After a massive upswing in US stocks over the last six months, the recent rally may finally be coming to an end. It seems that the trend of rising stocks on bad or better than expected news may be in a reversal, as evidenced by market participants’ caution over the last couple of weeks. For those that follow contrarian investors like Marc Faber, Jim Rogers, Gerald Celente and Harry Dent, this should come as no surprise.
Marc Faber, publisher of the Gloom Boom & Doom Report, advised his subscribers and followers to take positions in US tech stocks, the banking sector and hard assets at the bottom of the markets in early March of 2006. However, he did provide a word of caution on March 16, 2009, making it known that while he was a short-term bull on stocks, that eventually, the economic fundamentals would catch up:
“probably a total collapse in the second half of the year when it becomes clear that the economy is a total disaster.”
As recently as September 3rd, on Delhi TV, he made another call, essentially telling investors to get out:
“I believe in the next 10 days to two weeks we’ll get big moves in markets. And I wouldn’t be surprised if the Dollar would for a change strengthen and equity markets would correct and possibly quite meaningfully so.”
Gerald Celente, Trends Research forecaster and contrarian thinker, advised listeners of the Jeff Rense show on September 23rd to look out below, calling it the Christmas Crash. He believes that the next collapse will come quickly, sometime this Fall, but as late as January or February of 2010:
“It’s going to really be an ugly scene. We are really encouraging people now to take pro-active measures and prepare for the worst. Don’t spend an extra dime.”
Jim Rogers, who is well known for making millions during the recession and commodities boom of the 1970’s, is also hesitant about acquiring more equities. He is an avid US Dollar bear, but in an interview on September 30th, he turned bullish on the dollar in the short term. His advice?
“I am not buying shares anywhere in the world as we speak.”
Finally, we have economist and cyclical analyst Harry Dent Jr., who some may know for having called the real estate Bubble-Boom, and subsequent crash, years before it happened in his book The Next Great Bubble Boom. Dent was also bullish on the Dow, calling for it to reach between 9450 and 10,500 after the March lows of 2009. Like Faber, Dent also cautioned investors to stay vigilant once the 9000 mark was breached. In a recent Economic Forecast Alert to subscribers, Dent indicated that the tide was changing:
“The markets are very overstretched here and we think it is very likely that we are seeing a top just above 9,800 on the Dow today.
This is the best intermediate term play we have seen in a long time. Shorting the stock market (for example, ETF symbol SH) could yield 50% to 60%+ gains over the next year with a 5% to 15% downside if the markets keep edging up for awhile, even to extremes.”
Though we continue to see most mainstream analysts talk the bull market talk, it looks as if the bull may be in trouble, especially if individual investors realize what all of the big boys talking their books already know - that the economic fundamentals are simply horrific and the markets are already pricing in GDP growth of over 5% for the next 4 quarters. Considering that GDP grew at 0.7% in the 2nd quarter, that seems highly unlikely. Some estimates also suggest the the P/E of the S&P 500 right now is at unprecedented levels of over 100!
As of today, it looks as if investor focus is shifting from stocks and commodities into what some consider to be short-term safehaven assets, such as US Treasury Bills/Notes/Bonds. The yield on the 10 yr is at 3.15% as of October 2nd, significantly down since August 7th’s 3.85%, suggesting that safety, not risk, is now the name of the game. Interestingly, and unlike November of 2008, gold seems to be holding strong at around $1000, though this may change if the US Dollar rises, as Jim Rogers, Faber and Dent have suggested it may.
For those still in equities, we believe Tyler Durdern at Zero Hedge said it best, “Go long here at your peril.”
Interesting comments
Showing posts with label faber. Show all posts
Showing posts with label faber. Show all posts
5 October 2009
24 September 2009
Buy Stocks Because U.S. Dollars Will Be "Worthless," Says Faber
Watch
Marc Faber, editor of The Gloom, Boom & Doom Report is, by his own account, "ultra-bearish" on the long-term fundamentals of the U.S. market. (Discussed in detail in this clip.)
However, in the near term, Faber sees plenty of money-making opportunities in stocks. Sure, prices aren't as cheap as they were in March, yet he's confident, "in this environment cash will become worthless." As a result, he says investors are, "better off being in equities," for the next two to three years.
Faber is most bullish on mining and energy companies. He recommends:
Newmont Mining and FreeportMcMoran as relative inexpensive. He also mentions Nova Gold, as another, more speculative buy.
In a contrarian call, on natural gas, he says Chesapeake Energy will be a winner when prices eventually rebound.
Oil giant ExxonMobil is another stock he thinks offer good value.
Outside of that, Faber says buying large-cap pharmaceuticals like Pfizer and Johnson & Johnson offer good defensive options.
Finally, he suggests U.S. airlines are poised for a rebound. If that happens, international airlines will follow and Thai Airways stock could double.
Marc Faber, editor of The Gloom, Boom & Doom Report is, by his own account, "ultra-bearish" on the long-term fundamentals of the U.S. market. (Discussed in detail in this clip.)
However, in the near term, Faber sees plenty of money-making opportunities in stocks. Sure, prices aren't as cheap as they were in March, yet he's confident, "in this environment cash will become worthless." As a result, he says investors are, "better off being in equities," for the next two to three years.
Faber is most bullish on mining and energy companies. He recommends:
Newmont Mining and FreeportMcMoran as relative inexpensive. He also mentions Nova Gold, as another, more speculative buy.
