So much to Consider and so little Time

Monthly Market Commentary: December 1, 2018

Last month I concluded my report by stating: “I should warn my readers that the Wind of Change may bring about the end of the Great Asset Inflation, 1981 – 2016/2018, which propelled all assets higher including bonds, stocks, commodities, precious metals, properties, art, collectibles, etc. We may enter a period where asset prices stagnate or decline. This would imply a change from asset inflation to asset deflation.”

I must warn my readers that major changes in asset markets are never obvious because they involve enormous turbulences and divergences at the time of their occurrences, which obscure the change in the long term trend and mislead the majority of investors. Moreover, major trend changes are rather rare occurrences.

In the 1970s, the best performing assets had been oil, gold, US coins, silver, stamps, Chinese ceramics, diamonds, etc. with compound annual rates of return respectively of 34.7%, 31.6%, 27.7%, 23.7%, 21.8%, 21.6%, and 15.3%. In the 1970s, the two worst performing assets were bonds and stocks with respective compound annual rates of return of just 6.6% and 6.1%.

This all changed after 1981/1982 when equities and bonds became the best performers. But even among stocks the Change of Wind was confusing. In the 1970s, the best performing stocks had been mining companies and energy related companies, as precious metals and oil prices soared. But after the oil and precious metals collapse in 1980, these stocks performed miserably while cyclical (including autos), food and brokerage stocks performed superbly.

As my readers will most likely have noticed, in 2018 asset prices around the world performed poorly. According to Deutsche Bank Data going back to 1901, a record share of asset classes have posted negative total returns in 2018 (In 2017, just 1% of asset classes delivered negative returns).

Now, the big question is this: In the past, the Fed and other central banks have always supported asset price declines with additional liquidity injections (QEs), which drove asset markets to new highs. But will it work this time?

I am leaning towards the view that this time it will not work and that the coming asset deflation will have a devastating impact on the global economy and on most asset prices.

With investors being captivated by Trump’s Trade War, I would like my readers to remember the words of John W. Gardner, which explain most of the causes of the US Trade deficit:
“The society which scorns excellence in plumbing as a humble activity and tolerates shoddiness in philosophy because it is an exalted activity will have neither good plumbing nor good philosophy: neither its pipes nor its theories will hold water.”

I am enclosing a brief report by my friend Bob Hoye of Pivotal Events’ fame entitled, Debunking the Volcker Myth (bobhoye@remove-this.shaw.ca). Bob has a vast knowledge about economic and financial history, and he discusses here some important financial turning points.

Once again, I wish my readers Merry Christmas and a Happy New Year.

With kind regards   
Yours sincerely   
Marc Faber

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