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ISSN 1017-1371


JULY 2010

When Everything Else Fails, Immortality Can Always be Assured by Making Spectacular Errors

“The greatest contradiction of our time is the ability of our species to destroy itself, and its inability to govern itself.”

Fidel Castro Ruz

“It [the State] has taken on a vast mass of new duties and responsibilities; it has spread out its powers until they penetrate to every act of the citizen, however secret; it has begun to throw around its operations the high dignity and impeccability of a State religion; its agents become a separate and superior caste, with authority to bind and loose, and their thumbs in every pot. But it still remains, as it was in the beginning, the common enemy of all well-disposed, industrious and decent men.”

Henry L. Mencken

“The people who cast the votes don’t decide an election; the people who count the votes do.”

Joseph Stalin

“The American people will never knowingly adopt socialism, but under the name of ‘liberalism’, they will adopt every fragment of the socialist program until one day America will be a socialist nation without knowing it happened.”

Norman M. Thomas (Leader, US Socialist Party, 1948)


A recent letter to the editor of the Financial Times (FT, June 14, 2010) caught my attention and sympathy. T. C. Smith, CEO of Tullet Prebon (a provider of independent real-time price information), writes:

Sir, The recent letter from French president Nicholas Sarkozy and German chancellor Angela Merkel to the president of the European Commission on the subject of regulating short selling and the use of credit default swaps reminds me of an incident involving my father-in-law. When he was a headmaster he was approached by the parents of a boy who asked him to stop other children from taunting their son by calling him “Smelly”. He said he could perhaps make an announcement in assembly asking them to desist, but he also suggested a more radical solution which would address the causes rather than the symptoms

namely getting the boy to bathe. Perhaps if Europe’s political elite stopped trying to get markets to fund their grandiose designs and social engineering projects they would not need yet more regulation to control markets. In fact, financial markets are reacting exactly as they should do in the face of this profligacy and attempt to bribe the electorate with borrowed money. Of course,

sadly in the current age my father- in-law would be reported for political[ly] incorrect treatment of

a child who was soap-phobic [emphasis added].

I have to say that I love Smith’s

letter to the FT because, in just a few sentences, he addresses two

important points. Governments around the world have for the most part addressed the symptoms of the current economic crisis and not their causes. Moreover, there is almost a witch-hunt-like madness — especially in the US — about “political correctness”.

As I have explained previously, since the 1980s it has been the economic policy of governments and central banks to intervene in free markets each time asset markets began to sell off and economies were about to make the necessary adjustments in order to clean the excesses of the preceding boom in one or other sector of the economy (see Figure 1). I need to point out that numerous economists, including Paul Krugman, don’t believe that the excesses brought about by a boom need to be cleaned out by economic

adjustments on the downside (what Joseph Schumpeter calls the “excursion into depression”). The problem with preventing the cleansing out of the excesses of a previous boom with fiscal and monetary interventions is, of course, that “new excesses” or “bubbles” are created, while at the same time the overall economy’s financial position deteriorates. Taking the US as an example, there should be no debate that its financial position has continued to deteriorate since the

Figure 1

Each Crisis Produced Additional Government Interventions

Figure 1 Each Crisis Produced Additional Government Interventions Source: Ed Yardeni, www.yardeni.com

Source: Ed Yardeni, www.yardeni.com

early 1980s, because credit growth has exceeded nominal GDP growth. From 140% of GDP, total credit (ex unfunded liabilities) has risen to more than 375% of GDP currently. Interestingly, for the interventionists at the Fed and the Keynesians, it doesn’t seem to matter when credit as a percentage of the economy expands; however, when it is about to contract, “extraordinary measures” need to be taken to create renewed excesses. These, in turn, will lead to future problems, which it is acknowledged will have to be dealt with “later”. (In the summer of 2009, Krugman said: “A new bubble now would help us out a lot, even if we pay for it later.”) But it would appear that the paying “later” has become successively more painful, and certainly more expensive (although the Krugman cohort don’t seem concerned by this). The 1994 bailout of Mexico led to further excesses in emerging markets — in particular in Asia, where in 1997/98 a very serious economic crisis followed. The bailout of LTCM led to, among others, the NASDAQ bubble in 1999/2000, which when it burst led the Fed, fearing a deflationary recession, to keep interest rates at artificially low levels until the present time. In turn, these artificially low interest rates led to a colossal low-quality credit bubble between 2001 and 2007 and the resulting housing boom. Finally, to complement and compound a series of major interventionist economic policy mistakes, the Fed managed, by slashing the Fed fund rate to zero post-September 2007, to produce a commodities bubble between the end of 2007 and July 2008 (see Figures 2 and 3). The CRB Index soared from 312 before the September 2007 rate cuts to 473 in July 2008 (see Figure 3). This went against all the odds, since the global economy, and therefore the demand for industrial commodities, was already slowing down in the second half of 2007. The sharp increase in commodity prices in late 2007/early 2008 burdened the consumer with an additional tax. In the case of oil, US consumer

Figure 2

The Fed’s Slashing of Interest Rates Post-September 2007 Led to a Commodities Bubble

Fed’s Slashing of Interest Rates Post-September 2007 Led to a Commodities Bubble Source: Ed Yardeni, www.yardeni.com

Source: Ed Yardeni, www.yardeni.com

Figure 3

Following the Fed’s September Rate Cuts, Commodities Exploded on the Upside

Figure 3 Following the Fed’s September Rate Cuts, Commodities Exploded on the Upside Source: www.decisionpoint.com

Source: www.decisionpoint.com

spending on oil (directly and indirectly) per annum soared from approximately US$500 billion in the first half of 2007 to almost US$1 trillion in the summer of 2008 (see Figure 4). In fact, the repeated policy errors by the US Fed, which were encouraged and supported by a wide

body of academics in the field of economics, remind me of a famous Swiss professor of medicine who on one occasion, on emerging from the operating theatre, proudly announced that the operation had been very successful but that, unfortunately, the patient had died.

