind of make-or-break for the global financial markets. Not only do we have a Congressional election in the US, we’ve also got the FOMC‘s decision on further quantitative easing coming up. In addition, the European sovereign debt problem has taken a turn for the worst, with the difference in CDS spreads hitting a record high on Friday.

“The next few days will have a crucial importance on both politics and economics.”

Gavan Nolan


The revival of political risks in Greece, Portugal and Ireland, and the growing potential of an Anglo Irish Bank debt exchange, caused the sovereign CDS spreads to widen further. The basis between the Markit iTraxx SovX Western Europe Index and Markit iTraxx Europe Index reached 53bp on Friday – the widest on record.

However, according to Markit.com, the SovX is trading with a considerable skew; “i.e. the theoretical level of the index is trading tighter than the index itself,” credit analyst Gavan Nolan writes in Markit’s weekly credit wrap.

And when comparing the theoretical levels of the two indices the difference is 36bp.

“A high level but nothing exceptional and well below the 47bp reached on May 6,” Gavan Nolan points out.

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Formerly Known As “Political Risk”

Politicians have been derided many times for their often shaky knowledge of economics.

Ronald Reagan’s supply-side policies were dismissed as “voodoo economics” by none other than George Bush in the 1980 presidential race.

And when Bill Clinton ran against George W. Bush in 1992, one of his most famous slogans was; “It’s the economy, stupid!

Probably one of the best indications of how deep the knowledge of economic and financial issues  are (in general) amongst our political leaders, sadly.

More recently, the newly appointed UK shadow Chancellor of the Exchequer Alan Johnson has faced opprobrium for his supposed ignorance, even half-joking that his first action would be to “pick up a primer of economics for beginners”.

But whatever their levels of competence – and many of them are more than competent – the actions and utterances of
politicians have a direct influence on the economy and asset valuations.

“Events in the euro zone’s periphery over the past few days have made this evident. Political instability in two of the most troubled countries in the currency club has caused a mini-revival of the volatility seen earlier this year,” Gavan Nolan writes in this weeks market wrap.

Greece’s spreads widened sharply this week, reversing some of the strong rally seen over the last two months.

The Prime Minister George Papandreou warned that “we have not yet escaped the danger. I am sounding the alarm”.

As if this wasn’t enough to deter investors, Papandreou threatened to call a general election if his party fail to win decisively in the upcoming local elections.

Then the finance minister George Papaconstantinou weighed in, revealing that the country has “serious tax compliance issues”.

“Those familiar with Greece will regard this as a truism, but if the sovereign is to get its fiscal house in order then it needs to fix this issue quickly,” Nolan points out.

The country’s budget deficit is expected to be upgraded by Eurostat to over 15%, and the sovereign’s spreads are still indicating that a debt restructuring might be the most likely – and least painful – way forward.

“On the other side of the periphery, Portugal – hardly a paragon of fiscal prudence – has its own political problems.” Nolan comments.

Budget talks between the minority Socialist government and the main opposition party, the Social Democrats (PSD), broke down on Wednesday. The latter party is insisting that spending cuts should make a larger contribution to the austerity package.

It is likely that a compromise will be reached before the final vote on the budget next month.

“Nonetheless, the uncertainty created by the deadlock caused spreads to widen and they are set to remain volatile until an agreement is reached,” Nolan notes.

“Political friction in the euro zone will no doubt be relevant to risky asset valuations next week,” the analyst writes.

The Risks of the Week

But any fresh developments are likely to be overshadowed by events across the Atlantic, as Tuesday brings the US mid-term elections.

The polls are predicting that the Democrats will lose control of the House and maybe the Senate.

“As investors digest the implications of possible political gridlock they will be hit by the FOMC decision the following day,” Gavan Nolan adds.

The markets have been pricing in additional QE for some time now, and are expecting a confirmation on Wednesday.

The big question is how big – and how gradual – the liquidity injection will be.

“Prior to both events are the ISM and Markit Manufacturing PMIs on Monday (services on Wednesday) and then the week ends with non-farm payrolls on Friday,” markit.com informs.

“The next few days will have a crucial importance on both politics and economics,” Gavan Nolan concludes.

