Marc Faber said at a CFA Institute financial analysts seminar in Chicago Thursday “I believe stocks are fully priced here,” he added, and “I’m of the view of Jeremy Grantham — that when you have low valuations, future returns are relatively high; when you have high valuations, future returns are relatively low.”

“Growth doesn’t come from eating and consuming — it comes from capital investment.”, “geopolitical tensions in southern Asia between China, U.S., Vietnam, Philippines, etc. will have an effect on asset prices,” he said.
source :

To read more go HERE

….related:

Marc Faber : I like Agriculture ,Chinese & Hong Kong Stocks & Precious Metals

Top Risks in China, according to Marc Faber

Marc Faber admits to have been wrong since 2012

When the central bank pumps money into the economy and suppresses interest rates it creates incentives to speculate and invest in ways that would not otherwise be viable. At a superficial level the central bank’s strategy will often seem valid, because the increased speculating and investing prompted by the monetary stimulus will temporarily boost economic activity and could lead to lower unemployment. The problem is that the diversion of resources into projects and other investments that are only justified by the stream of new money and artificially low interest rates will destroy wealth at the same time as it is boosting activity. In effect, the central bank’s efforts cause the economy to feast on its seed corn, temporarily creating full bellies while setting the stage for severe hunger in the future.

We witnessed a classic example of the above-described phenomenon during 2001-2009, when aggressive monetary stimulus introduced by the US Federal Reserve to mitigate the fallout from the bursting of the NASDAQ bubble and “911” led to booms in US real estate and real-estate-related industries/investments. For a few years, the massive diversion of resources into real-estate projects and debt created the outward appearance of a strong economy, but a reduction in the rate of money-pumping eventually exposed the wastage and left millions of people unemployed or under-employed. The point is that the collapse of 2007-2009 would never have happened if the Fed hadn’t subjected the economy to a flood of new money and artificially-low interest rates during 2001-2005.

Rather than learning from prior mistakes, that is, rather than learning from the fact that the use of monetary stimulus to mitigate the effects of the 2000-2002 collapse led to a more serious collapse during 2007-2009 and a “lost decade” for the US economy, the 2007-2009 collapse became the justification for the most aggressive monetary stimulus to date. The damage wrought by previous attempts to artificially stimulate has resulted in the pace of economic activity remaining sluggish despite the aggressive monetary accommodation of the past several years, but it is still not difficult to find examples of the mal-investment that has set the stage for the next collapse. Here are some of them:

1) The suppression of interest rates has prompted a scramble for yield, which has pushed yields on higher-risk bonds down relative to yields on lower-risk bonds. The bonds issued by the governments of Spain and Italy now yield only slightly more than US Treasury Notes, the yields on investment-grade corporate bonds are now roughly the same as the yields on equivalent government bonds, and the yields on junk bonds are generally much lower than normal relative to the yields on investment-grade corporate bonds. This tells us that monetary accommodation has greatly increased the general appetite for risky investments, which is always a prelude to substantial losses.

2) Public companies have been buying back equity at a record pace, despite high equity valuations. One reason is that although equity valuations are high, debt is generally priced even higher. Regardless of how expensive a company’s stock happens to be, from a financial-engineering perspective it can make sense for the company to borrow money to repurchase its own stock as long as the interest rate on its debt is lower than its earnings yield. Buying back stock boosts per-share earnings and often increases bonus payments to management, but it does nothing to expand or improve the underlying business.

3) The number of unprofitable IPOs during the first half of this year was the highest since the first half of 2000. What a waste.

4) The latest boom has been so obviously reliant on the Fed’s easy money that the real economy’s response has been far less vigorous than usual. This at least partly explains the reticence of corporate America to devote money to capital expenditure designed to grow the business and, instead, to focus on financial engineering designed to give per-share earnings a boost. IBM provides us with an excellent example. As David Stockman points out in a recent blog post, since 2004 IBM has generated $131B of net income, spent $124B buying-back its own stock and devoted $45B to capital expenditure. IBM has therefore been channeling almost all of its earnings into stock buy-backs and has bought back almost $3 of its own stock for every $1 of capex. Furthermore, 90% of the capex was to cover depreciation and amortisation. No wonder IBM has just reported declining year-over-year revenue for the 9th quarter in succession.

If interest rates were at more realistic levels there would be less incentive to buy back stock and more incentive to invest in ways to increase productivity.