Still, despite my criticism of the Fed’s monetary policies, I have some sympathy for its policy errors. Politicians, investors, and the public all wanted an “eternal boom”, and hardly anyone was concerned about the consequences of excessive leverage, which became all too apparent in 2008 when asset markets imploded. In addition, in the 1980s and 1990s, several very fortunate conditions were supportive of expansionary monetary policies. The “rising wave” of the Kondratieff Long Wave Cycle had peaked out in the 1970s and was followed by a long “downward wave” in the 1980s and 1990s. Following their peak in January 1980, commodities entered a long-term bear market, which ended between 1998 and 2001 (see Figure 5). At the same time, the opening of China, with its gigantic low-cost and industrious workforce, began to put pressure on consumer goods prices. In turn, declining commodity prices and intense competition from China in manufactured goods industries stimulated the search for ways to cut production costs. So, in the 1990s, major technological innovations in the field of communications and information technology followed, which led to large productivity gains. All these factors led to the famous “disinflation” of the 1980s and 1990s, which was accompanied by declining interest rates (see Figure 6). I should remind our readers that since 1800, interest rates have tended to move up during the “rising wave” of the Kondratieff Long Wave and to decline during its “downward wave” (see also Figures 5 and 6). Now, it should be clear that it is far easier for a central bank to pursue expansionary monetary policies in a disinflationary or deflationary environment of a Kondratieff Cycle downward wave than during the rising wave, when the overall price level tends to increase at an accelerating rate. In the deflationary and disinflationary environment of the downward wave of the Kondratieff Cycle, easy monetary policies don’t lead to higher consumer price inflation. In fact, I could make the case that if

Figure 4

Soaring Oil Prices between September 2007 and July 2008 Imposed an Additional US$500 Billion Tax on the US Consumer

2007 and July 2008 Imposed an Additional US$500 Billion Tax on the US Consumer Source: Ed

Source: Ed Yardeni, www.yardeni.com

Figure 5

CRB Index, 1980–2010

Figure 5 CRB Index, 1980–2010 Source: www.decisionpoint.com

Source: www.decisionpoint.com

monetary conditions had not been expansionary, and if debt growth had not been spectacular, it is probable that we would have had deflation in the overall price level post-1980 (see Figure 7). Would outright deflation in the 1980s and 1990s have been negative for the health of the US

economy? Hardly! It would have made the US more competitive, and its financial position would today be far better in terms of total debt-to- GDP. So, whereas in the downward phase of the Kondratieff Cycle the increase in the quantity of money

and credit does not (for the reasons I mentioned above) lead to higher consumer prices, the excessive expansion of credit inflates asset prices such as real estate, commodities, equities, and at times even tulips. We therefore find the greatest investment manias in the downward phase of the Kondratieff. The 1865–1873, 1921–1929, and 1980–2000 stock market booms all occurred amidst falling commodity prices and interest rates. Also, to the extent that expansionary monetary policies induce investments in additional production capacities and new productivity-enhancing technologies,

which increase the supply of goods and lower their cost, expansionary monetary policies can — for some time at least — reinforce the deflationary trend in manufactured goods. This sequence of events was particularly evident in China where, over the last 20 years, artificially low interest rates and ample liquidity have brought about enormous capacity expansions and large technological advances and, hence, productivity improvements. What am I driving at? I think it is very important for investors to consider whether we are still in a Kondratieff downward wave,

or whether the price cycle has turned

up. If we are indeed still within the downward wave, it is likely that consumer prices will continue to trend down. Conversely, if we are already in a Kondratieff upward wave,

it is more likely that, in time,

consumer prices will begin to accelerate on the upside.


A reader of this report, Gary Bahre,

was kind enough to invite me to his family’s estate situated on a vast peninsula of Lake Winnipesaukee in New Hampshire. I have seen many luxurious properties in my life, but the Bahre family’s NH residence is the most impressive I have seen. Several buildings, all constructed to the highest standard, are situated in very large and beautifully landscaped

Figure 6

A Favourable Interest Rate Cycle Assisted the Fed’s Expansionary Monetary Policies

A Favourable Interest Rate Cycle Assisted the Fed’s Expansionary Monetary Policies Source: Ed Yardeni, www.yardeni.com

Source: Ed Yardeni, www.yardeni.com

Figure 7

Without Rapid Credit Growth, the US Price Level Would Likely Have Deflated

Source: The Bank Credit Analyst

Level Would Likely Have Deflated Source: The Bank Credit Analyst July 2010 The Gloom, Boom &

grounds. The grounds — endowed with impressive trees, lawns, walkways, and flower beds — are immaculately kept under the supervision of Gary’s mother, Sandy. They look as if an army of Swiss cleaning ladies attend to them daily, removing any impurities and dust with vacuum-cleaners and brooms. In the garage, Gary’s father Bob keeps some of the world’s most valuable vintage cars. The Bahre family, which is very low-key and humble, could not be nicer or more hospitable. The purpose of the invitation was for me to participate in a discussion with three of the currently most

vocal pessimists regarding the world economic outlook: Gary Shilling, David Rosenberg, and Nouriel Roubini (privately, all rather cheerful people, I should add). In a nutshell, Shilling, Rosenberg, and Roubini expect a meaningful economic slowdown in the second half of the year (a double dip) amidst deflation. Therefore, Shilling and Rosenberg, in particular, recommend the purchase of US long-term Treasuries. All three economists expected significantly lower stock prices (even a break below the March

2009 lows, when the S&P 500 traded

at 666). Equipped with an arsenal of charts, Shilling pointed out that investors had largely missed out on a huge opportunity in long-term Treasuries over the last 30 years or so,

and that the trend toward lower yields was still in place (see Figure 8). To his credit, Gary recommended repeatedly in the past the purchase of long-term Treasuries. In the January

2010 issue of his publication Insight,

he wrote:

Buy Treasury Bonds. Long-term Insight readers know we started recommending long Treasury bonds back in 1981 when we forecast secular and huge declines in inflation and interest rates. So we declared back then that “we’re entering the bond rally of a lifetime.” The yield on 30-year Treasuries was 14.7% and our eventual target was 3%. Last year

[in 2008 — ed. note], yields blew through 3% to reach 2.6% at year’s end [December 2008 — ed. note], so in our Jan. 2009 Insight we declared “mission accomplished” and removed Treasury bonds from our recommended list. But then Treasuries sold off, pushing the yield on the 30-year bond to 4.7% at the end of 2009. So we’ve reactivated the strategy with our forecast of a return in yields to 3.0% or lower. Treasuries will continue to be a safe haven in a troubled world and benefit from deflation as well as their three sterling features. They are the best credits in the world. They are highly liquid. And they generally can’t be called by the Treasury, and calls limit price appreciation when interest rates fall. A decline in yields from 4.7% at present to 3.0% may not sound like much, but the bond price would appreciate over 34%. If it occurs over two years, then two years worth of interest is collected, and the total return on the 30-year Treasury would be 44%. On a 30-year zero-coupon Tr easury, which pays no interest but is issued at a discount, the total return would be about 64% — most attractive! Recall that in 2008 when 30-year Treasuries rallied from 4.5% to 2.7%, their total return for the year was 42%. Treasury bonds way outperformed equities in the 1980s and 1990s in what was the longest and strongest stock bull market on record. The superiority of Treasuries has been even more so since then. Figure 8 [in this report — ed. note], our all-time favorite graph, shows the results from investing $100 in a 25-year zero-coupon Treasury bond at its yield high (and price low) in October 1981, and rolling it into another 25-year Treasury annually to maintain that 25-year maturity. In November 2009, that $100 was worth $16,972 with a compound annual return of 20.1%. In contrast, $100 invested in the S&P 500 at its low in July 1982

was worth $2,099 in November for an 11.8% annual return including dividend reinvestment. So Treasuries outperformed stocks by 8.1 times!

