Marc Faber: China could spark a bigger crisis than in 2008

An alarming credit boom in China could trigger a global financial crisis that would make the one in 2008 look mild by comparison, says old gloomy eyes, Marc Faber.

“If I am telling you that we had a credit crisis in 2008 because we had too much credit in the economy, then there is that much more credit as a percentage of the economy now,” the author of The Gloom, Boom & Doom Report told CNBC late Thursday. “So we are in a worse position than we were back then.”

China, in particular, has seen credit as a percentage of the economy jump 50% in the last four and a half years, said Faber, the “fastest credit growth you can image in the whole of Asia.”

He’s not alone in this China worry, as lots of economists have been warning about rapid credit growth there, even as officials are trying to curb it.

Meanwhile, Deutsche Bank strategist John-Paul Smith told clients on Wednesday that China’s growth model continues to be based on “ever-expanding debt, which leaves the country and financial markets very vulnerable to any potential loss of from investors and lenders.”

That’s even though China may change forever this weekend, as the Communist Party holds its Third Plenum, widely expected to introduce lots of reforms.

In his note, Smith says Deutsche Bank has had a pretty straightforward preference for developed over emerging markets the past three years. But that that now rests purely on its negative view of EM, rather than the “positive attractions of U.S. equities, which has become a consensus call”, he points out.

“The U.S. market now appears somewhat overvalued, and vulnerable over the medium term to a shift away from capital to labor from a fundamental perspective, but could be headed for bubble territory if the situation with China and commodities plays out as we anticipate,” he said.

Faber warns that China isn’t the only problem area. Other Asian countries are also seeing big jumps in household debt.

“Government debt has not gone up that much, but household debt has,” said Faber. “In Thailand, where I spend a lot of time, we have had no recession, but we have had no growth either. It’s the same in Singapore and Hong Kong.”


The above from an article at MarketWatch. Regarding the last comment, this might also be very true for Malaysia. That is, if inflation is correctly reported (not the simply incredible low numbers that have been officially reported), and thus the inflation-corrected GDP.


The following article in The Economist "Household debt in Asia" seems to agree with Faber's last paragraph:

"A new report from Standard & Poor’s, a credit-rating agency, worries about weakening credit quality at Asian banks, as loose lending practices lead to rapid loan growth, resulting in a sharp rise in household debt. A recent World Bank study identified Malaysia and Thailand as having the largest household debts, as a share of GDP, among eastern Asia’s developing economies. In Malaysia, where household debt now exceeds 80% of GDP, the government has been seeking to curb credit growth. Thailand’s government boosted access to credit following the country’s big floods in 2011. The recent slowing of growth in many Asian economies raises concerns about the sustainability of all this personal debt."

Great Marc Faber interview and understating of inflation

Great interview with Marc Faber by The Prospect Group in which Faber also mentions Malaysia several times.

"Shadow banking, market psychology, & the global impact of American monetary policy"

"Chinese foreign exchange reserves & the Sino-American geopolitical standoff"

"Growth in Southeast Asia & the economic future of Malaysia & Thailand"

"Higher education & protecting yourself in the coming economic collapse"


Faber mentions that the cost of living has increased so much in Asia, he estimates the inflation to be about 5%. In Malaysia inflation is reported as being between 1% and 2%, which is simply incredible.

Since the inflation is used to calculate the real GDP (GDP corrected for inflation, the factor that is used is slightly different from the consumer inflation, but very similar and highly correlated), basically the real GDP growth is clearly overstated.


Tom Holland wrote an article in the SCMP "Official manipulation adds 10 per cent to China's GDP" about the same subject (but then applied to China), some snippets:


Analysts have always suspected Beijing's statisticians manipulate China's economic data to come up with growth figures that are acceptable to the country's leadership.


[with Malaysia having the highest Power Distance Index in the world, surely government servants are also motivated to construct inflation numbers acceptable to the Malaysian leadership]


Above all, they believe that the National Bureau of Statistics systematically understates China's economy-wide inflation rate.

As a result, when Beijing's bean counters correct the raw data for nominal gross domestic product to adjust for inflation, they come up with a figure for China's real growth rate (see the first chart) that is anything but real. Instead it is too high.

Suspicion - even strong suspicion - comes easily. But working out exactly how officials tweak the data, and estimating the size of the resulting discrepancy between appearance and reality, is altogether trickier.

Now a new study by Christopher Balding from the HSBC Business School at Peking University sheds some welcome light on just how the data is manipulated.

Balding argues that housing costs - usually a major item in any country's consumer price index inflation basket - are both understated and underweighted by China's statistical agency.

He points out that, according to the official data, between 2000 and 2011 Chinese house prices rose by just 8 per cent. Urban prices climbed just 6 per cent.

As Balding notes, the modesty of this increase stretches credulity to the limit, especially over a period during which China's nominal GDP quintupled and its money supply expanded sixfold (see the second chart).

"The claim that the housing component of CPI grew by less than 10 per cent between 2000 and 2011 is nothing less than comical," he writes.

Compounding the error, officials assume that 80 per cent of the population live in China's cities, where they say property prices have risen more slowly than in rural areas.

In reality, some 48 per cent of people still live in the countryside.

And then to cap everything, housing barely contributes to the official inflation figures. Between 2000 and 2010, housing costs made up just 13 per cent of China's official consumer inflation basket.


His results show that economy-wide price levels today are likely to be about 10 per cent higher than China's implied GDP deflator index indicates. Taking the third-party price data, and assuming a 30 per cent housing cost weighting, the deviation could actually be as high as 16 per cent.

