Ages of Discord, and Political and Financial Instability: Marc Faber The Monthly Market Commentary Report

Dr.
Marc Faber Market Commentary February 1, 2018
Ages of Discord, and Political and Financial

Instability
Marc Faber
The Monthly Market Commentary Report
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© Copyright 2018 by Marc Faber - All rights reserved
Dr. Marc Faber Market Commentary February 1, 2018
Ages of Discord, and Political and Financial

Instability
“Every great cause begins as a movement, becomes a
business, and eventually degenerates into a racket.”
Eric Hoffer
“Four sorrows ... are certain to be visited on the United

States. Their cumulative effect guarantees that the U.S. will
cease to resemble the country outlined in the Constitution of
1787.
First, there will be a state of perpetual war, leading to more
terrorism against Americans wherever they may be and a
spreading reliance on nuclear weapons among smaller
nations as they try to ward off the imperial juggernaut.
Second is a loss of democracy and Constitutional rights as
the presidency eclipses Congress and is itself transformed
from a co-equal 'executive branch' of government into a
military junta.
Third is the replacement of truth by propaganda,
disinformation, and the glorification of war, power, and the
military legions.
Lastly, there is bankruptcy, as the United States pours its
economic resources into ever more grandiose military
projects and shortchanges the education, health, and safety
of its citizens.”
Chalmers Johnson, the
Sorrows of Empire
“A democracy cannot exist as a permanent form of

government. It can only exist until the voters discover that
they can vote themselves largesse from the public treasury.
From that moment on, the majority always votes for the
candidates promising the most benefits from the public
treasury with the result that a democracy always collapses
over loose fiscal policy, always followed by a dictatorship.
The average age of the world's greatest civilizations has
been 200 years. These nations have progressed through this
sequence:
From bondage to spiritual faith;
From spiritual faith to great courage;
From courage to liberty;
From liberty to abundance;
From abundance to selfishness;
From selfishness to apathy;
From apathy to dependence; From dependence back into
bondage.”
(Attributed to Alexander
Fraser Tytler Lord
Woodhouselee (1747 – 1813)
“Government has three primary functions. It should

provide for military defense of the nation. It should enforce
contracts between individuals. It should protect citizens
from crimes against themselves or their property. When
government - in pursuit of good intentions tries to
rearrange the economy, legislate morality, or help special
interests, the cost come in inefficiency, lack of motivation,
and loss of freedom. Government should be a referee, not
an active player.”
Milton Friedman
Charles Hugh Smith (www.oftwominds.com) recently penned an essay

entitled Social Change Will Upend the Status Quo: The nation is fragmenting
because the Status Quo is failing the majority of the citizenry.
According to Hugh Smith, “The core narrative of the Status Quo is that
nothing fundamental needs to be changed: all the problems can be solved with
more ‘free money’ (borrowed from the future at low rates of interest) and a few
policy tweaks such as Universal Basic Income.
This core narrative is false: everything needs to change, from the
bottom up. And that of course terrifies those gorging at the trough of status quo
wealth and power.
The power structure can manipulate financial metrics, but it can't manipulate
rising wealth/power inequality or social discord. Whatever you think of
President Trump, his election is a symptom of profound social discord -discord
which author Peter Turchin explains is cyclical and cannot be squashed with phony
reforms like UBI or police-state repression.
The nation is fragmenting because the Status Quo is failing the majority
of the citizenry. The protected few are reaping all the benefits of the Status Quo, at
the expense of the unprotected many.
As I have outlined many times, this unsustainable asymmetry is the only
possible outcome of our socio-economic system, which is dominated by these
forces:
1. Globalization--free flow of capital, labor arbitrage (workers must compete

with the lowest-cost labor around the world).
2. Nearly free money from central banks for bankers, financiers and
corporations.
3. Pay-to-play ‘democracy’- wealth casts the only votes that count.
4. State protected cartels that privatize gains and socialize losses.
5. A political system stripped of self-correcting feedback and accountability.
Once you understand the inputs and structure, you realize there is no other
possible output other than unsustainably expanding debt and wealth/income
inequality. Policy tweaks cannot change the output; all they do is provide
an illusion of reform that serves the need of those at the top to obscure the systemic
injustices and unsustainability of the extractive, exploitive, predatory, parasitic
system that's enriching them.
What do people do when centralized systems fail to deliver what was
promised? They fragment into smaller ‘tribes’ and find fewer reasons to
cooperate in centralized systems. As historian-economist Peter Turchin explained
in his 2016 book Ages of Discord, human history manifests cycles of social
disintegration and integration in which the impulse to cooperate in large social