Gary also pointed out that long- term yields could stay down for a long time — as was the case in the US in the 1940s, and in Japan over the last ten years — despite growing fiscal deficits (see Figure 9). David Rosenberg was very negative about the economic outlook in the second half of 2010, because of renewed weakness in housing (Shilling expects home prices to decline by another 20% or so) and based on recent weakness in the Economic Cycle Research Institute (ECRI) Weekly Leading Index (see Figure 10). Based on his negative outlook for the economy, Rosenberg forecasted that the yield on the ten-year Treasury note would decline below the December 18, 2008 low, when it touched 2.08% (see Figure 11). He also made the point that, whereas inflows into bond funds had been high, households were, if anything, underweight bonds (see Figure 12). Rosenberg then made an interesting point. According to him (I quote here from one of David’s daily comments, which are well worth a read), “As hedonistic as it is, the U.S. economy is the most flexible and adaptable economy, and for a whole host of reasons. At the same time, the national balance sheet is grim. The national debt/GDP ratio is about to pierce 100% [see Figure 13] and that does not include the state/ local government morass nor the wave of off balance sheet items and underfunded liabilities, which would then take that ratio north of 500%. That is the grim truth.” Rosenberg then argues that “even with low interest rates, the massive debt bulge has become so large that interest charges on the public debts are within three years of absorbing 30% of the revenue base, which then makes it that much tougher to reverse course [see Figure 14; from this figure, however, it would seem that interest charges will absorb 30% of the

Figure 8

The Performance of Stocks and Bonds since 1981

Figure 8 The Performance of Stocks and Bonds since 1981 Source: Gary Shilling, insight@agaryshilling.com

Source: Gary Shilling, insight@agaryshilling.com

Figure 9

Japanese Long-Term Government Bond Yields Stayed Low over the Last Ten Years

Long-Term Government Bond Yields Stayed Low over the Last Ten Years Source: Gary Shilling, insight@agaryshilling.com

Source: Gary Shilling, insight@agaryshilling.com

Figure 10 US ECRI Weekly Leading Index, Growth Rate (percent), 1967–2010

US ECRI Weekly Leading Index, Growth Rate (percent), 1967–2010 Sources: Haver Analytics, David Rosenberg, Gluskin Sheff

Sources: Haver Analytics, David Rosenberg, Gluskin Sheff

Figure 11 New Lows for Long-Term Treasury Yields?

Figure 11 New Lows for Long-Term Treasury Yields? Source: www.decisionpoint.com

Source: www.decisionpoint.com

Figure 12

US Household Holdings of Treasuries and Municipal Securities as a Share of Total Household Assets (percent), 1950–2010

as a Share of Total Household Assets (percent), 1950–2010 Sources: Haver Analytics, David Rosenberg, Gluskin Sheff

Sources: Haver Analytics, David Rosenberg, Gluskin Sheff

revenue base by 2020 — ed. note]. In other words, the fiscal problem is becoming increasingly structural and we are already at the stage where even if the economy were running flat out at full employment, the deficit would still be over 7% relative to GDP. At some point, this will begin to impede progress.” In particular, Rosenberg is concerned about entitlement programs.

When you add up the entitlement programs — you know, the ones you can’t cut back on — and interest payments on the grotesque debt load, we have 65% of total government spending that can’t be touched. In the next decade, under status quo policies, this “mandatory” share of the spending pie goes to 72% [see Figure 15]. Tack on the

defense budget, my friends, and we are up to 88% of federal government outlays that are next to impossible to reverse. So tell me — are we going to reverse this seemingly intractable runup in the public debt to GDP ratio by slicing 12% of the spending pie that is discretionary? It won’t be enough, even if all that 12% remainder “pork and barrel” spending were eliminated altogether.

According to Rosenberg, the future holds “higher taxes: very likely a national sales tax”, but obviously with higher taxes “the consumer discretionary part of the stock market goes into the penalty box for a few years”. Rosenberg’s pessimism is also based on the Ricardian equivalence:

Indeed, while many a Keynesian will point to the need for a government-led demand boost (see “That 30s Feeling”, by Paul Krugman, New York Times, July 17, 2010), the problem is that when the deficits and debts become structural, what is known as the “Ricardian equivalence” sets in and this means that the fiscal stimulus does more harm than good for the economy. Unfortunately, while the bailouts saved insolvent banks (oh, we’re not Japan at all) the stimulus from this Administration involved a series of short-term fixes that provided no long-term multiplier impact. At least FDR put people to work — not merely to pay them to be idle. [People are paid to be idle so they can vote for Mr. Obama — ed. note.] At least Eisenhower built highways — with a long-run payback.

I am very happy that some other economists have also begun to challenge the Krugman, Summers, & Co. view that more fiscal stimulus is needed. The third bear, Nouriel Roubini, was very negative about the outlook for Europe and, in particular, the

Figure 13

Public Debt as a Percentage of GDP, 1970–2020 (estimated)

13 Public Debt as a Percentage of GDP, 1970–2020 (estimated) Sources: Haver Analytics, David Rosenberg, Gluskin

Sources: Haver Analytics, David Rosenberg, Gluskin Sheff

Figure 14

US Government’s Interest Payments as a Share of Total Revenues, 1970– 2020 (estimated)

as a Share of Total Revenues, 1970– 2020 (estimated) Sources: Haver Analytics, David Rosenberg, Gluskin Sheff

Sources: Haver Analytics, David Rosenberg, Gluskin Sheff

Figure 15 US Federal Government Mandatory Outlays* (US$ billions), 1962–2010

Government Mandatory Outlays* (US$ billions), 1962–2010 *Includes current outlays on services and net interest

*Includes current outlays on services and net interest (Forecast by OMB). Source: Gary Shilling, insight@agaryshilling.com