Related by The Swapper:

Credits: PIGs Gone Wild

Marc Faber Expects Market Sell Off On QE2 Announcement

Chart Of The Day: Europe’s Web Of Debt

The Fight Against Currency War

Fitch Place Most US Banks On Negative Rating Watch

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Filed under International Econnomic Politics, National Economic Politics

Marc Faber Expects Market Sell Off On QE2 Announcement

With vacuum tubes expecting QE next Wednesday to come anywhere between $500 billion a $10 trillion, it falls upon Marc Faber to naturally take the other side of the bet, who, in this interview with Margaret Brennan, tells the impeccably coiffed Bloomberg anchor that instead of inciting the mother of all flash dashes and hitting the BlackRock 12 month target of Dow 36,000, Mr. Faber instead anticipates that the FED decision “could disappoint investors and may prompt a correction in US stocks.”

In response to Margaret’s question if size does in fact matter, Faber responds that anything under a trillion will “disappoint.”

And with Goldman now throwing out bogeys as high as $2-4 trillion, it is almost inevitable that a sell the news type day will be virtual certainty on mid-term election day.

“The markets are stretched: weak dollar, strong PMs and strong equities – I think a correction is overdue. But I wouldn’t think that a bear market is around the corner.”

In fact the opposite: “Maybe we will have a crack up boom in stocks and commodities like between the end of 1999 and March 2000 when the markets went up very strongly,” Faber says.

Marc “Gloom-And-Doom” Faber is once again mostly bearish on bonds (and cash), due to his long-running expectation that inflation, whether modest or hyper, will make all fixed paper investments lose value very fast.

As for specific equity sectors Faber highlights agricultural commodities and “I continue to recommend the accumulation of precious metals, whereby I think they are overdue for some kind of a correction here and then we’ll get the next move probably next year and then thereafter.”

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Norwegian Pensioners Enter Bear Market

The Chinese stock market entered officially a so called “bear market” yesterday after the Shanghai Composite Index have  declined over 20% since the peak in November last year – and so did Norwegian pensioners with nearly 50% of its NOK 2,7 trillion pension fund invested in Chinese equities.

“Will we have a crash? That’s quite possible. China is trying to cool the speculation and that will have an impact on economic activity.”

Marc Faber

The Shanghai index has dropped more than 20 percent from a November peak, the definition of a so-called bear market, on speculation efforts to rein in the housing market will hurt earnings. The Norwegian Government Pension Fund have nearly 50% of its total assets invested in the Chinese stock market.

According to the annual records revealed by the Norwegian Government Pension Fund (also called The Oil Fund) it holds Chinese equities mounting to a total of NOK 1.277 billion as of December 2009.

The largest investments are made in the following sectors:

1. Financials

2. Basic Materials (Oil&Gas)

3. Consumer Goods and Health Care

Composite Shanghai Index 300 (ytd)

The funds total value is estimated to about NOK 2.700 billion. Norway’s Sovereign Wealth Fund owns nearly 2% of all stocks in Europe and 1% of all the shares in the world.

The chief manager, Yngve Slyngstad, said at a press conference in relation with the funds Q1 report last week that the portfolio is pretty much the same at the moment as it was by the end of last year.

The Norwegian Oil Funds exposure to the PIIGS countries is NOK 290 billion – over 10% of total assets.

The holdings of government bonds in Greece, Spain, Portugal and Italy is currently at about NOK 54 billion.

To Late To Sell

In an interview with the newspaper Dagens Næringsliv following last weeks reporting, Mr. Slyngstad says that fund sold as much as they could of the PIGS debt in the last months of 2009.

“We sold off government bonds from PIGS countries in buckets and buckets in autumn last year. Securities worth 80 billion kroner was placed in the market generally in October and November.  At the end of last year, the fund down to 54 billion in government debt from PIGS countries,” Mr. Slyngstad says.

He won’t take Ireland into his account for some reason.

“With the positions we have now, it is not possible to do anything. It is not possible for a fund of our size to do anything. It is too late to sell. We are locked in,” he says.

Shanghaied In Shanghai?

Nobody has bothered to ask the man who manages almost NOK 3 trillion of Norwegian tax payers money how they’re doing with their investments in China.

I have just gone over the figures one more time and calculate the total holding of Chinese shares to a massive NOK 1.277 billion – nearly 50% of the funds total assets.

Bonds – sovereign and corporate – not included.

