Dr Marc Faber 2012 Presentation for the London Bullion Market Association 11.

00am, Monday, November 12, 2012 At the Grand Hyatt Hotel HONG KONG

Deflationary Bust or Government Profligacy and Money Printing

Our analysis leads us to believe that recovery is sound only if it does come of itself. For any revival which is merely due to artificial stimulus leaves part of the work of the depressions undone and adds, to an undigested remnant of maladjustments, new maladjustments of its own. Joseph Schumpeter

There are two ways to conquer and enslave a nation. One is by the sword. The other is by debt. John Adams

Marc Faber Limited Suite 801, The Workstation, 43 Lyndhurst Terrace Central, Hong Kong Tel: (852) 2801-5411 Fax: (852) 2845-9192 Email: faberdoom@yahoo.com

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TOPICS FOR DISCUSSION

The more I studied economic science, the smaller appeared the knowledge which I had of it in proportion to the knowledge I needed; and now, at the end of nearly half a century of almost exclusive study of it, I am conscious of more ignorance of it than I was at the beginning of the study. Alfred Marshall Addressing long-term structural problems with short-run fixes (Krugman) and superimposing new bubbles (Krugman, McCulley) upon busted ones is the shortest road to economic catastrophe Problems associated with expansionary monetary policies Problems associated with expansionary fiscal policies Causes and consequences of the ongoing shift in the balance of economic and political power from the most developed countries to emerging economies Rising social and political tensions in the Middle East and Central Asia, and territorial disputes in the South China Sea

Investment strategy in a rapidly changing and highly volatile economic, political and financial environment
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FED FUND RATE & CRISES, 1960 - 2012

Source: Ed Yardeni, www.yardeni.com

"If it were possible to take interest rates into negative territory I would be voting for that. Janet Yellen

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FOR HOW LONG WILL REAL INTEREST RATES STAY NEGATIVE?

Source: Ron Griess, www.thechartstore.com

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LONG TERM US INTEREST RATES, 1790 - 2012

Source: N/A

Since 1790, the average interest rate on US Long-Term Treasuries has been 5%!
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TOTAL CREDIT MARKET DEBT AS PERCENTAGE OF US GDP, 1921 2010

Source: Ned Davis Research

There are two ways to conquer and enslave a nation. One is by the sword. The other is by debt. John Adams
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IS A DEFLATIONARY COLLAPSE POSSIBLE?

Source: The Bank Credit Analyst, Barry Bannister, Stifel Nicolaus

The overall level of debt makes no difference one persons liability is another persons asset. Paul Krugman
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PRIVATE SECTOR CREDIT GROWTH EXPANDING AGAIN

Source: Ed Yardeni, www.yardeni.com

The grand fight between central bank debt monetization and the natural order of economic cleansing is about to enter a deeper, darker circle of hell. Bill King, The King Report (July 2012)

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US GOVERNMENT DEBT WILL CONTINUE TO EXPAND

Source: www.whitehouse.gov

Great nations are never impoverished by private, though they sometimes are by public prodigality and misconduct. Adam Smith
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OFFICIAL US FISCAL DEFICIT AND CALCULATED ACCORDING TO STANDARD ACCOUNTING RULES (IN $ TRILLIONS)

Source: USA TODAY Research, Congressional Budget Office

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THE UNLIKELY FISCAL CLIFF: SIZE OF FEDERAL TAX INCREASES, 1968 2012

Source: Strategas Research Partners, www.chartoftheday.com

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FEDERAL SPENDING AND INCOME AS A PERCENTAGE OF GDP

Source: www.usgovernmentspending.com, www.theliscioreport.com

We all know what to do, we just don't know how to get re-elected after we have done it. Jean- Claude Junker (Prime Minister Luxembourg)
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FEDERAL SPENDING AS SHARE OF GDP: CANADA AND US, 1965 - 2012

Source: Dan Mitchell, International Liberty

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PERCENTAGE OF US POPULATION LIVING IN A HOUSEHOLD RECEIVING SOME GOVERNMENT BENEFIT, 1983 - 2012

Source: US Census Bureau, The Wall Street Journal

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GOVERNMENT SPENDING AS A PERCENTAGE OF GDP, 1870 - 1913

Source: The Cato Institute

Little else is requisite to carry a state to the highest degree of opulence from the lowest barbarism, but peace, easy taxes and a tolerable administration of justice. Adam Smith www.gloomboomdoom.com

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GROWING WEALTH INEQUITY: THE GAP BETWEEN YOUNGER AND OLDER AMERICANS (MEDIAN NET WORTH IN 1984 AND IN 2009)

Source: CNN Money, Pew Research Center, www.mybudget360.com

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MEDIAN HOUSEHOLD NET WORTH BY AGE GROUP, 1989 2010

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Source: Board of Governors of Federal Reserve System, 2010, Economic Policy Institute

If all prices and incomes rose equally, no harm would be done to anyone. But the rise is not equal. Many lose and some gain. Irving Fisher www.gloomboomdoom.com

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NET US DOMESTIC CAPITAL SPENDING, 1947 - 2012

Source: Ed Yardeni; www.yardeni.com

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US TRADE BALANCE, 1950 - 2012

Source: Ron Griess, www.thechartstore.com

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INCREMENTAL DEMAND FROM CHINA AND EXPANSIONARY MONETARY POLICIES DROVE COMMODITY PRICES HIGHER

Source: Barry Bannister, Stifel Nicolaus

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THE INDUSTRIALIZED COUNTRIES RELATIVE ECONOMIC DECLINE

Source: Ed Yardeni; www.yardeni.com

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CHINAS EXPORT DESTINATIONS

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Source: The Bank Credit Analyst

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SOUTH KOREAS EXPORT DESTINATIONS

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Source: The Bank Credit Analyst

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CHINAS SHARE OF GLOBAL COMMODITY TRADE (NET IMPORT AS PERCENTAGE OF WORLD IMPORT), 1992 - 2012

Source: IMF, Maybank Kim Eng

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CHINAS CURRENT SHARE OF WORLD COMMODITY CONSUMPTION

Source: Barclays Capital, www.agorafinancial.com

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AT SOME POINT COMMODITIES CONSUMPTION GROWTH LEVELS OFF OR.