Euro, which he expected to decline to or below parity (see Figure 16). For the US economy, Roubini also expected a double dip and lower equity prices. I have to say that it was a very informative gathering of economists, and I admire the Bahre family, led by 84-year-old Bob, for going to the trouble and expense of inviting us. The family is not involved in any way in the financial services industry, except possibly as a client of several money managers (I assume) who were also in attendance. They included Sprott Inc. (managed by the outstanding investor Eric Sprott), Pictet of Geneva, and Gluskin Sheff of Toronto, which specialises in the management of funds for high-net- worth individuals. (Rosenberg is their chief economist.) I need to mention that Bob Bahre is a very unassuming self-made man and that, while a guest on his estate, I frequently felt that he should be the one teaching us economists how to make money — and not the other way around. At the same time, I came away from this gathering of economic bears with the feeling that I was even more negative about the world than Shilling, Rosenberg, and Roubini were, but for different reasons and also with different investment conclusions. Before making some critical comments about these economists’ views, I should like to emphasise that I have a high respect for them all. I have known Gary Shilling since 1973, when he joined White Weld & Co., Inc. as a chief economist (following the termination of Alan Greenspan’s consulting agreement by White Weld), and I can say that I learned a great deal from him over the years. Partly based on his advice, I had a far larger allocation to bonds than to equities from the early 1980s up until very recently. Also, I have read and known David Rosenberg for years, and I have always been extremely impressed by his ability to write concisely, and in an entertaining style, about economic trends. “Rosie”, as we call him, is also a very likeable individual who can take a joke. (The Bahre invitation coincided with his

Figure 16 Euro versus US Dollar, 1998–2010

Figure 16 Euro versus US Dollar, 1998–2010 Source: www.decisionpoint.com

Source: www.decisionpoint.com

25th wedding anniversary, and everybody teased him that he would have to sleep with me. After a few drinks, he admitted that I was starting to look better!) I have also been on panels with Roubini, and there is little doubt that he is an accomplished economist. So, if I have different views about investment strategies, which I shall discuss below, it is not out of disrespect for any one of these accomplished economists.


The Bahre family is atypical in the sense that they are all extremely low- key, humble, nice people who treat their employees with the highest respect. They enjoy a lifestyle on their stunning estate that very few people can afford, and they have the necessary staff and amenities to make the most of it. (Their helicopter, flown by their pilot, Kurt, picked me up in Boston. I’ll admit that I’ve never before been in such a nice flying machine — not that I’ve been in many helicopters.) But aside from such conveniences, the Bahres live a very modest, unostentatious lifestyle.

Where the Bahres are typical of the American Dream is that they have had successful businesses, including a racetrack that they sold at the right time to NASCAR, and are now eager to preserve the value of their assets. How to preserve the value of one’s assets is the question most of my readers — irrespective of whether they are fund managers, or wealthy or less-wealthy individuals, in which category I include myself — ask themselves almost daily. In the past, I have advocated diversification both of investment classes (real estate, equities, bonds, cash, commodities, precious metals, art, etc.) and of the custody of assets. As a Swiss citizen, for example, I don’t wish to hold all my assets through a Swiss legal entity. I want to hold some assets outside of the Swiss jurisdiction. And if I were a US citizen, I would do exactly the same. I would have some assets in Canada (of course, with Sprott Inc. and Gluskin Sheff), Europe, Asia, Australia or New Zealand, and some in Latin America with local banks or invested in real estate. Obviously, I am not a lawyer, and I cannot be the personal financial planner of each of my readers (and I seem to have

enough problems already at US Immigration), but the point is this:

Rather than worry 24 hours a day

about whether stocks will move up or down 10% in the next three months,

I think that investors should consider

the geographical distribution of the ownership of their assets very carefully (and before it might be too late to take the appropriate action). An analogy is how Abby Cohen (a very fine lady), while working at Drexel Burnham (where I also worked), continued to recommend stocks in 1989 and early 1990 while the firm she worked for went bankrupt. What really amazes me about so many investors is that, when they ask me to recommend a broker in Asia or a bank somewhere else in the world, they specify they want a “low commission” house. (I have never heard of anyone asking to be referred to a “cheap” doctor or dentist. Usually, people will ask for a referral to a “good” one.) No one has ever asked me to recommend a high- quality full-service firm. I deal with Kim Eng Securities, Clariden Leu, and Schroders in Singapore, and my firm has accounts with several banks — including a Chinese one — in Hong Kong, but more than that I cannot say. Given my ultra-negative view of the world (the replacement of General Stanley McChrystal by

General David Petraeus is not exactly

a sign that the war in Afghanistan is

progressing well), I want to hold assets in different jurisdictions in the hope that I won’t lose everything all at once. That’s how negative I am. But aside from making decisions about where to hold assets, investors need to consider in what asset classes they should hold their funds. And here I am less dogmatic than Rosenberg and Shilling are. For them, a double-dip recession assures lower government bond yields and declining stock prices, so put all your money in long-term US government bonds. (To be fair to Rosenberg, he also recommends the ownership of gold and corporate bonds.) In the May GBD report I mentioned that retail investors’ sentiment about long-term government bonds had become very negative, and that a temporary rebound in bond prices had become likely. But at the Bahre event, I bet a bottle of whisky that ten-year US government notes wouldn’t decline below the December 2008 lows (2.08%), whereas Rosenberg bet they would decline below that level. Let me explain where I take issue with both Gary Shilling and David Rosenberg. I agree with Shilling that, over the last 30 years or so, long-term US government bonds (rolled over every year — see Figure 8 and above) significantly outperformed equities in the US. But it is not necessarily that “Treasuries outperformed stocks by

8.1 times”, because Gary calculates “the results from investing $100 in a 25-year zero-coupon Treasury bond at its yield high (and price low) in October 1981, and rolling it into another 25-year Treasury annually to maintain that 25-year maturity”. In other words, Gary compares one specific sector of the bond market (25-year zero-coupon bonds) with a broad index of equities. If I were to turn around and take one specific sector of the stock market universe, I could point out that the Hong Kong stock market, with dividend reinvested, would probably have outperformed US government bonds. From a low of 676, the Hang Seng Index rose to over 30,000 and still hovers around 20,000 (see Figure 17). Or I could take a stock like Wal-Mart, which rose from US$0.38 in 1982 to over US$60 and is now hovering around US$50 (see Figure 18). I am not suggesting that Shilling is wrong about Treasuries having outperformed equities. But in the same way that the typical stock investor wouldn’t have put all his money in one stock or in one stock market (Hong Kong), the typical bond investor wouldn’t have invested all his money in “a 25-year zero- coupon Treasury bond”. I am not criticising Gary in any way, because I also owned — and still own some — zero-coupon bonds. But when comparing the performance of

