zInsight presents the following pithy treatise by –

Dr. Ron Paul ,  a former member of Congress and the author of The Revolution: A Manifesto, End The Fed, Liberty Defined, Farewell to Congress, and The School Revolution.

Dr. Marc Faber ,  the editor of The Gloom, Boom and Doom Report. Dr. Faber has been headquartered in Hong Kong for nearly 20 years.   A regular speaker at various investment seminars, Dr Faber is well known for his “contrarian” investment approach.

“Happiness” comes in a variety of packages, depending on the consumer’s preferences.

by Marc Faber

I recently attended an event where one of the speakers suggested that investors should buy “happiness stocks,” examples of which include luxury goods companies such as LVMH (Moët Hennessy Louis Vuitton), L’Oréal, Prada, and Tiffany (he also extolled high-end pleasure boat manufacturers), as well as Nestlé (because it manufactures and distributes chocolates). According to this consumer goods expert, people all around the world are trying to buy happiness, and these companies are suppliers of “happiness goods.”

Personally, I find this concept of “happiness stocks” quite bizarre, as everyone has a different concept of what makes them happy, depending on their socioeconomic status. Low income earners might consider themselves happy if they have enough money to buy food, pay their rent, purchase other necessities of life, and have something left over to buy cigarettes, booze, candy, movie tickets, lottery tickets, consumer electronics, clothing, etc.

Wealthy people, on the other hand, might consider that happiness lies in having enough money to purchase a luxury home or yacht, an expensive watch, fine wines, high-end fashion brands, art and collectibles, etc. In both cases, each purchase will give the buyer some initial satisfaction (happiness), irrespective of whether it is a luxury product or a necessity.

Moreover, happiness products differ depending on age group. A child will generally be far happier eating at a McDonald’s than in a high-end restaurant, where they are likely to feel bored. Younger people tend to enjoy trendy, noisy restaurants, where the quality of the food is secondary to their wish “to see and be seen”; whereas the elderly are likely to feel happier in quieter, more traditional places, where they won’t have trouble hearing the conversation around the table.

But consumer satisfaction isn’t associated only with the purchase of goods; services are also an important source of happiness for most people, whether those services be travel, wellness or fitness centres, yoga classes, beauty and hair salons, the performing arts, cosmetic surgery, or nightclubs, spectator sports, amusement parks, movie theatres, concerts, shows, gambling venues, betting offices, escort services, bordellos and financial services.

In other words, “happiness” comes in a variety of packages, depending on the consumer’s preferences. But I understand what the speaker at that event was driving at. Hundreds of millions of people around the world are joining the middle class, with luxury brands being a prime beneficiary of this social trend. I have some sympathy for this view, albeit with some serious reservations.

In the last few years, the demand for luxury goods has largely been driven by consumers in emerging economies (notably China) who have purchased these testaments to their improved social status either in their own markets or while travelling abroad in the more developed markets of the West. Therefore, if we assume that there was — and still is — a malaise in the emerging economies, a slowdown in the demand for luxury goods is almost a certainty.

Such demand is also driven by asset markets. Rising stock and property markets have a favourable impact on the demand for luxury goods but no discernible effect on the demand for necessities such as food and energy. Conversely, declining asset markets influence luxury sales more negatively than sales of necessities. So, assuming that the great asset inflation will at some point come to an end, a cautious (or negative) stance towards the luxury sector seems warranted.

I should also mention that competition among branded products is fierce, and that some brands may have over-expanded in terms of opening stores in very expensive locations. That all is not well in Luxuryland is evident from the recent performance of the stock prices of numerous luxury goods companies. LVMH Moët Hennessy Louis Vuitton is below its 2012 high, and L’Oréal is lower than it was in 2011. In the meantime, Coach has imploded.