5) Thanks to the combination of government support, low interest rates and a flood of new money, some large, poorly-run companies are staggering around like zombies, consuming resources that could have been used more productively. General Motors is a prime example.

6) On an economy-wide basis there has been no deleveraging in the US. This is evidenced by the following chart. Instead, the Fed’s promotion of leveraged speculation and the government’s deficit-spending maintained the steep upward trend in economy-wide credit. Consequently, in terms of total debt the US economy is in a more precarious position today than it was in 2007. It will therefore not be possible for interest rates to normalise without precipitating an economic collapse.

7) The abundance of cheap credit prompted hedge funds and private equity firms to buy more than 200,000 US houses, which in many cases are now being rented to people who lost their homes when the previous Fed-promoted boom turned to bust. This has boosted house prices and created the false impression that the residential real-estate market is immersed in a sustainable recovery, prompting new (mal-) investments in this market.

8) The strength in auto sales is linked to the ready availability of subprime credit, which, in turn, is an effect of central-banking largesse, making it likely that auto sales will tank within the next two years. This will not only affect the assemblers of cars and the manufacturers of the components that go into cars, but will also affect all the industries that are involved in the shipping, storage, selling and financing of new cars.

9) While there is no doubt that the shale oil-and-gas industry would have been a great success story without the flood of cheap credit engineered by the Fed, the flood of cheap credit has led to a massive increase in the industry’s debt-to-revenue ratio that has probably made the economics of shale-oil production look better than is actually the case and made the industry acutely vulnerable to tighter monetary conditions. Consequently, despite its solid economic foundation there will probably be many bankruptcies within this industry over the next few years.

A final point is that just as you never really know who has been swimming naked until after the tide goes out, you will never be able to identify all the mal-investments until after the monetary stimulus comes to an end.

We aren’t offering a free trial subscription at this time, but free samples of our work (excerpts from our regular commentaries) can be viewed at: http://www.speculative-investor.com/new/freesamples.html

Through innovation, the physical footprint of technology is becoming smaller day-by-day, and nanotech is the extreme. Nanotech is a vast overarching umbrella for technology in many industries (including energy, biotech, warfare, etc.), and it is garnering significant interest from both the private and public sector.

Nanotech’s reach in a wide range of industries is creating radical innovation across the board. Perhaps the most significant impact of nanotech is in health and medicine. Nanotech is being utilized in various forms of cancer treatment and it is progressively succeeding in fighting the deadly disease. Researchers have achieved promising results by applying gold nanoparticles to cancerous cells and heating the gold by using infrared lasers. In contrast to removing cancerous cells through surgery, this procedure is non-invasive and does no harm to healthy cells. Nanomedcine is a growing and promising industry. By some estimates, the market has the potential to be worth $177 billion by 2019.

Ray Kurzweil, renowned futurist and Director of Engineering at Google, has an interesting insight for the future of nanotech: “By the time we get to the 2040s, we’ll be able to multiply human intelligence a billionfold. That will be a profound change that’s singular in nature. Computers are going to keep getting smaller and smaller. Ultimately, they will go inside our bodies and brains and make us healthier, make us smarter.”

Original infographic from: Jabil

Market Outlook

I will start with the Partnership’s designated “alternative investment of choice” – the S&P 500. For the past five years, investors in the S&P 500 have enjoyed fantastic returns and minimal volatility. It is also likely that this “easy money” will be available for some time. The path of least resistance certainly seems to be up. However, it is essential to remember that, even as the S&P’s steady rise grows more and more intoxicating to the average investor, the past is not indicative of the future. This is not to say that a prudent speculator can’t make money by buying at these levels and then selling at an opportune time in the next 1-3 years. But for those trying to build a nest egg or save up for a college education, this is not the place to be. In light of the below chart, you can’t possibly believe that you’re early to the party!

The US macro backstop does not seem to support the rally. I understand that increasingly more of the S&P’s revenues are being generated outside of the US (currently 45% of S&P revenues are from overseas), but one would think that the recently reported 2.9% decline in US GDP for Q1 2014 would have at least some effect on the exuberance. A glance at the above chart suggests otherwise. Additionally, as stated in the previous letter, the most significant data point that belies this rally is the dearth of U.S. Net Investment over the past decade. With Tesla’s Gigafactory being a notable exception, the slump in capital expenditures (even in a period of record profits) does not bode well for the sustainability of this move.