structures waxes and wanes.
Turchin identified 25-year cycles that combine into roughly 50-year cycles,
comparable (though not identical with) Kondratieff's proposed economic cycles.
These 50-year cycles are part of longer 150 to 200-year cycles that move from
cooperation through an age of discord and disintegration to a new era of
cooperation.”
MF: Peter Turchin (born 1957) is a Russian-American scientist, specializing
in cultural evolution and the statistical analysis of the dynamics of historical
societies.
His 2016 book Ages of Discord explains why we should be worried about
the current course taken by American society and how we can use history to plan a
better future. According to Turchin, “something happened to American society
during the 1970s. Several previously positive social, economic, and political trends
suddenly reversed their direction.” (See Figure 1)
Figure 1: Turchin’s Cycles of Good Feelings and Political Instability
Source: Peter Turchin, Ages of Discord, 2016
Turchin further explains that, “there were two periods in American history
that were remarkably free of political violence: the Era of Good Feelings (the
1820s) and the post-war prosperity of the 1950s, which I termed the Era of Good
Feelings II. After the quiet 1950s, however, incidents of political violence again
became more frequent and now we may be in the middle of another wave of
sociopolitical instability.
Each of these turn-around points has been noticed and commented on by
social scientists and media commentators. However, what is not broadly
appreciated is that these trend reversals were related. A human society is a
dynamical system, and its economic, social, and political subsystems do not
operate in isolation (see Figure 2).
A well-meaning intervention to fix one particular problem is likely to have
unexpected and, often, undesirable consequences (although, one hopes, not a
disaster on the scale of the French Revolution and Terror). The only way to avoid
such undesirable consequences is to gain a deep understanding of the fundamental
mechanisms affecting functioning of complex macrosocial systems.”
Back to Hugh Smith who explains that “Turchin’s work draws upon his
previous books, including War and Peace and War: The Rise and Fall of Empires,
which I referenced in Following in Ancient Rome's Footsteps: Moral Decay, Rising
Wealth Inequality (September 30, 2015) and The Lesson of Empires: Once
Privilege Limits Social Mobility, Collapse Is Inevitable (April 18, 2016).
These long cycles parallel the cyclical analysis of David Hackett Fischer,
whose masterwork The Great Wave: Price Revolutions and the Rhythm of
History I've referenced many times over the years, most recently in We've Entered
an Era of Rising Instability and Uncertainty (July 18, 2016).
Turchin's model identifies three primary forces in these cycles:

1. An over-supply of labor that suppresses real (inflation-adjusted)
wages.
2. An overproduction of essentially parasitic Elites.
3. A deterioration in central state finances (over-indebtedness, decline in
tax revenues, increase in state dependents, fiscal burdens of war, etc.)
These combine to influence the social order, which is characterized in eras of
discord by declining loyalty to self-serving special interests (disintegration) and in
eras of cooperation by a willingness to compromise for the good of the entire

society (integration).”
MF: Based on these factors, Turchin created a “Political Stress Index,” which
increases in the Ages of Discord (see Figure 2).
Figure 2: Elite Overproduction, Popular Immiseration, and Fiscal Crisis of

the State lead to Sociopolitical Instability
Source: Peter Turchin, Ages of Discord, 2016
According to the Structural-Demographic Theory (Goldstone 1991, Turchin

2003), population growth in excess of the productivity gains of the land has several
effects on social institutions. Turchin: “First, it leads to persistent price inflation,
falling real wages, rural misery, urban migration, and increased frequency of food
riots and wage protests. Second, rapid expansion of population results in elite
overproduction - an increased number of aspirants for the limited supply of
elite positions. Increased intraelite competition leads to the formation of rival

