Circus and Pane Stimulus
“...We know Mr. Bush wants to be re-elected à tout prix, and that therefore, over the next 12 months, he and his lackeys at the Fed and the Treasury will only take economic policy measures that are designed to keep the American public happy with ‘circus and pane.’ However, such policies can give the majority of investors the illusion of wealth as asset markets appreciate, while the loss of the currency's purchasing power is hardly noticed...”
Dr. Marc Faber
SourceHong Kong - What worries me most at present is that even I, a skeptic, can't find any good reason why stock markets around the world would decline significantly. That's not to say there aren't a lot of issues that concern me. But if central bankers around the world are prepared to print money and to flood the system with unlimited liquidity at the first sign of weakness in the asset markets, then it is difficult to make a very bearish case for either U.S. real estate or U.S. equities in dollar terms.
We know Mr. Bush wants to be re-elected à tout prix, and that therefore, over the next 12 months, he and his lackeys at the Fed and the Treasury will only take economic policy measures that are designed to keep the American public happy with "circus and pane." This economic policy was practiced for centuries by the Roman emperors and was designed to keep the lower classes of society in good spirits and obedient.
In the U.S., we no longer have gladiators, taken prisoner from foreign lands, pitted against wild animals in public arenas, but we have Hollywood, which produces movies where the villain is usually a Vietnamese, Chinese, Japanese, Eastern European, Arab, Italian or Latino, and we have the money printing press, which allows individuals to speculate on stock and futures exchanges and in real estate or to gamble in casinos. Moreover, "pane" is distributed in the form of rising budget deficits, which boost personal disposable incomes temporarily, but obviously not in the long term. The average household tax rate collapsed over the last 18 months as a result of the tax cuts and is now at one of its lowest levels since the Second World War!
I have been careful to say that, given the present central bank policies, it is difficult to make an overly bearish case for either U.S. real estate or U.S. equities in dollar terms. The U.S. Federal Reserve Bank can, if it continuously floods the system with liquidity, keep asset markets up, but what it cannot do when it follows such policies is control the value of the U.S. dollar against foreign currencies and its purchasing power. As was the case in the Roman Empire, "circus and pane" economic policies undermine the value of a currency and, if pursued long enough, eventually lead to a total loss of its purchasing power.
However, and this should be noted, such policies can give the majority of investors the illusion of wealth as asset markets appreciate, while the loss of the currency's purchasing power is hardly noticed. This is particularly true of a society that has a very large domestic market, where 90% of the people don't have a passport and therefore know little about what is going on outside their own continent, and where the import prices of manufactured goods are in continuous decline because of the entry of China, as a huge new supplier of products with an extremely low cost structure, into the global market economy.
What better economic paradise could a society wish for than an environment in which assets such as stocks and properties appreciate, while consumer goods decline in price? The basket of goods a household can purchase increases in such an environment, not only because the household's wealth rises every year, but also because of the price declines of the goods that make it up, such as is the case for office and computer equipment, cellular phones, furniture, cars, consumer electronics and household appliances, all of which have steadily declined in price in recent years.
It's no wonder that people feel so optimistic about the future of equities! The Investors Intelligence Sentiment Index for stocks has been hovering recently at its highest level since 1987, and there are more stocks reflecting this widespread optimism, being above their 30-week moving average, than at any time since 1997.
The question is, to what extent is this widespread optimism justified? And how much of this "bright outlook" for the economy and corporate profits, and the belief that the Fed will continuously support asset markets through liquidity injections, has already been discounted by the surge in stock prices that we have seen over the last 12 months?
It would seem that the U.S. stock market is discounting almost the best of all possible worlds at the moment. Expectations among investors are extremely optimistic; I suspect they are likely to be disappointed in the period directly ahead.
Asian Equities Sleuth and The Original Bear On Japan
Dr. Marc Faber is the editor of The Gloom, Boom and Doom Report and a major contributor to Strategic Investment . 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. Dr. Faber is the author of the current best-seller: Tomorrow's Gold.