A sharp decline in the velocity of money also behooves the current market environment. As demonstrated by the below chart, the velocity of the M2 Money Stock has plunged over the past five years. This is happening despite historically low interest rates and the Fed’s multi-year money printing experiment that will continue through at least 2014. In his typically direct (and sometimes draconian) manner, John Kaiser concludes: “The people of America are paralyzed with fear about the future; the shriveling middle class has no spending power and the elite has no desire to spend its accumulating net worth. Banks are not lending because there is no vision of America’s economic future, businesses are not investing capital because they do not see a growing consumption demand, and the wealthy are preparing to ride out the deflation that will accompany the return of interest rates to normal levels.” There are notable exceptions to this statement (think Silicon Valley or the shale gas boom), but I agree largely with this sentiment.

Trends keep working in the same direction until they don’t. When a trend stops working, there is a reversal in the opposite direction. And the longer the original trend, the more painful the reversal (think 2000 or 2008). Whether the next S&P reversal occurs before or after the Fed ceases their omnipresent hand waving remains to be seen. But, one way or another, there will be a significant reversal in the near to medium term. This is the nature of our debt-fueled, boom and bust economy.

Switching gears to the resource market, it appears that the TSX Venture Index bottomed in mid-2013. (Remember that 80% of the Partnership’s capital is deployed in mining equities, with many of these companies in the exploration/development stages. The TSX Venture Index is the best proxy for this market.) While determining a market bottom is an inexact science at best, the stages of capitulation we witnessed in 2012/2013 and the current market disinterest signals that, in the absence of a black swan event, the TSX has reached its lows in this current cycle. The below chart outlines the index’s performance in this historic bear market.

However, this “bottoming” needs to be taken with a grain of salt. The index as a whole is unlikely to zoom upwards anytime soon and many marginal companies will continue to decline for the indefinite future. There are still lots of dead beats out there. According to John Kaiser, 60% of juniors in the TSX Venture Exchange have $500k or less in capital. Companies with this amount of capital will have a hard enough time covering overhead, let alone making tangible development progress on their properties. Within a year there will be dramatically fewer choices in the resource space – these companies can only function as walking dead zombies for so long.

As this attrition continues over the coming quarters, in composite, the surviving juniors will be much stronger than the current batch. Bad bear markets are the perfect breeding ground for leaner and meaner indexes. There will be a time in the upcoming two years where a fresh wave of money enters the junior resource market, right as the remaining zombies are closing up shop. This decrease in variety of potential investments will be good for two reasons. The first is that institutions will begin to team up in financing the very best prospects, leading to strong shareholder bases all around. The second is that these surviving companies are poised for exciting outperformance. As these new investors reap killings in the junior space, more money will find its way into resources as the cycle shifts into a bull market. The Partnership looks forward to waiting patiently as this process unfolds.

One of the most frustrating aspects of the past few years has been the high correlation between all mining related equities. Regardless of the company’s fundamentals, the only direction for the past couple of years has been down. This is a terrible situation for investors attempting to cherry pick the very best from a larger universe of companies. (I am a strong believer in Pareto’s Principle, or the “80-20 Rule”. This rule of thumb dictates that 80% of any industry’s profits are generated by the best 20% of the companies. Extending that further, 64% of an industry’s profits are generated by the best 4% of the companies.) That being said, this concept was temporarily defied in the previous few years as all mining equities traded lower in tandem.

The exciting news is that bifurcation is now very real between the Partnership’s current holdings and “the rest”. This is the “stealth rally” that Rick Rule often references – and it has really come to life since November 2013. I’ve provided some charts below to demonstrate this marked change of performance since late 2013. For points of comparison, I also provide the aggregate performance of past holdings of the Partnership (that have been liquidated due to poor operational performance) and the TSX Venture Index as a whole. Keep in mind that these charts assume equal weightings between all Partnership holdings. As evidenced by the upcoming Overview of Partnership Holdings section, this is a simplification.

Current Holdings

Past Holdings

TSX Venture Index

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Less Growth, Less Certainty, More Geopolitical Risk

Steen Jakobsen, chief economist and CIO at Saxo Bank, has an interesting article today on War & Markets which I present below as a guest post.