The Shanghai Composite Index (CSI 300) has declined 19 percent this year, the world’s third-worst performer among the 93 gauges tracked by Bloomberg, after surging 80 percent in 2009.

Only Greece and Cyprus have done worse.

Shanghai will impose a series of regulations, including residential property taxes, to curb real-estate prices in the financial hub as early as this month, the Shanghai Securities News said today, citing unidentified people close to the government.

This may extend the slide of the Chinese stock market, as it probably will have a negative impact on Chinese companies income.

And the Norwegian peoples “piggy-bank” might suddenly find themselves in the same position with China as they now are in with the PIGS; not being able to sell because it will enforce the negative market trend.

In A Bear Market

This means that Norwegian pensioners are following the investors into a so called “bear market” in China.

About “bear markets”, Investopedia.com writes:

“A bear market should not be confused with a correction, which is a short-term trend that has a duration of less than two months. While corrections are often a great place for a value investor to find an entry point, bear markets rarely provide great entry points, as timing the bottom is very difficult to do. Fighting back can be extremely dangerous because it is quite difficult for an investor to make stellar gains during a bear market unless he or she is a short seller.”

Unfortunately, the Norwegian Government Pension Fund – Global, has to operate within the guidelines given by the Norwegian parliament; short selling is most certainly not an option.

Hit By Mother of “Black Swans”?

Several prominent economists, among them professor Nouriel Roubini  at New York University, is warning of a giant asset bubble in China, more or less as a result of the nations unprecedented fiscal stimulus.

“There is an overheating of the economy,” Roubini,  says on Bloomberg Television today.

“China should be tightening monetary policy, increasing interest rates and let its currency appreciate over time. They are too slow, they are not doing it fast enough.”

Legendary investors, like Marc Faber and Jim Rogers, are saying the same ting, although in a more direct way:

“The market is telling you that something is not quite right. The Chinese economy is going to slow down regardless. It is more likely that we will even have a crash sometime in the next nine to 12 months,” Faber said in a interview with Bloomberg Television in Hong Kong, May 3.

Jim Rogers started to warn of a bubble forming in the Chinese markets back in late 2008.

This video was uploaded on YouTube by The Jim Rogers Channel, August 7. last year:

There are even more disturbing information coming analysts with extended knowledge of China’s economy and politics.

Director of Research, Vitaliy N. Katsenelson, at Investment Management Associates, Inc. issued an update on his   analysis “China – The Mother of All Black Swans” in April 2010.

According to Mr.Katsenelson, this will be the consequences of a bursting Chinese bubble:

What happens in China doesn’t stay in China (not any more); it spills over to the rest of the world.

China will turn from a windin the sails of the global economy to its anchor.The impact will be felt in many, and unsuspected, places.

It will tank the commodity markets, commodity producers, and commodity-exporting nations.(Incremental demand from China collapses, oil prices follow, taking the Russian and Middle Eastern oil-centric economies with it). According to GaveKal Research, China accounts for 15% of Brazil’s exports (up from 1.5% a decade ago).

Demand for industrial goods will fall off the cliff.China consumes a lot of those goods –$550 billion worth annually (according to GaveKal Research).

Chinese appetite for our fine currency will diminish, driving the dollar lower against the renminbi and boostingour interest rates higher. No more 5% mortgages or 6% car loans.

Political instability in China is a possible outcome from a significantly weakening economy.

Here’s a copy of the updated analysis.

As for the Norwegian Pension Fund, they have now hired an army of risk analysts after being criticized for not having good enough risk management after the 2008 market crash.

But the thing is; when hit by a “black swan” – or a “fat tail event” – no risk analysis, mathematical model or advanced investment strategy is wort a shit…

Related by the Econotwist:

Here’s The REAL Norwegian PIIGS Exposure

Central Bank of Norway Raises Key Interest Rate Again

Warnings Agains Hong Kong Financial Fraud

Norwegian Labor Costs At Record High

Norway: A Mutated Dutch Disease

Norwegian Oil Explorer Files For Bankruptcy

Consumer Confusion Index At Record High

Evaluation Of Norwegian Monetary Policy

Norway’s GDP Fall For First Time In 20 Years

Norway Economic Update – “Partly Grim”

Fighting The Reality

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Filed under International Econnomic Politics, National Economic Politics