patronage networks vying for state rewards [corruption – ed. note]. As a result,
elites become riven by increasing rivalry and factionalism. Third, population
growth leads to expansion of the army and the bureaucracy and to rising real costs.
States have no choice but to seek to expand taxation, despite resistance from the
elites and the general populace. Yet, attempts to increase revenues cannot offset
the spiraling state expenses. Thus, even if the state succeeds in raising taxes, it is
still headed for fiscal crisis. As all these trends intensify, the end result is state
bankruptcy and consequent loss of military control; elite movements of regional
and national rebellion; and a combination of elite-mobilized and popular uprisings
that expose the breakdown of central authority.
Sociopolitical instability resulting from state collapse feeds back on
population growth via depressed birth rates and elevated mortality and emigration.
Additionally, increased migration and vagrancy spread the disease by connecting
areas that would have stayed isolated during better times. As a result, epidemics
and even pandemics strike disproportionately often during the disintegrative phases
of secular cycles (Turchin 2008b).
Instability also has a negative impact on the productive capacity of a society.
Lacking strong government to protect them, peasants cultivate only fields that are
near fortified.
The principle of elite overproduction is also a consequence of the law of
supply and demand. The elites (in both agrarian and capitalist societies) are
consumers of commoner labor. Low labor costs lead not only to declining
living standards for a large segment of the population (employees, especially
unskilled ones), but also to a favorable economic conjuncture for the elites
(more specifically, for the economic segment of the elites—employers).
There are several important consequences of this development [Multi-
Secular Cycles in Historical and Modern Societies]. First, the elites become
accustomed to ever greater levels of consumption. Furthermore, competition for
social status fuels ‘conspicuous consumption’ (Veblen 1973 [1899]). Thus, the
minimum level of consumption necessary for maintaining the elite status exhibits
runaway growth. Second, the numbers of elites, in relation to the rest of the
population, increase. A favorable economic conjuncture for the employers enables
large numbers of intelligent, hard-working, or simply lucky workers to accumulate
wealth and then attempt to translate it into social status. As a result, upward
mobility into the ranks of the elites will greatly surpass downward mobility.
Additionally, there may be increased biological reproduction within elite families,
although this mechanism was of greater importance in pre-industrial societies and,
especially, societies with widespread polygyny among the elites (such as the
Islamic ones). The third consequence is that the twin processes of declining living
standards for the commoners and increasing consumption levels for the elites will
drive up socioeconomic inequality.
As a result of the growth in elite appetites and numbers, the proportion
of the total economic pie consumed by them will increase. [Read government
spending as a percentage of GDP.] However, there are limits on how far this
process can go. Eventually, increasing numbers of elites and elite aspirants will
have to translate into declining consumption levels for some, leading to the
condition that has been termed elite overproduction (this is reminiscent of
population growth leading to overpopulation). Intraelite competition for limited
elite positions in the economy and government will become more fierce.
Competition will be particularly intense for government positions whose supply is
relatively inelastic (or completely inelastic—there can be only one President, nine
Supreme Court Justices, and one hundred Senators). Since the number of power
positions is limited, a growing segment of elites/elite aspirants must be denied
access to them. These ‘surplus’ elites must challenge the established elites for
access to elite positions, or acquiesce in downward mobility. A democratic system
of government may allow for nonviolent rotation of political elites, but ultimately
this depends on the willingness of some segments of established elites and/or elite
aspirants to give up their elite positions and status. Thus, elite overproduction
increases the probability of violent intraelite conflict. One common response by the
established elites under these conditions is to close ranks and exclude other elite
aspirants from power, which causes the latter to organize as counter-elites.
Elite overproduction leading to intraelite competition and conflict is,
thus, one of the chief causes of political instability. Two other causes are
popular discontent resulting from falling living standards, and fiscal crisis.
These three causes interact in producing conditions ripe for political violence.
Thus, one common tactic employed by the counter-elites is to mobilize the masses
against the established elites, something made possible by deep-running popular
discontent. On the other hand, elite overproduction contributes to the financial
difficulties of the state, because impoverished members of the elites, seeking to
secure resources to maintain their status, put enormous pressure on the state to
provide employment for them, tipping state finances further into the red.”
MF: After so much literature I think it’s safe to say that the cyclical view of
history, which is defined as repeating cycles of events, is nothing new. Social and
political cycles were known to the Greek, Roman, Middle Eastern, and Chinese
historian/philosophers. Plutarch, Polybius, Ibn Khaldun were prominent precursors
of this analysis. Polybius blamed in particular the decline of the Hellenistic world
on low fertility rates, (has resonance today in context of declining birth rates
among the natives and extremely high birth rates amongst new immigrants,
especially in Europe and the US. Japan, incidentally has neither high birth rates nor
immigration) writing in his work The Histories that: “In our time all Greece was
visited by a dearth of children and generally a decay of population, owing to which
the cities were denuded of inhabitants, and a failure of productiveness resulted,
though there were no long-continued wars or serious pestilences among us. For this
evil grew upon us rapidly, and without attracting attention, by our men becoming
perverted to a passion for show and money and the pleasures of an idle life, and
accordingly either not marrying at all, or, if they did marry, refusing to rear the
children that were born, or at most one or two out of a great number, for the sake
of leaving them well off or bringing them up in extravagant luxury.”
In recent times, P. R. Sarkar (also known as Bábá) in his Social Cycle
Theory has used this idea to elaborate his interpretation of history. The Russian
philosopher Nikolai Danilewski (1822–1885) differentiated in Rossiia i Evropa
(1869) between various smaller civilizations (Egyptian, Chinese, Persian, Greek,
Roman, German and Slav, among others) and thought that each civilization had a
life cycle, and that by the end of the 19th century the Roman-German civilization
was in decline, while the Slav civilization was approaching its Golden Age. A
similar theory was put forward by Oswald Spengler (1880–1936) who in his Der
Untergang des Abendlandes (1918) also argued that the Western civilization had
entered its final phase of development and its decline was inevitable. One of the
first social cycles theory in sociology was created by Italian sociologist and
economist Vilfredo Pareto (1848–1923) in his Trattato di Sociologia Generale
(1916). He centered his theory on the concept of an elite social class, which he
divided into cunning 'foxes' and violent 'lions'. In his view of society, the power
constantly passes from the 'foxes' to the 'lions' and vice versa.
A sociological cycle theory was also developed by Pitirin A. Sorokin (1889–

1968) in Social and Cultural Dynamics (1937, 1943). He classified societies
according to their 'cultural mentality', which can be ideational (reality is spiritual),
sensate (reality is material), or idealistic (a synthesis of the two).
Historian Arnold J. Toynbee explained in A Study of History (1961), that all
civilizations pass through several distinct stages: genesis, growth, time of troubles,
universal state, and disintegration. He argued that the breakdown of civilizations is
not caused by loss of control over the environment or attacks from outside but that,
societies that develop great expertise in problem solving become incapable of
solving new problems by overdeveloping their structures for solving old ones.
According to him, the fixation on the old methods of the “Creative Minority”
would eventually cease to be creative and degenerates into merely a “dominant
minority,” which forces the majority to obey without meriting obedience and
which fails to recognize new ways of thinking.
The larger point is that social cycle theories are nothing new and have been
around for a while now. But Turchin added in my opinion an important factor by
discussing “parisitic elite overproduction leading to intraelite competition and
conflict” which causes political instability. [Turchin did not specifically address
the overproduction of bureaucrats but I suppose he includes them among the elite.
Looking at the Davos circus there can’t be any question that the last few years have
truly overproduced the class of the political, financial and business elite. Sure
seems like more of a function of a rising stock market the world over due to
wanton money printing rather than any genuine ingenuity on the part of the
attendees.]
Dan Mitchell, a libertarian economist, recently wrote under the heading
Falling Red Tape = Rising Economic Growth that he was going “to give Trump
some credit for what's happening with regulation and red tape.” According to
Mitchell the Competitive Enterprise Institute measures the change:
“The calendar year concluded with 61,950 pages in the Federal Register.
This is the lowest count since 1993’s 61,166 pages. A year ago, Obama set the
all-time Federal Register page record with 95,894 pages. Trump’s Federal
Register is a 35 percent drop from Obama’s record. After the National
Archives processes all the blank pages and skips in the 2017 Federal Register,
Trump’s final count will ultimately be even lower” (see Table 1).
Wayne Crews of the Competitive Enterprise Institute explained that the