There is another point to consider. In most countries around the world, we are seeing an increase in wealth and income inequality. In order to appease the majority of people whose incomes and wealth failed to rise much, taxes on capital gains, assets, and luxury goods are likely to be increased. Take Singapore as an example. According to the Financial Times of February 6, 2014:

Sales of supercars in Singapore have crashed by up to 90 per cent to their lowest levels in years after government measures aimed at tackling growing social inequality started to take their toll. The Asian city state’s growing population of billionaires has been a magnet for carmakers including Maserati, Lamborghini and McLaren. The British marque opened its first showroom in Singapore last year. But the government, increasingly concerned about a yawning [gap] between rich and poor Singaporeans, introduced two measures in last year’s budget aimed at making the luxury cars less affordable. One measure raised the upfront tax on vehicles, while the other increased the proportion of cash downpayment that drivers require to buy cars using loans. Those measures have sent sales of top-end cars plummeting, with Ferrari registrations down by 92 per cent in the second half of last year, compared with the first half.

Now, I am not suggesting that taxes will rise on Hermès scarves, L’Oréal cosmetics, Chanel dresses, Louis Vuitton bags, and Ralph Lauren polo shirts, but our interventionist governments could easily increase capital gains taxes on the “1%” in order to tackle growing social inequality. Moreover, if the social climate deteriorates, wealthy people may choose to curtail their displays of opulence.

I have mentioned the luxury (high-end) sector of the economy once again because it is likely that we are in the midst of a colossal high-end sector bubble (properties in Mayfair, The Hamptons, Manhattan, and Newport Beach, watches, wines, entertainment venues, fashion stores, cosmetic surgery, prestigious hotels, private jets, sports franchises, art and collectibles, etc.), which is extremely vulnerable to the rats occupying tax offices around the world and the resentment of the bottom 50% of households.

Furthermore, everywhere I go, I hear about how foreigners (mostly Chinese, Latin Americans, Middle Easterners, and Russians) are buying up, or will buy in the future, these properties, that artist’s paintings, those luxury watches, that prestigious car, etc. Considering the meaningful slowdown in emerging economies as well as their weakening currencies, and the “mother of all credit bubbles” in China, I would be far less sanguine about the luxury (high-end) sectors around the world. In fact, how correlated the high-end sector is to asset markets is visible from the performance of Sotheby’s stock price.

Dr. Marc Faber is the editor of The Gloom, Boom and Doom Report. Dr. Faber has been headquartered in Hong Kong for nearly 20 years, during which time he has specialized in Asian markets and advised major clients seeking down-and-out bargains with deep hidden value–unknown to the average investing public–bargains with immense upside potential. A book on Dr Faber, “Riding the Millennial Storm”, by Nury Vittachi, was published in 1998. A regular speaker at various investment seminars, Dr Faber is well known for his “contrarian” investment approach.

WITHOUT WORK, LIFE IS ROTTEN, BUT WHEN WORK IS WITHOUT A SOUL, LIFE DIES.

The Monthly Market Commentary
March , 2014

Lucy Kellaway argues in the Financial Times that the idea so beloved by “the cheesier half of corporate America, that employees are somehow part of the family is one of the most delusional metaphors of modern corporate life.”

I have to say that I completely disagree with Miss Kellaway’s views about “families” and workplace “fake families.”

I was fortunate because I always had a close relationship with my co-workers, and all my superiors were always most courteous toward me, my wife and my daughter. In fact, they always went out of their way to support and help me. This, despite the fact, that I was probably their most “difficult” employee. But my bosses took my unpleasant character in stride and told me smilingly that if I were not “difficult,” they would not have hired me in the first place.