Source: Ed Yardeni; www.yardeni.com

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..OR DECLINES AS IN THE MOST ADVANCED ECONOMIES

Source: Ed Yardeni; www.yardeni.com

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A CREDIT BUBBLE IN CHINA!

Source: Bridgewater Associates

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RATIO OF HOME PRICES TO ANNUAL INCOME IN SELECTED CITIES, 2011

Source: IMF, Global Stability Report, Albert Edwards, Societe General

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CHINAS OIL CONSUMPTION, 1987 - 2012

Source: Ed Yardeni; www.yardeni.com

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CHINAS STRING OF PEARLS TO PROTECT THE SHIPPING LANES

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Sources: International Maritime Bureau

The first panacea for a mismanaged nation is inflation of the currency; the second is war. Both bring a temporary prosperity; both bring permanent ruin. Ernest Hemingway
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TENSIONS AROUND THE SOUTH CHINA SEA

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Source: www.middlebury.edu

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INVESTMENT STRATEGY: THE CHALLENGE

The chief danger in life is that you may take too many precautions. Alfred Adler The attraction which inflation policies have for so many people grows, in part at least, out of what may be called the money illusions. Irving Fisher Negative real interest rates bring about higher economic and financial volatility Different asset classes inflate and deflate at different times with different intensity

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Two Strategies
Equities Cash and Bonds Aggressively shifting from one asset class to another or Achieving safety through diversification

Real Estate
Gold

Paradoxically, monetary inflation creates great opportunities to invest in distressed assets

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AVERAGE HOLDING PERIODS OF US EQUITIES, 1926 2011

Source: Alan Newman, www.cross-currents.net

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HIGH VOLATILITY LIKELY TO CHARACTERIZE ALL INVESTMENT MARKETS

Source: John Roque, WJB Capital Group (jroque@wjbcap.com)

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CENTRAL BANKS BALANCE SHEETS, 2003 2012

Source: John Lohman, Bloomberg, Bank of Japan

"If all else fails, immortality can always be assured by spectacular error. John Kenneth Galbraith
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HOW DO WE VALUE ASSETS WHEN REAL INTEREST RATES ARE NEGATIVE?

Source: Barry Bannister, Stifel Nicolaus

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WILL US CORPORATE PROFITS DISAPPOINT? (AFTER-TAX PROFITS OF US CORPORATIONS AS A PERCENTAGE OF BUSINESS GDP, 1950 2011)

Source: Gerard Minack, Morgan Stanley

It has long been recognized, by the business world and by economists alike, that a period of rising prices acts as a stimulus to enterprise and is beneficial to business men. John Maynard Keynes

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PERCENTAGE OF US STOCKS WITH A DIVIDEND YIELD HIGHER THAN TEN-YEAR TREASURY NOTE YIELD, 2006 2012

Source: Wolfe Trahan & Co

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SELECTED PRICE BUBBLES

Source: The Bank Credit Analyst

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SELECTED EQUITIES IN GREECE, PORTUGAL, SPAIN, ITALY, AND FRANCE ARE INEXPENSIVE

Source: Thompson Reuters Datastream

We are continually faced with a series of great opportunities brilliantly disguised as insoluble problems. John W. Gardner
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WHAT IF THE EURO FALLS APART?

MEXICAN PESO, 1969 - 2009 (Monthly Spot Pesos per USD)

Source: Ron Griess, www.thechartstore.com

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MOVEMENT OF MEXICAN STOCKS IN PESO AND USD, 1979 - 1988

Source: Acciones Y Valores De Mexico, SA; Marc Faber, The Great Money Illusion (Hong Kong, 1988)

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S&P 500 TRAILING 10-YEAR COMPOUND ANNUAL TOTAL RETURN, 1825 - 2011

Source: Barry Bannister, Stifel Nicolaus

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PREFERENCE FOR ASIAN EQUITIES

Source: Nicholas Smithie, UBS

Inflation is like sin; every government denounces it and every government practices it. Frederick Leigh-Ross
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ONE CONCERN: EMERGING MARKET CURRENCIES

Source: The Bank Credit Analyst, J.P. Morgan Chase & Co

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THE WORLDS FINANCIAL WEALTH 2009

Source: McKinsey & Company

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IN GOLD I STILL TRUST

Source: Alan Newman, www.cross-currents.net

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HOW TO REPAIR THE GLOBAL ECONOMY? LESS GOVERNMENT SPENDING!

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The growth in government economic activity has a positive effect on productivity growth when government expenditures are les s than 17 percent of GNP, but when government expenditures are greater than 17 percent of GNP this effect is negative. Maximum long-run productivity growth thus occurs when government expenditures are about half of their 1986 percentage.
Edgar Peden, Productivity in the United States and its Relationship to Government Activity: An Analysis of 57 years, 19291986 (Public Choice, vol. 69, 1991)

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There is no means of avoiding a final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as a result of a voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved.
Ludwig von Mises

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