numbers of rules have dropped in addition to the number of pages. According to
Crews, “...the Federal Register may be a poor guide for regulation. The ‘problem’
of assessing magnitude is even worse this year, because many of Trump’s
‘rules’ are rules written to get rid of rules. There has also been a major
reduction in the number of rules and regulations under Trump. Today the Federal
Register closed out with 3,281 final rules within its pages. This is the lowest
count since records began being kept in the mid-1970s.”
Table 1: Federal Register, 2009 – 2017
Source: Competitive Enterprise Institute, Dan Mitchell,
Mitchell then quotes Susan Dudley of George Washington University who

looked at what had been happening to regulation for Forbes. Dudley writes:
“...what has the administration achieved on the regulatory front in 2017? President
Trump issued Executive Order 13771 directing federal agencies to remove two
regulations for every new one they issued, and to cap the total cost of new
regulations at zero. An Office of Management and Budget report...finds that
during the first eight months of the administration (through September 30th),
executive agencies issued 67 deregulatory actions and only 3 significant
regulatory actions. More meaningful is the report’s estimate that these actions
will save Americans more than $570 million per year on net. This was the year of
the Congressional Review Act. Working with the Republican Congress, President
Trump has disapproved 15 regulations, most issued at the end of the Obama
administration.”
Mitchell further explained that Dudley also looked at regulation which
involved a lot of money and that she had observed:
“The pace of new regulation has visibly slowed in the Trump administration.
A search of OMB’s database reveals that, between January 21 and December 20,
2017, the Office of Information and Regulatory Affairs concluded review of 21
‘economically significant’ regulations - those with impacts (costs or benefits)
expected to be $100 million or more in a year. As the chart below shows that is
dramatically fewer rules than previous presidents have issued in their first years”
(see Figure 3).
The most impressive part is that some of these "significant" rules are
actually designed to reduce red tape. According to Dudley, “a further breakdown
of those 21 economically significant actions this year: Three are classified as
‘regulatory,’ including two from HHS and one from the IRS. Four are
‘deregulatory,’ including three HHS rules as well as the congressionally-
disapproved FAR rule mentioned earlier.”
Figure 3: Number of Economically Significant Regulations Completed by

Presidential Year, 1981 - 2017
Source: Susan Dudley, The George Washington University Regulatory Studies

Center, Dan Mitchell
Mitchell then points out that even the New York Times reported that less red
tape was favorable for the economy. Goes without saying, not many expected that
now, or did they from the NYT? Under the title The Trump Effect: Business
Anticipating Less Regulation, Loosens Purse Strings (see NYT, January 1, 2018).
According to the New York Times,
“in the administration and across the business community, there is a
perception that years of increased environmental, financial and other regulatory
oversight by the Obama administration dampened investment and job creation —
and that Mr. Trump’s more hands-off approach has unleashed the “animal spirits”
of companies that had hoarded cash after the recession of 2008. ...with tax cuts
coming and a generally improving economic outlook, both domestically and
internationally, economists are revising growth forecasts upward for last year and
this year. Even before it became clear that Republicans would pass a major tax cut,
capital spending had risen significantly, climbing at an annualized rate of 6.2
percent during the first three quarters of last year. Surveys of planned spending
also show increases. ...business executives are largely convinced that the cost of
complying with rules diverts money that could be invested elsewhere. And
economists see a plausible connection between Mr. Trump’s determination to
prune the federal rule book and the willingness of businesses to crank open their
vaults (see Figure 4). Measures of business confidence have climbed to record
heights during Mr. Trump’s first year. The Business Roundtable, a corporate
lobbying group in Washington, reported last month that ‘regulatory costs’
were no longer the top concern of American executives, for the first time in six
years. The National Association of Manufacturers’ fourth-quarter member
survey found that fewer than half of manufacturers cited an ‘unfavorable
business climate’- including regulations and taxes - as a challenge to their
business, down from nearly three-quarters a year ago” (emphasis added).
Figure 4: President Trump said last Month at a News Conference that he had
rolled back 22 Regulations for every new One.
Source: The New York Times
Already in 2015, I had attracted my readers’ attention to a study by John W.