However, I also advise my younger readers who come out of school or university to first work in a successful company in order to learn the ins-and-out of an industry. And while working for a company, it is important to make the best out of it either by joining or by forming a “fake family.” Some of your colleagues will be close friends for life even if you work somewhere else, while others will become your customers or will be in a position to help you in many different ways (the Goldman Sachs people seem to be very good in this respect). In fact, whereas my life improved after starting my own business (although I worked harder than when I was an employee), the one and only thing that I occasionally miss working on my own is the daily interaction with colleagues or as Kellaway puts it, working and living within a “fake family.” Another point I wish to make about corporate life is this: Corporate life is usually not particularly pleasant. But since most people will work all their lives as employees of companies and therefore, spend more time at work than at home, they can greatly improve their working lives (and their performance) by having a cordial relationship with their colleagues and superiors. Personally, I actually believe that most people have a better relationship with their co-workers (their fake families) than with their spouses at home.

In early January 2014, I opined that, “It might seem to my readers counterintuitive to have a position in 10-year Treasuries, and at the same time to believe that commodity prices could rebound.”

However, since the beginning of the year, both long-term Treasuries and most commodities rebounded strongly. Long-term Treasuries are up 5%, gold is up 12%, and the Junior Gold Mining Index (GDXJ) is up 52% from the late December 2013 low.

Also, as I explained in previous reports, I would reduce my US equities positions altogether because valuations (and profit margins) are stretched.

I do own some long-term Treasuries because I believe that owning them is an inexpensive and relatively low risk strategy for shorting the stock market.

Two Enclosures:

My friend Joseph Glass kindly wrote for us an essay entitled Homeland inSecurities, A Case for Divestment. Glass is deeply concerned about the abridgement of freedom of people by gradual and silent encroachment by those in power. I think it is an excellent albeit very disturbing read, which should provide food for thought to all our friends who have younger children. After reading Joe’s essay you will realize that I am not exaggerating when I opine that , “we are all doomed.”

Another friend of mine, Fernando Del Pino sent me an interview he had with the value investing publication called The Manual of Ideas. Our readers who are interested in value investing will appreciate his views and learn from his investment strategy. One sentence caught my attention: Del Pino: “I love cash. Of course, holding large amounts of cash makes no sense strategically, but it does make an awful lot of sense tactically, even when our extravagant central bankers make it so hard, having arbitrarily killed the notion of risk-free return, and created an ugly-looking monster called return-free risk.”

Kind regards
Marc Faber

 

The Sunday Investment Review Presents…

Protectionism is a predictable consequence of paper-money inflation, just as is the impoverishment of an entire middle class.

Managing an Unmanageable Monetary System

by Ron Paul

Today’s economic conditions reflect a fiat monetary system held together by many tricks and luck over the past 40 years. The world has been awash in paper money since removal of the last vestige of the gold standard by Richard Nixon when he buried the Bretton Woods agreement — the gold exchange standard — on August 15, 1971.

Since then we’ve been on a worldwide paper dollar standard. Quite possibly we are seeing the beginning of the end of that system. If so, tough times are ahead for the United States and the world economy.

A paper monetary standard means there are no restraints on the printing press or on federal deficits. Since 1971, our dollar has lost almost 80% of its purchasing power. Common sense tells us that this process is not sustainable and something has to give. So far, no one in Washington seems interested.

Although dollar creation is ultimately the key to its value, many other factors play a part in its perceived value, such as: the strength of our economy, our political stability, our military power, the benefit of the dollar being the key reserve currency of the world, and the relative weakness of other nation’s economies and their currencies.

For these reasons, the dollar has enjoyed a special place in the world economy. Increases in productivity have also helped to bestow undeserved trust in our economy with consumer prices, to some degree, being held in check and fooling the people, at the urging of the Fed, that “inflation” is not a problem. Trust is an important factor in how the dollar is perceived. Sound money encourages trust, but trust can come from these other sources as well. But when this trust is lost, which always occurs with paper money, the delayed adjustments can hit with a vengeance.

Following the breakdown of the Bretton Woods agreement, the world essentially accepted the dollar as a replacement for gold, to be held in reserve upon which even more monetary expansion could occur. It was a great arrangement that up until now seemed to make everyone happy.