Figure 17 Hang Seng Index, 1982–2010

Figure 17 Hang Seng Index, 1982–2010 Source: Bloomberg

Source: Bloomberg

Figure 18 Wal-Mart, 1985–2010

Figure 18 Wal-Mart, 1985–2010 Source: www.decisionpoint.com

Source: www.decisionpoint.com

different asset classes, we need to be careful and compare how a typical or average investor would have invested his money. There is another point I should like to make about comparing the performance of different asset classes. The starting and ending points of the comparison make a huge difference. Above, I mentioned that the rising wave of the Kondratieff Long Wave Cycle had peaked out in the 1970s and was followed by a long downward wave in the 1980s and 1990s. Following their peak in January 1980, commodities entered a long-term bear market, which ended between 1998 and 2001 (see Figure 5). I noted that since 1800 interest rates have tended to move up during the rising wave of the Kondratieff Long Wave, and to decline during its downward wave (see Figures 5 and 6). I then concluded that, in the deflationary and disinflationary environment of the downward wave of the Kondratieff Cycle, easy monetary policies don’t lead to higher consumer price inflation. Now, if we compared the performance of a 25-year zero-coupon bond annually rolled over to maintain the 25-year maturity and

that of equities between, say, the 1940s and today, the performance of the long-term zero-coupon bond would have been disastrous. In the 1940s, an investor would have purchased his first zero-coupon bonds with a yield of less than 2%. Since the investor didn’t benefit from any cash flow, which coupon bonds offer, he would almost certainly have lost most of his money by 1981 when yields exceeded 15% (see Figure 6). By investing in stocks, however, which the investor could have bought in the 1940s with an almost three times higher dividend yield than what bonds were yielding, he would have enjoyed the equity market appreciation of the 1950s and 1960s. So, I think that it is fair to say that in a Kondratieff downward wave, long-term government bonds are likely to outperform equities; whereas in a Kondratieff rising wave, stocks are likely to outperform bonds. But once again, the starting and ending points of the comparison make all the difference. (In the 1940s, stocks were very inexpensive and bonds expensive.) I should also like to add that if I look at the list of the world’s richest people over time, they were usually the owners of

equities (either directly in their own companies, or indirectly through public stock ownership), real estate, and commodities (mines). On the other hand, bond holders have suffered repeatedly from hyperinflation and, periodically, from defaults. But, the point I really would like to make is that we need to decide whether we are still in a downward wave of the Kondratieff Cycle, or whether a new upward wave is underway. (Remember, the Kondratieff is a price cycle and not a business cycle.) As my regular readers will know, I believe that the commodities cycle bottomed out between 1998 and 2001 and that “cost-of-living expenses” are going up by far more than what the Consumer Price Index would indicate. Moreover, as Rosenberg suggested, “taxation costs” are very likely to increase. (I recently stayed in Boston for a night; cost of room: $640, Boston Convention Occupancy Tax:

$17.60, Boston Local Occupancy Tax: $38.40, Massachusetts State Occupancy Tax: $36.48.) Also, the BP oil spill disaster will increase the cost of deep-sea offshore drilling and is unlikely to bring about meaningfully lower oil prices. Healthcare costs will increase. Food prices are increasing — in some emerging economies at an annual rate of close to 20% (see Figure 19). And, finally, Chinese product prices are unlikely to decline much further because wage inflation is likely to accelerate. So, it is my belief that the deflationary forces that prevailed in the 1980s and 1990s are largely behind us. Also, I am far less optimistic than Rosenberg and Roubini that fiscal restraint will be implemented in the US and Europe. In fact, I think that more stimulus measures will be implemented. And given the increase in the US federal government’s mandatory outlays (see Figure 15) and, in particular, the increase in the its interest payments as a share of total revenues (see Figure 14), I believe that the Fed will keep the Fed fund far below the “real” cost-of- living increases and will continue to

Figure 19 UN Food Price Index, 1990–2010

Figure 19 UN Food Price Index, 1990–2010 Sources: United Nations, Gary Kuever, www.nowandfutures.com

Sources: United Nations, Gary Kuever, www.nowandfutures.com

monetise debts (negative real interest rates for as far as the eye can see). So, lack of fiscal restraint combined with easy monetary policies within an upward wave of the Kondratieff Cycle should lead in time to far higher inflation rates and a poor performance of long-term government bonds. This is not to say that Treasuries cannot rally somewhat further, but that it is more likely that long-term Treasury yields are far closer to a secular low (see Figure 11) than to a secular high, as was the case in 1981 (see Figure 6). Therefore, although I am very negative about Western governments’ economic policies, political, social, and geopolitical trends, future global economic prospects, the ability of many Western countries to avoid defaulting on their debts (either directly or through restructuring of their debts), while at the same time the temptation for them to print money and to tax asset-rich people — or to expropriate their assets altogether — is increasing, I find that investors might be better off by being invested in equities, real estate, commodities, and precious metals, rather than being heavily positioned in US government bonds. So, what kind of asset allocation would I recommend? I am aware that each individual lives under different conditions in terms of cash flow

(income), tax status, investment horizon, tolerance for pain, etc., but assuming that wealth preservation is a priority I would recommend the following asset allocation: equities:

20–30%, real estate: 20–30%, corporate bonds of different maturities: 20–30%, precious metals:

10–20%, cash 20–30%. A few observations: Equities would include a diversified portfolio of well-managed companies located in different geographical regions, with about 50% of the equity allocation invested in emerging economies. (Eight per cent of my equity investments are in Asia.) As explained above, I would hold equities with different custodians in different geographical locations. Real estate: We all know that in some countries (the US, Spain, the UK, Ireland, Dubai, etc.) property prices have been very weak. But at the same time, the expansion of global liquidity courtesy of the American current account deficit has massively inflated property values in most emerging economies, and in particular in resource-producing countries such as Canada and Australia, over the last ten years. (I expect that property values will deflate quite badly in the resource- producing countries, as well as in China, in the very near term, as cracks are becoming apparent.) But,