Dawson (Department of Economics Appalachian State University) and John J.
Seater (Department of Economics North Carolina State University entitled Federal
Regulation and Aggregate Economic Growth. In the introduction and the
conclusion, the study concluded that “regulation has statistically and economically
significant affected on aggregate output and the factors that produce it – total factor
productivity (TFP), physical capital and labor. Regulation has caused substantial
reductions in the growth rates of both output and TFP and has had effects on
the trends in capital and labor that vary over time in both sign and
magnitude. Changes in regulation offer a straightforward explanation for the
productivity slowdown of the 1970s. Qualitatively and quantitatively, our results
agree with those obtained from cross-section and panel measures of regulation
using cross-country data.
Regulation’s overall effect on output’s growth rate is negative and
substantial. Federal regulations added over the past fifty years have reduced
real output growth by about two percentage points on average over the period
1949-2005. That reduction in the growth rate has led to an accumulated
reduction in GDP of about $38.8 trillion as of the end of 2011. That is, GDP at
the end of 2011 would have been $53.9 trillion instead of $15.1 trillion if
regulation had remained at its 1949 level. One channel through which regulation
has reduced output is TFP. We find that federal regulation can explain much of the
famous and famously puzzling productivity slowdown of the 1970s.”
MF: Needless to say, I am less certain that, “Federal regulations added over
the past fifty years have reduced real output growth by about two percentage points
on average over the period 1949-2005” and that US “GDP at the end of 2011
would have been $53.9 trillion instead of $15.1 trillion if regulation had remained
at its 1949 level,” but undoubtedly regulations and a complex legal system has
reduced the potential growth rate. But surely, as Adam Smith already observed two
hundred years ago, “Though the profusion of government must, undoubtedly, have
retarded the natural progress of England towards wealth and improvement, it has
not been able to stop it.”
Like most of my readers I have no great admiration for Mr. Trump and I
regard him to be an ignoramus (an ignorant person about most issues), but in terms
of rolling back cumbersome regulations, which fosters “elite overproduction,” he
deserves positive marks. The fact that he has been a businessman all is life and not
a community organiser also helps immensely. Mitchell (see above) praises Trump
for having out-performed his own expectations and suggests people to contemplate
what impact the shift in regulatory policy could have on economic growth rates.
According to Mitchell,
- Americans spend 8.8 billion hours every year filling out government
forms.
- The economy-wide cost of regulation is now $1.75 trillion.
- For every bureaucrat at a regulatory agency, 100 jobs are destroyed in
the economy’s productive sector.
- A World Bank study determined that moving from heavy regulation to
light regulation ‘can increase a country’s average annual GDP per
capita growth by 2.3 percentage points.’
- The European Central Bank estimated that product market and

employment regulation has led to costly ‘misallocation of labour and
capital in eight macro-sectors.’
We do not know whether Mr. Trump will continue to deregulate or whether

deregulation will be offset by increasing fiscal expenditures and fiscal deficits,
which could have negative consequences because of rising interest rates, but I can’t
stress enough that I am far more impressed by Trump’s deregulation than by his
tax cuts, which are likely to have a limited positive impact – if at all. First of all it
should be noted that the effective corporate tax rates have been far lower than the
stated tax rates in recent years (see Figure 5)
Figure 5: Nonfinancial Corporate Business Effective Tax Rates, 1960 – 2017
Source: Ed Yardeni, www.yardeni.com
Furthermore, my friend Kevin Duffy who is a principal of Bearing Asset

Management, which he co-founded in 2002 with Bill Laggner, and which manages
two long/short hedge funds brought to my attention how little tax some major
“high-tech” companies were already paying (see Table 2). Duffy thinks, therefore,
that tax cuts will not benefit high tech companies much.
Table 2: Corporate tax rates (2017)
Source: Kevin Duffy, Bearing Asset Managemen
Duffy also opines that, “A large pillar in the bull case is that large cap tech
stocks do not appear to be in bubble territory. Companies like Apple, Facebook
and Google generated a combined $76.3 billion in free cash flow (after subtracting
stock-based compensation) over the past 12 months and grew annual gross profit at
20.2%, yet trade for just 22 times consensus forward earnings (Table 3).
Table 3: Tech Stock Valuation (January 2018)
Source: Yahoo Finance, SEC EDGAR Company Filings, Kevin Duffy
Duffy also believes that, “There are several risks, not least of which is that
by the sheer size of these companies and the maturing of their markets, growth
rates will come down. A decade ago, they each had plenty of elbow room, but now
are increasingly bumping into each other, fighting over the same pie (albeit a
growing one). In fact, Amazon is even aggressively getting into search and
challenging Google and Facebook in digital advertising. Apple has dominated the
high end of a saturated smartphone market, but how long will they be able to
command a luxury premium and 27% operating margins?”
Last month, I reminded my readers that Apple would likely disappoint
investors as IPhone sales have gone nowhere in the last few years and this was
unlikely to change in 2018 (see Figure 6). Given that Apple is one of large
institutional investors’ favourite holding any sales disappointment could have a
very negative impact on the stock (see Figure 7).
Figure 6: Number of iPhones sold by Apple Worldwide, 2007 – 2017 (in

Millions)
Source: Apple, Business Insiders
In fact, Apple is down 1% so far in 2018. It has been underperforming the

