Inflation, China and the ‘Trump Top’ with Mr Doom

Marc Faber, investor and editor of the investor newsletter, Boom, Doom. Gloom provides some fascinating insights on our topsy-turvy world.

We enjoy Mr Fabers views - we don’t always agree, but they are informative. To begin with he was a professional ski-racer, in his younger days - respect (watch some ski-racing here). However, beyond that he has been the editor of a thoughtful and interesting financial newsletter for decades. Here, we break down an interview with Wealthion (see entire interview here), and as usual analyse his views.

One benefit of listening to investors is they often have no political axe to grind - they just want to invest smartly. Their views are more authentic. As usual, this is not an investment newsletter, and nothing here constitutes investment advice. Rather, we like markets commentary for what it tells us about politics and world trends.

Unprecedented Asset Bubble and Terminal Bull Market

Faber believes the U.S. is experiencing an unprecedented asset bubble and is in the terminal phase of a bull market. He refers to the peak as the "Trump top". We are in history in an unprecedented asset bubble," he says. "I think the US is in a terminal phase of a bull market I call this the Trump Top."

Our thoughts: The publisher of Boom, Doom, Gloom, may not be the most upbeat person in the world. Mr Faber represents those who excoriate our Keynsian system (where central banks create money) - he prefers sound money - money that can’t be created by central banks. The only warning we have for those who are ‘trading the bubble’ is that ‘markets can remain irrational for longer than you can remain solvent,’ as John Maynard Keynes observed - who by all accounts was a very successful investor.

"...the fiscal deficits combined with money printing have been very favourable since 1981, for bonds, for stocks, for commodities, for Real Estate...," says Faber.

Our thoughts: It is hard to argue with that. Any chart that compares the S&P 500 to money supply, shows a undeniable correlation. Critics argue that in recent decades we have seen a ‘financialisation’ of the system, where debt as fed its way into valuations, as opposed to genuine productivity gains. Examples are companies issuing debt to buy back shares, boosting their share prices, while leveraging their balance-sheet. The exceptions to this are big tech and big pharma, whose balance-sheets are loaded with cash (and have much less debt).

Critique of Central Banks and Money Printing

Faber considers central banks that print money as "criminal" because they impoverish the lower and middle classes while enriching asset holders. He highlights that government fiscal policies and central bank money printing are the causes of inflation.

"A central bank that prints money is a is a criminal that is the word criminal," scolds Faber. "...they impoverish by purpose the lower income recipients and the middle class and they enrich the asset holders who were born already with money..."

Our thoughts: This is partially right. Faber is an investor and focuses on money supply. He is a ‘laissez-faire capitalist’, which means unlike us, he thinks capitalism, unchecked, works just fine. In it’s most basic sense, inflation is about the quantity of money relative to the quantity of goods (and services). When central banks increase the quantity of money it may increase inflation. However, the quantity of goods matters too. This is the basis of the Keynes and Hayek debate of the 1930s. Hayek was in the Austrian School (hard money advocated - do not create money, but link it to gold, that can’t be created), focused on money supply. However, Keynes was also focused on production. And we see this today in the era of anti-globalisation and conflict. When you put Ukraine or Syria’s wheat production out of the world market place for wheat, prices go up. Unproductive policies cause inflation, just as much as money printing.

"...the cause of inflation as you know is uh government fiscal policies in other words you create deficits and you have an accomplice in the form of your central bank...," says Faber.

Our thoughts: Yes, but poor government policy can also exacerbate inflation. The weapons industry is another example - guns and bombs aren’t productive. They are dormant or used to destroy production somewhere else. As the world moves apart, defence spending will increase - all poor policy that is inflationary.

Socialism vs. Capitalism

Faber emphasizes that socialism leads to oppression and that capitalism, despite its imperfections, is essential for freedom and prosperity. He expresses concern that young people and academics often favour socialism without understanding its negative consequences.

"...the young people today who want vote for the Socialist and the rich people who vote for the Socialist are a disaster because they haven't seen the oppression that occurs on the socialism," argues Faber. "capitalism this is the essential ideology of freedom and of prosperity that I want to say this I've seen with my own eyes and therefore I can judge it."

Our thoughts: He is of course correct. Socialism, and by that he means communism, as opposed to European style social democracy, can be very oppressive. However, in our opinion, this is not a function of socialism per se. It is because many countries that have tried controlled, distributive economics fail to drive individual productivity, and that leads to economic collapse, that is accompanied by oppression. Equally, societies can move the other way - laissez faire capitalism, leads to a wealthy elite, who concerned by popular unrest, turn to fascist (plutocratic government) authoritarianism - we saw this in 1930s Germany, but also the police states in Spain, Greece, Chile, etc - that too was very oppressive.

"...the capitalistic system is not perfect it has also some disadvantages but it's the still the fair system," he argues.

Our thoughts: And so in this last sentence we get to Hayek’s controversial endorsement of Chile’s dictator Pinochet. Hayek went to Chile during the controversial period of mass human rights abuses, and concluded that Chile still had ‘property rights’ and so it was fine.

Read the rest of this article for free on Substack here.