temporary real estate downside corrections aside, I believe that, over longer periods of time, well- diversified and not overleveraged real estate investments are destined to preserve and increase wealth. I also believe that the current slump in real estate prices in countries such as the US and Spain will provide excellent entry points over the next two to three years. Real estate exposure can also be obtained through the purchase of farmland, plantations, property funds, and REITs. In Asia, companies such as Swire Pacific (19 HK), Sung Hung Kai Properties (16), Capitaland (CAPL SP), and City Developments (CIT SP) should offer a good long-term exposure to the Asian property market. (I have a preference for Singapore REITS, which I have discussed in earlier reports, because of their relatively high yield.) Corporate bonds: Bond spreads have narrowed considerably, but the corporate sector is in a relatively healthy financial condition. Compared to equities, corporate bonds don’t seem to be particularly expensive. Precious metals: It is nice to preach deflation and to forecast a double dip. But the fact remains that, amidst deflation, central banks will feel even more confident about printing money (quantitative easing). That money will flow somewhere. It may not flow into stocks and real estate for now, but it is likely to continue to boost assets where supplies are very limited, such as precious metals, rare art, precious stones, and rare collectibles (old stamps, vintage cars, coins, books). I am by no means an art expert (my friend Kenny Schachter — see his report below — is one), and I know little about precious stones, stamps, etc. However, I should mention that my principal concern about gold is not that its price will decline, but that our Western governments, which are composed of a rare breed of geniuses, will one day take it away from us gold holders. The expropriation of stamps, precious stones, and rare art is far less likely. Therefore, I would consider that

investors diversify part of their allocation to precious metals into the just-mentioned assets. I should add that most of the hedge fund managers I know who collect art made more money from buying art in the last ten years than from the performance of their funds (though not from the fees they collected). Earlier this year, Roubini felt that gold was a “bubble”. This is not my impression. We have a bubble in government wasteful spending, in money printing, and in Keynesian economic sophism, but not in gold, which is still under- owned (see Figure 20). This is not to say that gold cannot correct on the downside to shake out the leveraged players (the bullish consensus is far too high), but strong support exists around the US$1,120 level and then around US$980 per ounce. With zero interest rates, and with the prospect that real interest rates will remain negative for as long as Mr. Bernanke and Miss Yellen are at the Fed, the bull market should continue. Aside from physical gold, investors should also consider investments in gold shares (see Figure 21). Cash: I consider cash to be unattractive. However, given the high volatility we shall experience, I keep a relatively high allocation of my assets in cash (diversified in several currencies) because it allows me to take advantage of sharp market drops in one or other asset classes. I disagree with Rosenberg, Shilling, and Roubini that stocks will retest their March 2009 lows (or even break below these lows), but I concede that the stock market action and the performance of some consumer- related stocks is far from encouraging (see Figure 22). So, my economist friends might be right and I might be wrong, in which case I would have the necessary reserves to increase my exposure to equities at a much lower level. Still, I wish to reiterate that I consider holding 100% of one’s assets in cash, as some of my readers do, to be an extremely risky strategy in a money-printing environment. As I have explained in earlier reports, there are times when the worse the “news” becomes, the more that stocks increase in price. This year we almost

Figure 20 Gold — Still an Under-owned Asset Class

Figure 20 Gold — Still an Under-owned Asset Class Source: www.contraryinvestor.com

Source: www.contraryinvestor.com

Figure 21 Gold Stocks to Break Out on the Upside?

Figure 21 Gold Stocks to Break Out on the Upside? Source: www.decisionpoint.com

Source: www.decisionpoint.com

had a civil war in Thailand and yet stocks are up 8% year-to-date! History has not been kind to the purchasing power of paper currencies. Over time, they have all lost most, if not all, of their value. I suppose that this is the reason why the world’s richest families own assets invested conservatively in a geographically

diversified portfolio of real estate, equities, commodities, art, and collectibles. I am aware that Bill Gross became extremely prosperous from investing in bonds; however, this had to do less with the performance of bonds, than with the fees his firm collected for successfully managing assets.

Figure 22 Weakness in Wal-Mart — a Negative Omen

Figure 22 Weakness in Wal-Mart — a Negative Omen Source: www.decisionpoint.com

Source: www.decisionpoint.com

In last month’s report I noted that I was growing “increasingly apprehensive that the late April US stock market high, which wasn’t confirmed by a large number of foreign stock markets, may turn out to be a more important top that may not be exceeded in the next six months or so”. Late June stock market weakness brought about another oversold condition, and for

the near term I would expect the recent lows at 1040 for the S&P 500 to hold. However, I am concerned that in the next six months the economic news could turn increasingly disappointing (a sharp deceleration in China’s growth, further home price weakness, no employment gains, corporate profit estimates for 2011 coming down, etc.); therefore, a break below these

lows (1040 for the S&P 500) is a distinct possibility in the months of September and October. But, as explained previously, once the S&P drops below 1000, the money- printing presses all over the world will be running on 24-hour shifts, which should again lift assets. Below, I am pleased to enclose two reports. The first one is by my old friend Georges Karlweis, who has made his home in the Bahamas. I met Georges in the early 1970s when he was running Banque Privée Edmond de Rothschild in Geneva. I am not exaggerating when I say that Georges (he is now retired) belongs to a rare breed of private bankers who possess a very high level of intellect and keen investment acumen. He also happens to be great company and a likeable bon vivant. In 1969 he set up, with some of his friends and associates, Leveraged Capital Holdings, the first “Fund of Hedge Funds”. His report, “A Plea for Hedge Funds”, is well worth a read, providing all the investment wisdom an investor needs to know. And for those of my readers who constantly and nervously worry about near-term stock market fluctuations, I particularly recommend that they read the last three paragraphs. Further below, my friend Kenny Schachter reports on the Basel Art Fair.

A Plea for Hedge Funds

Georges Karlweis, E-mail: gekaba@gmail.com

For decades I have been shocked at how governments and administrations immediately blame hedge funds whenever there is a financial crisis. The people most responsible for the current financial, economic, and social disaster are the barons of Wall Street and a number of large international banks. It was greed and lust for bonuses based on trumped-up profits that caused them to disregard professional ethics. They sold toxic products — sub-prime debt, derivatives, and other junk — that brought them huge fees while ruining their clients. Judging by their present attitude towards their 2009 bonuses, these unsavoury characters have not learned anything. We should not forget that there are some things that consumers and customers buy, and others that slick operators sell to them by pulling the wool over their eyes. On the face of it, numerous bankers are engaged in wool pulling, which in their case amounts to professional misconduct. The credit-rating agencies were inept or even bought off, so far without paying the consequences. AIG, the world’s biggest insurer, was saved from bankruptcy by a US$180 billion credit line thrown by the US Federal Reserve. This also saved Goldman Sachs, whose former CEO, Hank Paulson, had become the US Treasury secretary. The second group responsible for the debacle are central banks, often run by theoreticians who have never had any practical experience in business or industry. Their manipulation of interest rates has been one of the causes of instability. The 1% policy rate maintained by the Fed for several quarters was an aberration in what we still call a capitalist world. This created the opportunity for the sale of billions of sub-primes. Moreover, central banks in general have been utterly incompetent when it comes to monitoring commercial banks and finance houses. They failed

