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Beware the driving forces behind surging asset prices
By Marc Faber

Asset prices have soared in value everywhere in the world since October 2002. Prices of stocks, commodities, real estate, art, and every kind of totally useless collectible have shot up. Even bond prices have until recently gone up as interest rates fell.

That all asset classes increased in value simultaneously around the world is most unusual. (...) the beauty today is that every kind of asset is grossly inflated. How could this happen?

Already ahead of 2000, the US Federal Reserve pursued an ultra-expansionary monetary policy. Then, after the March 2000 peak in the Nasdaq, the Fed eased monetary conditions massively. All asset prices soared, particularly for US homes. A subsequent boom in refinancing and home equity extraction injected an overdose of adrenaline into consumption-addicted US households.  (...)

However, two asset classes stand out as major losers: the Zimbabwe dollar and the US dollar.

The latter has been in a down trend since 2001. Its value depends on the worst possible combination of factors - arrogant, bold and ignorant neo-conservatives, and Ben Bernanke, who prides himself by exclaiming that "we have the printing presses".

(...)

In fact, we have already reached the danger zone. It is no longer the real economy that is driving asset prices.

In a credit, and hence asset price-driven economy, money supply and credit must continue to grow at an accelerating rate in order to sustain the expansion.

The moment credit growth no longer grows at an accelerating rate, the economic plane loses altitude. This is now the case. Not because the Fed has tightened credit but because the market has done by tightening lending standards for mortgages because of the subprime lending collapse. Contracting liquidity and less consumption in the household sector follows.



In the long run, we're all dead. John Maynard Keynes
by Jerome a Paris (etg@eurotrib.com) on Wed Jun 20th, 2007 at 07:51:37 AM EST
What I find incomprehensible is that after a first-rate dissection of the problem, Faber goes on to advocate buying $ US liabilities..................

"The future is already here -- it's just not very evenly distributed" William Gibson
by ChrisCook (cojockathotmaildotcom) on Wed Jun 20th, 2007 at 10:46:10 AM EST
[ Parent ]
that he makes money out of relative values, not absolute ones...

In the long run, we're all dead. John Maynard Keynes
by Jerome a Paris (etg@eurotrib.com) on Wed Jun 20th, 2007 at 05:19:43 PM EST
[ Parent ]
That I know, but if dollars keep on being created ad infinitum, how can they fail to depreciate relative to assets, commodities, and particularly, energy?

"The future is already here -- it's just not very evenly distributed" William Gibson
by ChrisCook (cojockathotmaildotcom) on Wed Jun 20th, 2007 at 07:29:23 PM EST
[ Parent ]

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