Applying this correction to China's output data, argues Balding, reduces China's real GDP by between 8 per cent and 12 per cent, knocking about 5 trillion yuan (HK$6.3 trillion) off 2012's figure.

"It is disturbing that a statistical body would so obviously manipulate and produce blatantly fraudulent data," Balding writes.

"Given the relative ease with which obvious statistical manipulation was found, it is quite likely that less obvious fraud is present.

"It seems likely that much larger revisions to Chinese real GDP and other economic data are needed to produce more reliable statistics."

Household incomes continue to soar?

I read with amazement the following article from Bernama:

"Household Income Continues to Soar on Economic Transformation".

"The current average monthly household income of Malaysians at about RM5,000 compared to RM4,025 in 2009"

This simple statement begs a few remarks:

[1] 2008/2009 was the worst global recession of the last 50 years, to take 2009 as the starting point for a comparison is rather tricky; at the very least it should have been noted that 2009 was an exceptional year, to put things in the right perspective.

[2] The average monthly household income does not mean much for the average person on the street. Malaysia has one of the worst GINI scores in the world, this index measures the degree of inequality in the distribution of family income in a country. A much better measure would have been to divide the population in brackets and to show how much for instance the people earning the lowest 20% wages have benefitted.

[3] An increase in income is only "real" if accompanied by low inflation. The Department of Statistics claims that the inflation is indeed very low (between 1% and 2% the last year), see for instance this graph. I don't believe those low numbers at all, when I left Malaysia in 2010 almost all prices that I could come up with had roughly doubled in the last say 10 years, not exactly an indication of low inflation (I have to admit that I compared prices in KL, in the rural areas it might have been different).

Interestingly, the Bernama article seems to agree that the official number is wrong:

• "However, he said the government should place greater emphasis and take measures to reduce inflation rates in the two states, which were escalating due to indiscriminate hikes in prices of goods by certain parties."
• "Universiti Sains Malaysia, School of Social Sciences, associate professor of criminology Dr P. Sundramoorthy said, all the government initiatives and various financial support were timely and relevant to ease the burden of the rising cost of living."

But if the real inflation rate is indeed much higher than the reported one (and I think everybody will agree with that), then the real GDP growth (which is the GDP growth corrected for inflation) is much lower than reported.

I wrote before about Malaysia's economic growth, and made some critical comments.

I like quite a few aspects from the Economic Transformation Program and in general I am positive about their achievements, but some of the claims they make are really too much. By giving a more balanced picture their credibility would increase.

Gold: a Buy or a Sell?

Gold trades currently above USD 1,600 per ounce. The previous bull run ended in 1980 at around USD 850 per ounce, after which a 26(!) year bear market followed. The following chart is not adjusted for inflation:

There are four people I admire.

Warren Buffett:

“Gold gets dug out of the ground in Africa, or some place. Then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head.”

“Gold is a way of going long on fear, and it has been a pretty good way of going long on fear from time to time. But you really have to hope people become more afraid in a year or two years than they are now. And if they become more afraid you make money, if they become less afraid you lose money, but the gold itself doesn’t produce anything.”

Charlie Munger:

“I don’t have the slightest interest in gold. I like understanding what works and what doesn’t in human systems. To me that’s not optional; that’s a moral obligation. If you’re capable of understanding the world, you have a moral obligation to become rational. And I don’t see how you become rational hoarding gold. Even if it works, you’re a jerk.”

Jim Rogers:
"I own gold and silver, because paper money all over the world is being debased.  In a few years we will probably all have our money in physical assets, because nearly all paper money is being debased at a rapid rate by politicians who have learned how to buy votes.  It is the wrong thing to do, but they don't care.  They're worried about the next election."

Marc Faber:

“And so the question is, you know, where do you put your money if you and I go away to an island or to jail for ten years and we can’t make any transactions and we come back in ten years’ time? I think if the objective is the maintenance of purchasing power, in other words, you just don’t want to wake up in ten years’ time when you come out of jail and what you have is worthless, then I would say that probably gold is the best alternative. If the question is how do you maximize profit, probably there may be more profit in equities because, you know, we have abysmal performance of equities in the last ten years. And particularly in the US, as a result of the decline in the value of the US dollar, equities would seem to me to be not particularly expensive. I think what would be dangerous for you and me would be to put all our money in US dollar cash and in US government bonds for ten years and then come back and maybe find out that we can buy with a hundred thousand dollars just a cup of coffee — or not even that.”

He said that longer-term gold can only go higher because of negative real interest rates. Even a deflationary collapse is unlikely to hurt gold because the Fed will simply debase the dollar to get nominal prices higher.

"If the Fed gets it right and successfully re-inflates asset prices, then inflation will be in the double-digits, which would be bullish for gold," Faber pointed out.”

Marc Faber argued the following in his "Gloom, Boom and Doom" newsletter:

It took the US government about 80 years (between 1920 and 2000) to devalue the USD by 95%. In other words, it would take $20 in 2000 to buy the same item that cost $1 in 1920. The US government will again devalue the USD by 95%, but this time they will do it much faster. Paper currencies can be printed at will, they don’t even need a physical printer, they can add money electronically. The only money they can’t print at will is money supported by real items, like Gold.

For me, if these clever people have such a different opinion, then what can I add? I simply find it fascinating, such a difference of opinion by such clever people.

For me, I own some gold and some gold miners (through Blackrock World Gold Fund), I don’t intend to buy nor sell at this moment. Other good long-term inflation hedges are land, property and to some extend shares. The best is to spread risk by investing in different asset classes.