to see the “shadow banking system”, comprised of contingent liabilities that totalled 30 to 50 times the capital and reserves of lending institutions like Citicorp, Royal Bank of Scotland, and UBS (whose boards of directors and top executives ought to be hauled into court). In 18 months, Citicorp shareholders lost nearly US$300 billion after their shares withered from US$60 to US$1, despite a US$50 billion capital injection and US$450 billion of loan guarantees stumped up by the US government. Prior to the credit crunch, Citicorp was considered a tried-and-trusted investment. Today, Citigroup shares are worth US$3.50. Nearly a dozen other American banks had to be rescued. Governments also had to intervene in Europe and elsewhere in the world. Before turning to hedge funds, a word first on the Madoff scandal. Bernie Madoff didn’t run a hedge fund; he was simply a crook. There have always been crooks, and customers for them to prey upon. Madoff’s victims should have been tipped of by the fact that he had never had a down year. Hedge funds were classified as high-risk investments when they first appeared. They were out of bounds to small-time savers. Yet, hedge fund managers typically have most of their personal savings invested in their fund, pooled together with the shareholders’ stakes. Thus, they don’t only manage other people’s money. They share the same risk of loss as their backers. If their fund goes bankrupt, they lose their investment. They have no golden parachute and don’t cost the government a penny. Not so for banks that speculate with other people’s money (read “customer deposits”). If they take a hit, the loss is paid for by their shareholders first and then by taxpayers. Banks are the only casinos where you don’t have to buy chips before sitting down to gamble. Obviously, there is always a link

in life between the risk one takes and the potential reward. You cannot get an annual return of 10% or 15% if you invest in so-called risk-free securities such as US Treasury paper, which used to yield 3–5% a year and now yields 1–4%. To earn more you have to take risks, and you cannot afford to be wrong too often. When visiting New York brokers in the 1960s, I noticed that the brightest analysts I met were all under 30. When I returned to the same firms and found them gone, I was told they had become investment bankers or independent fund managers. By getting in touch with some of these rising stars (who were celebrated in A New Breed on Wall Street, a book published in 1968), I was plunged into the burgeoning world of hedge funds, invented and made fashionable by A.W. Jones. The analysts who continued to work for a broker were usually competent at their job. If they were good salesmen as well, they could earn good money. But those who were confident enough in their ability to go into business for themselves had one objective in mind: to become multimillionaires. Usually they had already amassed a wad of capital by managing accounts for their employer and sometimes for its partners, who became their first investors. Such “smart money” was a good sign. To me the new investment techniques used by the new breed of money managers — selling short, speculating on interest rates and currencies — seemed to offer interesting possibilities. These youngsters, whose careers were riding on such bets, had strong personalities, gumption, and high IQs. Some had no university education and were merely traders who had learned on the job. In addition to experience, they had common sense and a profound understanding of the way markets worked. (Eight times out of ten, the things we see happening now have happened before.)

To judge for myself, I placed a few hundred thousand dollars with six of these “gunslingers” (as Wall Street referred to them). After 18–24 months, three of my returns on investment proved very good, one was remarkable, and two disappointed. In getting acquainted with hedge funds in this way, I discovered sources of profit that, as yet, few people were tapping into. At the time there were more special situations, too. I came to know the people behind hedge funds, their personalities and way of seeing things. Some had exceptional minds. All had drive, courage, and nerves of steel. Those first years, there were about 30 hedge funds, a number that quickly grew to 50. During the same period, a US mutual fund salesman named Bernie Cornfeld set up Investors Overseas Services (IOS) near Geneva. This company sold investment fund units to American servicemen stationed in Europe. It was he who came up with the idea of creating a fund of funds so that people could invest in a pick of the top-performing mutual funds (an arrangement that enabled him to charge an extra fee). His “Fund of Funds” turned out to be very popular:

civilians throughout Europe were soon subscribing shares as well, particularly in Germany. In its heyday, IOS had US$2 billion of assets at a time when the dollar was trading at 4.30 Swiss francs. But then

a former lawyer and a wheeler-dealer

got control and started cooking the company’s books, before settling down to some all-out plundering. When there was only US$300 million of assets left, the last chief executive had the sum transferred to his account and fled to the Bahamas. It was a major scandal. That was sad, I thought, for the idea of a fund of funds was good in itself. Applied honestly, it ought to

result in a highly effective investment vehicle. Hence my decision to set up the very first “fund of hedged funds” (in the parlance of the time) to offer

a pick of the new breed of money

managers who were bursting on to

the scene. I teamed up with some friends and associates — in

particular, with Lucas Wurfbain, a veteran investment banker at Pierson Heldring & Pierson, the Rothschild family’s longstanding Amsterdam correspondent bank. To my mind, a fund of hedge funds would provide:

• the ability to spread risks

(crucial in view of the sizeable

gambles that hedge funds sometimes take);

• the hope that over time the

assets managed by the best managers would be multiplied by two, three, or four; and

• the certainty that if any of the

underlying funds went under, we could not lose more than the amount we had invested in it. (This actually happened twice in the first years of our fund of hedge funds’ operation, within the first 18 months of our relationship with the funds in question when our outlay in them

was still small.) Some hedge fund managers turned out to be brilliant. George Soros, after 40 years, still is. Mike Steinhardt was for 25 years, before retiring. Julian Robertson, who still sponsors new, talented managers. Joe Mcnay, Dick McKenzie, and more recently Ackman and John Paulson, were other standouts. That said, one should never include a hedge fund in a fund of funds without first meeting two or three times with the manager. One must also be absolutely convinced that one has understood why and how he performs better than others while abiding by the law and using leverage reasonably. It is useless and dangerous to talk twice to a candidate who claims to have a magic formula hidden in a black box. And a manager who changes his strategy completely — for example, by switching from value stocks to growth stocks, or vice versa — is a bad omen. It was only from 1995 onwards that I heard of managers with MBAs and more dazzling credentials (like

the Nobel laureates at LTCM

talking about risk management. Relying on this “science” soon resulted in excessive risk-taking. In my view only common sense, not calculations or formulas, can tell us how much is too much.