We own the printing press and create as many dollars as we please. These dollars are used to buy federal debt. This allows our debt to be monetized and the spendthrift Congress, of course, finds this a delightful convenience and never complains. As the dollars circulate through our fractional reserve banking system, they expand many times over. With our excess dollars at home, our trading partners are only too happy to accept these dollars in order to sell us their products.

Because our dollar is relatively strong compared to other currencies, we can buy foreign products at a discounted price. In other words, we get to create the world’s reserve currency at no cost, spend it overseas, and receive manufactured goods in return. Our excess dollars go abroad and other countries — especially Japan and China — are only too happy to loan them right back to us by buying our government and GSE debt. Up until now both sides have been happy with this arrangement.

But all good things must come to an end and this arrangement is ending. The process put us into a position of being a huge debtor nation, We now owe foreigners more than any other nation ever owed in all of history, over $17.5 trillion.

A debt of this sort always ends by the currency of the debtor nation decreasing in value. And that’s what has started to happen with the dollar, although it still has a long way to go. Our free lunch cannot last. Printing money, buying foreign products, and selling foreign holders of dollars our debt ends when the foreign holders of this debt become concerned with the dollar’s future value.

Once this process starts, interest rates will rise. And in recent weeks, despite the frenetic effort of the Fed to keep interest rates low, they are actually rising instead. The official explanation is that this is due to an economic rebound with an increase in demand for loans. Yet a decrease in demand for our debt and reluctance to hold our dollars is a more likely cause. Only time will tell whether the economy rebounds to any significant degree, but one must be aware that rising interest rates and serious price inflation can also reflect a weak dollar and a weak economy.

The stagflation of the 1970s baffled many conventional economists, but not the Austrian economists. Many other countries have in the past suffered from the extremes of inflation in an inflationary depression, and we are not immune from that happening here. Our monetary and fiscal policies are actually conducive to such a scenario.

In the short run, the current system gives us a free ride, our paper buys cheap goods from overseas, and foreigners risk all by financing our extravagance. But in the long run, we will surely pay for living beyond our means. Debt will be paid for one way or another. An inflated currency always comes back to haunt those who enjoyed the “benefits” of inflation.

Although this process is extremely dangerous, many economists and politicians do not see it as a currency problem and are only too willing to find a villain to attack. Surprisingly the villain is often the foreigner who foolishly takes our paper for useful goods and accommodates us by loaning the proceeds back to us.

It’s true that the system encourages exportation of jobs as we buy more and more foreign goods. But nobody understands the Fed role in this, so the cries go out to punish the competition with tariffs. Protectionism is a predictable consequence of paper-money inflation, just as is the impoverishment of an entire middle class.

It should surprise no one that even in the boom phase of the 1990s, there were still many people who became poorer. Yet all we hear are calls for more government mischief to correct the problems with tariffs, increased welfare for the poor, increased unemployment benefits, deficit spending, and special interest tax reduction, none of which can solve the problems ingrained in a system that operates with paper money and a central bank.

If inflation were equitable and treated all classes the same, it would be less socially divisive. But while some see their incomes going up above the rate of inflation (movie stars, CEOs, stock brokers, speculators, professional athletes), others see their incomes stagnate like lower-middle-income workers, retired people, and farmers. Likewise, the rise in the cost of living hurts the poor and middle class more than the wealthy. Because inflation treats certain groups unfairly, anger and envy are directed toward those who have benefited.

The long-term philosophic problem with this is that the central bank and the fiat monetary system are not blamed; instead free market capitalism is. This is what happened in the 1930s. The Keynesians, who grew to dominate economic thinking at the time, erroneously blamed the gold standard, balanced budgets, and capitalism instead of tax increases, tariffs, and Fed policy.

This country cannot afford another attack on economic liberty similar to what followed the 1929 crash that ushered in the economic interventionism and inflationism which we have been saddled with ever since. These policies have brought us to the brink of another colossal economic downturn and we need to be prepared.

