THE GLOOM, BOOM & DOOM REPORT

ISSN 1017-1371 A PUBLICATION OF MARC FABER LIMITED 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)

“Bankruptcies of governments have, on the whole, done less harm to

mankind than their ability to raise loans.”

R.H. Tawney (Religion and the Rise of Capitalism, 1926)

 INTRODUCTION
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 —
Figure 1 Each Crisis Produced Additional Government Interventions
Source: Ed Yardeni, www.yardeni.com
2 The Gloom, Boom & Doom Report
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
July 2010
early 1980s, because credit growth
has exceeded nominal GDP growth. Figure 2 The Fed’s Slashing of Interest Rates Post-September 2007
From 140% of GDP, total credit (ex Led to a Commodities Bubble
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 Source: Ed Yardeni, www.yardeni.com
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 Figure 3 Following the Fed’s September Rate Cuts, Commodities
emerging markets — in particular in Exploded on the Upside
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 Source: www.decisionpoint.com
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 spending on oil (directly and body of academics in the field of
therefore the demand for industrial indirectly) per annum soared from economics, remind me of a famous
commodities, was already slowing approximately US$500 billion in the Swiss professor of medicine who on
down in the second half of 2007. The first half of 2007 to almost US$1 one occasion, on emerging from the
sharp increase in commodity prices in trillion in the summer of 2008 (see operating theatre, proudly announced
late 2007/early 2008 burdened the Figure 4). In fact, the repeated policy that the operation had been very
consumer with an additional tax. In errors by the US Fed, which were successful but that, unfortunately, the
the case of oil, US consumer encouraged and supported by a wide patient had died.

July 2010 The Gloom, Boom & Doom Report 3

 Still, despite my criticism of the
Fed’s monetary policies, I have some Figure 4 Soaring Oil Prices between September 2007 and July 2008
sympathy for its policy errors. Imposed an Additional US$500 Billion Tax on the US
Politicians, investors, and the public Consumer
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 Source: Ed Yardeni, www.yardeni.com
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 Figure 5 CRB Index, 1980–2010
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 Source: www.decisionpoint.com
or deflationary environment of a
Kondratieff Cycle downward wave
than during the rising wave, when
the overall price level tends to monetary conditions had not been economy? Hardly! It would have
increase at an accelerating rate. In expansionary, and if debt growth had made the US more competitive, and
the deflationary and disinflationary not been spectacular, it is probable its financial position would today be
environment of the downward wave that we would have had deflation in far better in terms of total debt-to-
of the Kondratieff Cycle, easy the overall price level post-1980 (see GDP.
monetary policies don’t lead to Figure 7). Would outright deflation So, whereas in the downward
higher consumer price inflation. In in the 1980s and 1990s have been phase of the Kondratieff Cycle the
fact, I could make the case that if negative for the health of the US increase in the quantity of money

4 The Gloom, Boom & Doom Report July 2010

and credit does not (for the reasons I
mentioned above) lead to higher Figure 6 A Favourable Interest Rate Cycle Assisted the Fed’s
consumer prices, the excessive Expansionary Monetary Policies
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
Source: Ed Yardeni, www.yardeni.com
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 Figure 7 Without Rapid Credit Growth, the US Price Level Would
have brought about enormous Likely Have Deflated
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.

MEETING OF THE SUPER

BEARS

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 Source: The Bank Credit Analyst
very large and beautifully landscaped

July 2010 The Gloom, Boom & Doom Report 5

 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
6 The Gloom, Boom & Doom Report
[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
Treasury, 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
July 2010
 Figure 8 The Performance of Stocks and Bonds since 1981

Source: Gary Shilling, insight@agaryshilling.com

Figure 9 Japanese Long-Term Government Bond Yields Stayed Low over the Last Ten Years

Source: Gary Shilling, insight@agaryshilling.com

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

Sources: Haver Analytics, David Rosenberg, Gluskin Sheff

July 2010 The Gloom, Boom & Doom Report 7


Figure 11 New Lows for Long-Term Treasury Yields?
Source: www.decisionpoint.com
Figure 12 US Household Holdings of Treasuries and Municipal
Securities as a Share of Total Household Assets
(percent), 1950–2010
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.
8 The Gloom, Boom & Doom Report
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
July 2010
 Figure 13 Public Debt as a Percentage of GDP, Figure 14 US Government’s Interest Payments
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

*Includes current outlays on services and net interest (Forecast by OMB).