Webster’s defines a hedge as “a transaction tending to the opposite effect of another transaction, engaged in to minimize a potential loss on the latter”. Experience has shown me that in practice long and short positions don’t necessarily

counterbalance each other. Sometimes one has to count them as separate risks, as a precautionary measure. So the fact that we couldn’t

borrow at the fund-of-funds level, the fact that our underlying hedge funds could do it to increase their returns penalised by the imperfect long/short

match, made me replace the word “hedged” by “leveraged”. Hence the name “Leveraged Capital Holdings”. As a fund-of-funds manager with my own understanding of the markets, I judged money managers less on their track record and more on their analysis of present circumstances and on what they planned to do in the event of a major crisis. The most fascinating managers are the ones who can foresee certain developments and who, by what they say and do, are able to influence the markets and speed up the occurrence of the inevitable. They don’t create an event but rather trigger it, as George Soros did by pressuring the pound to the point where the Bank of England had to throw in the towel and devalue. To make a long story short, I came to ask myself three questions about a money manager whose fund we were contemplating buying into:

1. Would he always perform

better than we could (since he

managed assets full time, whereas we had other responsibilities)?

2. Would he have the courage to

“bet the ranch” if he believed the situation called for it?

3. Was he prepared to lose no

more than 50% of his assets under management (my application of the Wall Street warning, “If he has no instinct for survival, avoid him”)? If after consulting with certain members of the Investment Committee the answer to all three of these questions was “yes”, if our investigation into the manager’s reputation and ethics was favourable, and if the auditors were trustworthy,

then we began to consider the terms on which we would be willing to subscribe the fund’s shares.

* * *

To day, after over 50 years in finance, I am still convinced that the best vehicles for comprehensive asset management are long/short hedge funds on equities, currencies, interest rates, and commodities, provided they avoid excessive use of leveraging and derivatives.

P.S. LCH shares, issued at US$20 each, were split in 10 when their price rose above US$1,000. Now this share trades at US$240. The first year was a bad one for the US stock market: the S&P 500 index fell from 98 to 69 starting in November 1969. In 1974 it tanked again, to 62. This spelled disaster for LCH, whose NAV tumbled to a low of US$12 in January 1971. But consider this: If the few brave souls who bought in then still have their investment, it is now worth 200 times more!

In 40 years (from 1969 to 2009) the US Consumer Price Index rose from 37.5 to 217, and the S&P 500 dividends reinvested (less 30% withholding tax) climbed from US$98 to US$2,750. In other words,

the CPI was multiplied by a factor of 8 (I would say at least 10) and the S&P 500 by a factor of 28. Gold rose by a factor of 34, LCH by a factor of


Boffo Basel

Kenny Schachter, E-mail: schachter@mindspring.com

There’s been a tectonic shift in the market to conservative Impressionist,

Modern, and classic Contemporary art evident at the 41st Basel Art Fair, but I must admit it seemed as though everything was flying off the shelf indiscriminately. There was an orgiastic frenzy of activity, from art transactions to hyper-networking; the boom is back. The fair layout reflects

a hierarchy of more established, blue

chip art on the ground floor and contemporary on the second. Nowadays, I would rather wait till it drops down a floor so there’s more wheat, less chaff — it’s worth the extra hay. Some of the best art in Basel was the graffiti seen through the train window on entering town. Seriously, the overall quality of material on display was staggering and would rival the best international institutions.

The art market is like a fast train, but with no destination. Can it sustain itself? Save for nuclear Armageddon,

I fear to say it will. Look for

continued strong, record-breaking, headline-making art activity in the near future. There should be a World Cup for hustling invites and passes at fairs. One morning after prodigious Basel party hopping, I sent my suit to the cleaners. Housekeeping returned it, along with my passport, cash, and a large taxi receipt for a fare from Basel to Zurich. Rough night; no one ever said the art world was for the faint of

heart. Museums are akin to books, fairs more like magazines: a quick fix for

those with short attention spans and

a need for immediate gratification.

For a while, a 30% discount on art was the new 10%; now, 10% is the new 20%. The walls they were

a-changing. With passing time the fair replicates itself in a new form, like a snake shedding its skin, as inventory is shifted when shifted and constantly hung anew. After hours of walking up and down the aisles I was left with a hammering pain in my toe, more than any recollection of specific artworks. Now I know why I had observed so many people on crutches.

I never realised how anal the Swiss

are until I was scolded for public phoning on various occasions by locals who practically made citizen’s arrests. Also, while arguing with hotel security about entering a crowded bar, 15 people simultaneously walked past. But the Jean-Michel Basquiat retrospective at

the Beyeler Foundation

sight to behold — warranting the astronomical figures the paintings are now fetching, and going some length to explain their ubiquitousness at the fair. When an artist achieves a big museum retrospective, or makes an unusually high number at auction, the works flood from the woodwork into the booths and public sales. Another “new” nine-foot-wide Damien Hirst jewel-cabinet, entitled Memories of Love, sold at Basel for US$3.5 million. The price reflected a 50% decline from an exact-same work sold at the £111.5 million Sotheby’s September 2008 sale —

What a

Beautiful Inside My Head Forever the day my headline would have read:

“Merrill sold, Lehman fold”. In stocks, such market dumping is known as “churn and burn”; with Hirst, it should be known as “churn and earn”. In 2008 I curated an exhibit with Pritzker Prize winning Iraqi architect Zaha Hadid at Sonnabend Gallery in New York, upon which New York Times critic Ken Johnson reflected:

“No architect has ever made good art and this is no exception.” Such sweeping generalisation is at best dumb and at worst dangerous. I wonder if he’s ever bothered to view a Le Corbusier painting. I helped to facilitate another Zaha Hadid show at Gmurzynska Gallery in Zurich during the fair (which fact seems to have eluded the gallery) that is an installation incorporating Constructivist masterworks by Malevich, Rodchenko, and Lissitzsky and Hadid herself. The installation uses the Public Square and façade of the building as a framing device, transforming what originated as a 2D rendering into a walk-in line drawing with magical effect. Ken Johnson could cure his myopia if the New York Times would splurge on a trip to Zurich sometime before the exhibit ends in September. Architecture as art is an up-and-coming, new collecting category located between design and sculpture, and is a great new way to domesticate progressive architecture in a home setting. Look for values to progressively rise.


© Marc Faber, 2010

DISCLAIMER: The information, tools and material presented herein are provided for informational purposes only and are not to be used or considered as an offer or a solicitation to sell or an offer or solicitation to buy or subscribe for securities, investment products or other financial instruments, nor to constitute any advice or recommendation with respect to such securities, investment products or other financial instruments. This research report is prepared for general circulation. It does not have regard to the specific investment objectives, financial situation and the particular needs of any specific person who may receive this report. You should independently evaluate particular investments and consult an independent financial adviser before making any investments or entering into any transaction in relation to any securities mentioned in this report.

MAY 2010

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