S&P 500 massively in the last couple of months since the S&P 500 is up 7% year-
to-date. Moreover, it is usually not a bad strategy to avoid the largest market
capitalisation stocks – just remember GE), which was the second largest market
cap stock in 1999 and in 2007 (see Table 4 and Figure 8).
Figure 7: Apple, 2017 - 2018
Source: www.stockcharts.com
Table 4: Five Largest US Stock Market Cap Stocks (December 1999)
Source: Tom von Alten, tva@fortboise.org
Figure 8: General Electric, 1999 – 2018
GE is actually a good example that it is not so important what you buy, but
when you buy it. Between early 1999 and the September 2000 high and between
2003 and 2007 the stock more than doubled. Between the 2009 low and the July
2016 high the stock more than quadrupled (see Figure 8). So even if one owns an
unattractive company, there are opportunities for the buyers who are disciplined
and buy after lengthy market declines, and sell following strong long-term stock
market gains.
In a little more than one month the bull market will celebrate its 9 years
anniversary and the S&P 500 has now gone more than 400 days without a 5%
pullback (see Figure 9). The S&P 500 has made history on a seemingly weekly
basis with its record highs, but this unprecedented feat is about longevity. The
index has gone for over 400 days without a 5% pullback, putting it at the longest
streak on record, dating back to 1929, an infamous year no doubt (according to

Goldman Sachs data). According to Business Insider, “That US stocks are at the
precipice of such a prolonged stretch of strength speaks to the resilience of the
ongoing bull market, which will turn nine years old in early March and is already
the second-longest on record. At the core of the ongoing rally has been a ‘buy the
dip’ mentality, which involves adding to bullish positions whenever stocks drop.”
Figure 9: Trading Days since last 5% S&P 500 Drawdown (as at December
29, 2017)
Source: Goldman Sacks Global Investment Research
Business Insider further adds that, “The tactic has been crucial for the near-
record streak as a healthy undercurrent of pessimism has led to minor pullbacks
that bulls have then used to fatten their existing positions. In fact, it's been so
effective that investors are now embracing brief rough patches, Bank of America
Merrill Lynch says. ‘Investors no longer fear shocks but love them,’ a group of
strategists led by Nitin Saksena wrote in a recent client note. ‘Since 2013, central
banks have stepped in - or communicated that they may step in — to protect
markets, leaving investors confident enough to buy the dip.’

Of course, no rally can be considered legitimate without concrete reasons for
traders to buy more stocks. In the case of the streak without a 5% dip, US equities
have benefited greatly from six straight quarters of earnings growth, which
followed a multiquarter profit recession.
Add that earnings expansion to a gradually improving economy and
continued monetary accommodation from global central banks and you have a
combination of factors ideal for supporting an unprecedented run of gains.
And that bullish outlook matches up with Wall Street expectations.
According to the median 2018 price target, strategists expect the S&P 500 to climb
5.2% from current levels to 2,855 by year-end” (this was written on January 4,
2018 – therefore the target has already been exceeded).
However, the problem is now precisely the complete lack of any fear about
downside risk, which is reflected not only by the low level of the VIX Index but
also by the record low assets in the Rydex Ursa Fund (see Figure 10).
Figure 10: Total Assets: Rydex Ursa, 2011 - 2018
Source: Tom McClellan, www.mcoscillator.com
According to McClellan the “total assets in the Rydex Ursa Fund (the
very first bearish mutual fund) is now down to only $56 million in assets,
which is the lowest level since shortly after that fund debuted in 1994. Few
investors, it seems, want to be short a market that is assuredly (in their minds)
going higher.”
In recent reports, I have repeatedly explained that investors’ sentiment had

become excessively bullish and that the US stock market was moving in exactly
the opposite position it had been at the low in 2009. McClellan recently published
a fascinating chart, which shows the Dow Jones Industrial Average with the pattern
inverted and reversed (see Figure 11).
Figure 11: Dow Jones Industrial Average with the Pattern Inverted and
Reversed, 2008 - 2018
Source: Tom McClellan, www.mcoscillator.com
McClellan explains that he had a wild idea, “which came from looking at a chart
someone shared online showing the DJIA from 2008 to present. Looking at that
chart, something jumped out at me, which was that the left end of the chart looked
a lot like the right end of the chart, just upside down and backwards. It has long
been rumoured that if you play certain Beatles songs backwards, a technique
known as ‘backmasking’, you can hear secret messages, including the revelation
that “Paul is dead” (he’s not, by the way, last I checked). If you look closely, you
can see lots of moments of coincidence in the minor price patterns, which makes
this comparison really interesting. There are also a few instances of pattern
inversion, which is pretty normal in any analog comparison. The implication is that
the current blowoff upward in prices is the echo of the up move out of the 2009
bottom. This is an irregular bit of chart analysis, full of peril in drawing
conclusions about what we see continuing. But it is still a fun insight.”
McClellan is right. Near the 2009 low investors were extremely bearish and
three prominent economists were predicting the S&P 500 to decline to 400 (the
low in early March 2009 was 666). The almost universal bearish sentiment was
evident from the low reading of the investors intelligence bulls & bears ratio (see
Figure 12).
Figure 12: Investors Intelligence Bulls & Bears Ratio, 1987 - 2018
Investors’ sentiment is now the polar opposite from the 2009 low. It is
actually at the highest level since 1987, and we all know what happened between
August and October 1987. There is, however, a marked difference between today
and 1987: In 1987, the 40% slump between August and October did not cause any
economic damage. This would be very different nowadays. A 40% decline in
equity prices would inevitably cause serious damage given the elevated Wilshire
5000 market capitalisation to GNP ratio (see Figure 13). Figure 13 shows clearly
that this ratio was a tad above 60% in 1987 whereas it is now above 140%. All
time highs. [The Wilshire 5000 Total Market Index, or simply the Wilshire 5000,
is a market-capitalization-weighted index of the market value of all stocks actively
traded in the United States.]
Figure 13: Wilshire 5000 compared to US GNP, 1971 - 2018
Nell Sloane nsloane@capitaltradinggroup.com
Wolf Richter of www.wolfstreet.com recently observed that, “As far as the