Steen says …

Prepare for less growth, less certainty and more geopolitical risk
Crude oil price is simplest proxy for geopolitical risk
Wars reflect a world where growth is low and energy expensive 

“There are causes worth dying for, but none worth killing for” – Albert Camus

The world is increasingly becoming engaged in civil wars and general turmoil where Camus’ words could and should play a central [role] but never will. This article is one of the hardest to write as war is never about right or wrong. They are per definition always wrong and extremely personal and emotional. The fact is, however, that we need to put “the risk of wars” into our macro outlook as they are increasing not only in intensity but also in the numbers of casualties.

I will not condone anyone or any party involved in the present conflicts – I learned my hard lesson advocating the removal of Saddam Hussein, only to learn that his successors are just as bad. Therefore, Camus’ words will remain my mantra.

The simplest way to “measure” geopolitical risk is to look at the price of energy. Energy is everything for a macro economist as it’s a tax on the economy when high, and a discount when low. High energy consumption levels makes it a critical part of any projection but despite this, energy assumptions are often exogenous (given!).

Think about this: Everything you did this morning involved energy consumption: Waking up to your smart phone (charging overnight), putting on the coffee, pouring the cold milk from the fridge, taking a shower, driving the car to work and walking into your air-conditioned office. Likewise, the rest of your day will be one big consumption of energy. The world’s energy resources are primarily extracted from “volatile” or underdeveloped regions, creating a real risk of disruption of supply. Herein lies a clear and quantifiable risk.

The way I measure this geopolitical risk is through measuring the spread between the 5th contract of WTI crude oil and the first contract. Of course, there are other factor at work, but in the absence of a better alternative, I use this War Risk Premium Indicator.

As can be seen, since July 15 the “war premium” or more neutral “disruption premium” have increased by USD 2 and the world’s consumers are now paying two dollars more per barrel of WTI crude. Overall there are many factors influencing the crude market but the price of energy remains the one component we need to know is stable and preferably falling.

The overall impact from war is negative despite the glorified analysis of how World War II stopped the recession – think of the 1970s – probably a better and more relevant analogy to today’s trouble in Gaza, Iraq, Russia/Ukraine, Libya, and Syria. Many will argue it’s different this time, back then we were too dependent on the Middle East!  Sure, but prices were only between 10 and 25 US dollars a barrel back then!

Now we have lived with an oil rise in excess of  USD 100 more or less since 2007! Crude is now four times higher in price than during the “inflationist” 1970s – the era in which we ended  the Bretton Woods system of monetary management and where central banks started targeting inflation instead.

No, the signal from the energy market about the demand of energy and the risk of getting enough of it is clear: Prepare for less growth, less certainty and more geopolitical risk. The market, however, maintains a steady hand: Israel will be contained inside a couple of weeks, Russia vs. Ukraine will find a solution. The non-acceptance of tail-risk (Black Swans) is clear for everyone to see. The market is “perfect” in its information, zero interest rates will save us and we have all been fooled into believing that the real world no longer matters.

Unemployment, social inequality, wars, innocents being killed, and TV images of people fighting to live another day are not relevant………except for the fact that for world growth to keep increasing we need to continue to see growth in Africa, the Middle East and Eastern Europe.

We need to accept that the world is now truly global – we smiled while globalisation reduced prices and made our companies more profit, now the escalation of wars reflect a world where growth is low, energy is expensive and increasingly hard to get and that we have gone full circle with macro and interventionist policies.

The escalation of turmoil in the world is yet to play a role for the market, but be warned: everything economic has a delayed reaction of nine to twelve month – whenever there is an action there will be a reaction. If the present state of alertness continues through the summer you can bet on higher energy prices having a serious impact on not only world growth but also on markets. But don’t ever forget that the real losers are the individual families losing loves ones. No, Camus got it right. There is nothing worth killing for, plenty to fight for.

Mish Comments

The above in entirety courtesy of Steen Jakobsen.

I would not go so far as to say the “risk premium” has risen $2 since July 15. There are too many variables and even random fluctuations that could be at play. If oil would have otherwise been falling because of slowing in China, the risk premium could be way higher. Similarly, oil could be rising for other reasons and the risk premium could be zero or negative although I consider that unlikely.

That said, Steen is generally on the mark with his observations especially his conclusion: “If the present state of alertness continues through the summer you can bet on higher energy prices having a serious impact on not only world growth but also on markets. But don’t ever forget that the real losers are the individual families losing loves ones. No, Camus got it right. There is nothing worth killing for, plenty to fight for.“

Mike “Mish” Shedlock
http://globaleconomicanalysis.blogspot.com