Source: Gary Shilling, insight@agaryshilling.com

July 2010 The Gloom, Boom & Doom Report 9

 Euro, which he expected to decline
to or below parity (see Figure 16). For Figure 16 Euro versus US Dollar, 1998–2010
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 Source: www.decisionpoint.com
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. 25th wedding anniversary, and Where the Bahres are typical of the
At the same time, I came away everybody teased him that he would American Dream is that they have
from this gathering of economic bears have to sleep with me. After a few had successful businesses, including a
with the feeling that I was even more drinks, he admitted that I was racetrack that they sold at the right
negative about the world than starting to look better!) I have also time to NASCAR, and are now eager
Shilling, Rosenberg, and Roubini been on panels with Roubini, and to preserve the value of their assets.
were, but for different reasons and there is little doubt that he is an How to preserve the value of one’s
also with different investment accomplished economist. So, if I have assets is the question most of my
conclusions. Before making some different views about investment readers — irrespective of whether
critical comments about these strategies, which I shall discuss below, they are fund managers, or wealthy or
economists’ views, I should like to it is not out of disrespect for any one less-wealthy individuals, in which
emphasise that I have a high respect of these accomplished economists. category I include myself — ask
for them all. I have known Gary themselves almost daily. In the past, I
Shilling since 1973, when he joined HOW TO PROTECT YOUR have advocated diversification both
White Weld & Co., Inc. as a chief WEALTH? of investment classes (real estate,
economist (following the termination equities, bonds, cash, commodities,
of Alan Greenspan’s consulting The Bahre family is atypical in the precious metals, art, etc.) and of the
agreement by White Weld), and I sense that they are all extremely low- custody of assets. As a Swiss citizen,
can say that I learned a great deal key, humble, nice people who treat for example, I don’t wish to hold all
from him over the years. Partly based their employees with the highest my assets through a Swiss legal entity.
on his advice, I had a far larger respect. They enjoy a lifestyle on I want to hold some assets outside of
allocation to bonds than to equities their stunning estate that very few the Swiss jurisdiction. And if I were a
from the early 1980s up until very people can afford, and they have the US citizen, I would do exactly the
recently. Also, I have read and necessary staff and amenities to make same. I would have some assets in
known David Rosenberg for years, the most of it. (Their helicopter, Canada (of course, with Sprott Inc.
and I have always been extremely flown by their pilot, Kurt, picked me and Gluskin Sheff), Europe, Asia,
impressed by his ability to write up in Boston. I’ll admit that I’ve Australia or New Zealand, and some
concisely, and in an entertaining never before been in such a nice in Latin America with local banks or
style, about economic trends. “Rosie”, flying machine — not that I’ve been invested in real estate. Obviously, I
as we call him, is also a very likeable in many helicopters.) But aside from am not a lawyer, and I cannot be the
individual who can take a joke. (The such conveniences, the Bahres live a personal financial planner of each of
Bahre invitation coincided with his very modest, unostentatious lifestyle. my readers (and I seem to have

10 The Gloom, Boom & Doom Report July 2010

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
Figure 17 Hang Seng Index, 1982–2010
Source: Bloomberg
July 2010
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
The Gloom, Boom & Doom Report 11

Figure 18 Wal-Mart, 1985–2010
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
12 The Gloom, Boom & Doom Report
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
July 2010

Figure 19 UN Food Price Index, 1990–2010
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
July 2010
(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
The Gloom, Boom & Doom Report 13
 investors diversify part of their
allocation to precious metals into the Figure 20 Gold — Still an Under-owned Asset Class
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
Source: www.contraryinvestor.com
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 Figure 21 Gold Stocks to Break Out on the Upside?
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
Source: www.decisionpoint.com
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 had a civil war in Thailand and yet diversified portfolio of real estate,
consider holding 100% of one’s assets stocks are up 8% year-to-date! equities, commodities, art, and
in cash, as some of my readers do, to History has not been kind to the collectibles. I am aware that Bill
be an extremely risky strategy in a purchasing power of paper currencies. Gross became extremely prosperous
money-printing environment. As I Over time, they have all lost most, if from investing in bonds; however,
have explained in earlier reports, not all, of their value. I suppose that this had to do less with the
there are times when the worse the this is the reason why the world’s performance of bonds, than with the
“news” becomes, the more that stocks richest families own assets invested fees his firm collected for successfully
increase in price. This year we almost conservatively in a geographically managing assets.

14 The Gloom, Boom & Doom Report July 2010


Figure 22 Weakness in Wal-Mart — a Negative Omen
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
July 2010
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.
The Gloom, Boom & Doom Report 15
 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
16 The Gloom, Boom & Doom Report
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.)
July 2010
 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
July 2010
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,
The Gloom, Boom & Doom Report 17
 then we began to consider the terms
on which we would be willing to
subscribe the fund’s shares.
***
Today, 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.
18 The Gloom, Boom & Doom Report
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
120.
July 2010
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
July 2010
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... What a
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 —
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.
The Gloom, Boom & Doom Report 19
 THE GLOOM, BOOM & DOOM REPORT
© Marc Faber, 2010
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