stock market is concerned, it took a while – in fact, it took eight years, but retail
investors are finally all in, bristling with enthusiasm. TD Ameritrade’s Investor
Movement Index rose to 8.59 in December, a new record. TDA’s clients were
net buyers for the 11th month in a row, one of the longest buying streaks and ended
up with more exposure to the stock market than ever before in the history of the
index” Talk about being late to the party. Heavy retail investor participation
signifies a very mature rally. It’s not a coincidence as to how strong profit booking
has been in all levels above 26,000 on the Dow all of last month. Smart hands
seem to be selling (see Figure 14).
Figure 14: Retail Investors’ Bullishness: TD Ameritrade Investor Movement
Index, 2010 – 2017
Source: TD Ameritrade, www.wolfstreet.com
Richter further added that, “retail investors had been to varying degrees
among the naysayers from the end of the Financial Crisis till the end of 2016,
before they suddenly became true believers in February 2017. ‘I don’t think the
investors who are engaging regularly are doing so in a dangerous fashion,’ said
TDA Chief Market Strategist J.J. Kinahan in an interview. But he added, clients at
the beginning of 2017 were ‘up to their knees in it and then up to their thighs, and
now up to their chests’ (see also Figure 10).
The implication is that they could get in a little deeper before they’d drown.
‘As the year went on, people got more confident,’ he said. And despite
major geopolitical issues, ‘the market was never tested at all’ last year. There was
this ‘buy-the-dip mentality’ every time the market dipped 1% or 2%.
But one of his ‘bigger fears’ this year is this very buy-the-dip mentality,
he said. People buy when the market goes down 1% or 2%, and ‘it goes down
5%, then it goes down 8% - and they turn into sellers, and then they get an
exponential move to the downside.’
This enthusiasm by retail investors confirms the surge in margin debt – a
measure of stock market leverage and risk – which has been jumping from record
to record, and hit a new high of $581 billion, up 16% from a year earlier” (see
Figure 15).
Figure 15: Total Margin Debt versus GDP, 1958 - 2018
Source: Alan Newman, www.cross-currents.net
According to Newman, “The mania in stocks took another step towards the
cliff the day after Christmas, as FINRA reported total margin data of $627.42
billion, up 3.2% over the previous month, up 18.5% for the year and 19.8% over
the previous 12 months. Every month, there are new records galore. But that is
precisely the hallmark of manias. Extremes beget more extremes, which beget
even more extremes. Over the last couple of years, we’ve made many
comparisons to the four previous stock manias that ended in 1929, in 1972, 2000
and 2007.
Despite any best laid plans, those that stuck it out paid a huge price as those
bubbles were down 90%, 45%, 50% and 50% respectively” (emphasis added).
I should add that according to TD Ameritrade, during December, its clients
were net buyers of AMZN, GE, NVDA, and MU (see Figure 16). Chinese stocks
were also among the favourites of TD Ameritrade's clients, which were
purchasing BABA and TCEHY.
Figure 16: Micron Technology, 2016 - 2018
Lastly, according to Richter, MarketWatch reported that “cash balances for

Charles Schwab clients reached their lowest level on record in the third quarter.”
Morgan Stanley wrote that retail investors “can’t stay away’ from stocks,”
while the stock allocation index by the American Association of Individual
Investors “jumped to 72%, its highest level since 2000” as “retail investors –
according to a Deutsche Bank analysis of consumer sentiment data – view the
current environment as “the best time ever to invest in the market.”
In my humble opinion, now is certainly not “the best time ever to invest in
the [stock] market” for all the reasons I discussed above. I would also avoid the
FAANG and FAANG related stocks, which are among TD Ameritrade’s clients’
favorite stocks.
In recent reports, I frequently mentioned Malaysian banks including
Malayan Banking (MAY MK), Public Bank (PBK MK) and CIMB Group (CIMB
MK) as some of my stock holdings. In my opinion, the Malaysian economy is
underappreciated by international investors, but this could change rapidly once
investors understand that Malaysia is not more corrupt than the US. Investors can
gain exposure to Malaysia by buying the Malaysian ETF (see Figure 17).
Figure 17: Malaysian Stocks ETF (EWM), 2009 - 2018
But, as I mentioned in last month’s report, if I were overweight stocks such as