Big business and banking deserve our harsh criticism, but not because they are big or because they make a lot of money. Our criticism should come because of the special benefits they receive from a monetary system designed to assist the business class at the expense of the working class.

Labor leader Samuel Gompers understood this and feared paper money and a central bank while arguing the case for gold. Since the monetary system is used to finance deficits that come from war expenditures, the military industrial complex is a strong supporter of the current monetary system.

Liberals foolishly believe that they can control the process and curtail the benefits going to corporations and banks by increasing the spending for welfare for the poor. But this never happens. Powerful financial special interests control the government spending process and throw only crumbs to the poor.

The fallacy with this approach is that the advocates fail to see the harm done to the poor, with cost of living increases and job losses that are a natural consequence of monetary debasement. Therefore, even more liberal control over the spending process can never compensate for the great harm done to the economy and the poor by the Federal Reserve’s effort to manage an unmanageable fiat monetary system.

Economic intervention, financed by inflation, is high-stakes government. It provides the incentive for the big money to “invest” in gaining government control. The big money comes from those who have it — corporations and banking interests. That’s why literally billions of dollars are spent on elections and lobbying.

The only way to restore equity is to change the primary function of government from economic planning and militarism to protecting liberty. Without money, the poor and middle class are disenfranchised since access for the most part requires money. Obviously, this is not a partisan issue since both major parties are controlled by wealthy special interests. Only the rhetoric is different.

Our current economic problems are directly related to the monetary excesses of three decades and the more recent efforts by the Federal Reserve to thwart the correction that the market is forcing upon us.

Paper money encourages speculation, excessive debt, and misdirected investments. The market, however, always moves in the direction of eliminating bad investments, liquidating debt, and reducing speculative excesses. What we have seen, especially since the stock market peak of early 2000, is a knock-down, drag-out battle between the Fed’s effort to avoid a recession, limit the recession, and stimulate growth with its only tool, money creation, while the market demands the elimination of bad investments and excess debt.

The Fed was also motivated to save the stock market from collapsing, which in some ways they have been able to do. The market, in contrast, will insist on liquidation of unsustainable debt, removal of investment mistakes made over several decades, and a dramatic revaluation of the stock market. In this go-around, the Fed has pulled out all the stops and is more determined than ever, yet the market is saying that new and healthy growth cannot occur until a major cleansing of the system occurs. Does anyone think that tariffs and interest rates of 1% will encourage the rebuilding of our steel and textile industries anytime soon? Obviously, something more is needed.

The world central bankers are concerned with the lack of response to low interest rates and they have joined in a concerted effort to rescue the world economy through a policy of protecting the dollar’s role in the world economy, denying that inflation exists, and justifying unlimited expansion of the dollar money supply. To maintain confidence in the dollar, gold prices must be held in check. In the 1960s our government didn’t want a vote of no confidence in the dollar, and for a couple of decades, the price of gold was artificially held at $35 per ounce. That, of course, did not last.

In recent years, there has been a coordinated effort by the world central bankers to keep the gold price in check by dumping part of their large horde of gold into the market. This has worked to a degree, but just as it could not be sustained in the 1960s, until Nixon declared the Bretton Woods agreement dead in 1971, this effort will fail as well.

The market price of gold is important because it reflects the ultimate confidence in the dollar. An artificially low price for gold contributes to false confidence and when this is lost, more chaos ensues as the market adjusts for the delay.

Monetary policy today is designed to demonetize gold and guarantee for the first time that paper can serve as an adequate substitute in the hands of wise central bankers. Trust, then, has to be transferred from gold to the politicians and bureaucrats who are in charge of our monetary system.

This fails to recognize the obvious reason that market participants throughout history have always preferred to deal with real assets, real money, rather than government paper. This contest between paper and honest money is of much greater significance than many realize. We should know the outcome of this struggle within the next decade.

Regards,

Ron Paul