individual investors with a stock allocation of 72% of financial assets (see
above) I would reduce positions because I view the current environment as
not as “the best time ever to invest in the market,” but actually as the worst
time from a long term perspective. Also, since investors hold so little cash (“cash
balances for Charles Schwab clients reached their lowest level on record in the
third quarter”- see above) I am increasing my holdings of Two-Year US Treasuries
in my US dollar cash allocation, although the steep rise in yields makes me
somewhat uncomfortable as well (see Figure 18).
Figure 18: Two-Year US Treasury, 2006 - 2018
I want to make perfectly clear to my readers that I do not trust the US dollar in the
age of Trump the Bold Ignoramus Maximus. Although a brief dollar rally should
be expected, the longer term is outlook for the dollar is negative (see Figure 19).
Figure 19: Trade-Weighted US Dollar Index, 1995 – 2017
As explained in last month’s report, the Japanese Yen looks particularly attractive.
However, as I have stressed on numerous occasions, I have a preference for
physical precious metals. Contrary to the narrative of the naysayers gold has
actually performed reasonably well since the late December 2015 low. It is up 28%
since then. Near term all precious metals are moderately overbought (US dollar
oversold), but in the current Age of Discord and grossly inflated financial assets, I
want to gradually increase my exposure. [Disappointing is the performance of most
gold stocks – I admit.] Above I brought up Malaysia. The country would be a
prime beneficiary from rising agricultural prices. 2018 could the year of sharp
increases in the price of Soybeans, Corn and Wheat.
Above I mentioned that the S&P 500 has made history on a seemingly
weekly basis with its record highs, but this unprecedented feat is about longevity.
The index has gone for over 400 days without a 5% pullback, putting it at the
longest streak on record, dating back to 1929. In this respect, investors should
remember the words of Valerius Maximus who opined that,
“The divine wrath is slow indeed in vengeance, but it makes

up for its tardiness by the severity of the punishment.”
Valerius Maximus (Roman Historian, 1st

century A.D.).

Ages of Discord, and Political and Financial Instability: Marc Faber The Monthly Market Commentary Report

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Ages of Discord, and Political and Financial Instability: Marc Faber The Monthly Market Commentary Report

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Dr.

Marc Faber Market Commentary February 1, 2018

Ages of Discord, and Political and Financial

© Copyright 2018 by Marc Faber and www.gloomboomdoom.com - All rights

Ages of Discord, and Political and Financial

“Four sorrows ... are certain to be visited on the United

“A democracy cannot exist as a permanent form of

“Government has three primary functions. It should

Charles Hugh Smith (www.oftwominds.com) recently penned an essay

1. Globalization--free flow of capital, labor arbitrage (workers must compete

disintegration and integration in which the impulse to cooperate in large social

Figure 1: Turchin’s Cycles of Good Feelings and Political Instability

Source: Peter Turchin, Ages of Discord, 2016

Turchin's model identifies three primary forces in these cycles:

eras of cooperation by a willingness to compromise for the good of the entire

Figure 2: Elite Overproduction, Popular Immiseration, and Fiscal Crisis of

Source: Peter Turchin, Ages of Discord, 2016

According to the Structural-Demographic Theory (Goldstone 1991, Turchin

elite positions. Increased intraelite competition leads to the formation of rival

A sociological cycle theory was also developed by Pitirin A. Sorokin (1889–

Wayne Crews of the Competitive Enterprise Institute explained that the

Table 1: Federal Register, 2009 – 2017

Source: Competitive Enterprise Institute, Dan Mitchell,

Mitchell then quotes Susan Dudley of George Washington University who

Figure 3: Number of Economically Significant Regulations Completed by

Source: Susan Dudley, The George Washington University Regulatory Studies

Source: The New York Times

Already in 2015, I had attracted my readers’ attention to a study by John W.

- The European Central Bank estimated that product market and

We do not know whether Mr. Trump will continue to deregulate or whether

Figure 5: Nonfinancial Corporate Business Effective Tax Rates, 1960 – 2017

Source: Ed Yardeni, www.yardeni.com

Furthermore, my friend Kevin Duffy who is a principal of Bearing Asset

Table 2: Corporate tax rates (2017)

Source: Kevin Duffy, Bearing Asset Managemen

Table 3: Tech Stock Valuation (January 2018)

Source: Yahoo Finance, SEC EDGAR Company Filings, Kevin Duffy

Figure 6: Number of iPhones sold by Apple Worldwide, 2007 – 2017 (in

Source: Apple, Business Insiders

In fact, Apple is down 1% so far in 2018. It has been underperforming the

Figure 7: Apple, 2017 - 2018

Table 4: Five Largest US Stock Market Cap Stocks (December 1999)

Source: Tom von Alten, tva@fortboise.org

Figure 8: General Electric, 1999 – 2018

streak on record, dating back to 1929, an infamous year no doubt (according to

Source: Goldman Sacks Global Investment Research

markets, leaving investors confident enough to buy the dip.’

Figure 10: Total Assets: Rydex Ursa, 2011 - 2018

Source: Tom McClellan, www.mcoscillator.com

In recent reports, I have repeatedly explained that investors’ sentiment had

Source: Tom McClellan, www.mcoscillator.com

Source: Ed Yardeni, www.yardeni.com

Figure 13: Wilshire 5000 compared to US GNP, 1971 - 2018

Nell Sloane nsloane@capitaltradinggroup.com

Wolf Richter of www.wolfstreet.com recently observed that, “As far as the

Source: TD Ameritrade, www.wolfstreet.com

Figure 15: Total Margin Debt versus GDP, 1958 - 2018

Source: Alan Newman, www.cross-currents.net

Figure 16: Micron Technology, 2016 - 2018

Lastly, according to Richter, MarketWatch reported that “cash balances for

But, as I mentioned in last month’s report, if I were overweight stocks such as

Figure 18: Two-Year US Treasury, 2006 - 2018

Figure 19: Trade-Weighted US Dollar Index, 1995 – 2017