In a contrarian call, on natural gas, he says Chesapeake Energy will be a winner when prices eventually rebound.
Oil giant ExxonMobil is another stock he thinks offer good value.
Outside of that, Faber says buying large-cap pharmaceuticals like Pfizer and Johnson & Johnson offer good defensive options.
Finally, he suggests U.S. airlines are poised for a rebound. If that happens, international airlines will follow and Thai Airways stock could double.
18 May 2009
Markets to fly on a sea of money ~ Marc Faber
The Fed printing presses are turning at full speed as the government is monetizing the debt by printing more money said Marc Faber yesterday . "from 2002 to 2007 We had this huge bull market in asset prices, during which everything went up. Commodities, equities, real estate worldwide , even bond prices and art.
Then came the big awakening, credit growth began to slow down and in 2008 everything collapsed except for bonds and the US Dollar, because global liquidity was shrinking and that was dollar supportive. And then we had the beginning of the recession at the end of 2007 and the global economy fell off a cliff between September of 2008 and March of 2009.
I think the rate of deceleration is now diminishing, we still have bad news, the global economy will not recover in a long time but it is not going to deteriorate much more. And we have a huge effort by governments worldwide to create fiscal deficits, in other words to print money. For that reason even if the world economy does not recover you will have a strong recovery in asset prices."
2 March 2009
Dr Doom says US govt bonds next bubble to burst
SINGAPORE, Feb 23 – As usual, Dr Marc Faber, the author of The Gloom Boom and Doom Report and contrarian views, did not disappoint the masochist in us as he gave his spiel on the causes of the current economic turmoil at a dialogue on Friday organised by The Business Times in partnership with Julius Baer, one of Switzerland's leading wealth managers.
His topic “Were You Born Before Or After 2007”, that is, before or after the global economies began their steep decline, got nearly 400 bankers and businessmen intrigued enough to spend four-and-a-half hours at the Ritz Carlton Singapore.
Luckily lunch was served before Dr Doom, as Dr Faber is often called, took the floor. The picture he painted was indeed gloomy, with no end in sight of what appears to be a very long tunnel.
The present credit crisis caused by ultra expansionary monetary policies was very serious, he said – as if the audience of bankers and business were not already aware of this.
He went on to add that non-financial credit growth has declined from an annual rate of 16 per cent in late 2006 to between 1 and 2 per cent now.
The deleveraging taking place among financial intermediaries is negative for the American economy that is addicted to credit growth, he pointed out. The United States' trade and current account deficits will shrink further and diminish international liquidity. This is bad for asset prices.
“We had an unprecedented global economic boom between 2002 and 2007. A colossal global economic bust is now following,” he said.
And worse might follow, as he noted: There was still one bubble more to be deflated – US government bonds.
Adding more fuel to his fire of gloom was his warning that regardless of the policies followed by the US government and its agencies, the American consumer was in a recession, which will only deepen.
“Expansionary monetary policies, which caused the current credit crisis in the first place, are the wrong medicine to solve the current problems. They can address the symptoms of excessive credit growth, but not the cause,” he noted.
Expansionary fiscal and monetary policies will, after a bout of deflation, lead to much higher inflation rates, which will have a negative impact on the valuation of equities in real terms, he observed.
“But what options does the Federal Reserve have with a total credit market debt to GDP (Gross Domestic Product) of more than 350 per cent?” he asked rhetorically.
And if that was bad enough, he raised the spectre of war looming on the horizon, noting that geopolitical tensions were on the rise. He predicted that commodity shortages, especially of oil, would lead to increased international tensions and to what he called resource nationalism.
The shortage of oil would be caused not only by increased demand from China and India, but also the Middle East. “Not only do they (the Middle East) produce oil, they produce too many babies,” he said in one of the few light moments of his dialogue.
The good doctor, however, had some upbeat investment advice: In Asia, avoid real estate in financial centres, but look at things such as soft commodities, which, while volatile, are on an upward trend.
There are also opportunities in pharmaceutical and hospital management companies, and in banks, insurance companies and brokers, especially in emerging economies.
Opportunities also abound in plantations and farmlands in Indonesia, Malaysia, Latin America and the Ukraine. He also advised investors to go long on gold and corporate bonds but to dump US government bonds.
However, what was lacking at the talk were solutions to the current crisis. And answers. When can we see the light at the end of the tunnel? How long is the tunnel that we are in? – Today
link
His topic “Were You Born Before Or After 2007”, that is, before or after the global economies began their steep decline, got nearly 400 bankers and businessmen intrigued enough to spend four-and-a-half hours at the Ritz Carlton Singapore.
Luckily lunch was served before Dr Doom, as Dr Faber is often called, took the floor. The picture he painted was indeed gloomy, with no end in sight of what appears to be a very long tunnel.
The present credit crisis caused by ultra expansionary monetary policies was very serious, he said – as if the audience of bankers and business were not already aware of this.
He went on to add that non-financial credit growth has declined from an annual rate of 16 per cent in late 2006 to between 1 and 2 per cent now.
The deleveraging taking place among financial intermediaries is negative for the American economy that is addicted to credit growth, he pointed out. The United States' trade and current account deficits will shrink further and diminish international liquidity. This is bad for asset prices.
“We had an unprecedented global economic boom between 2002 and 2007. A colossal global economic bust is now following,” he said.
And worse might follow, as he noted: There was still one bubble more to be deflated – US government bonds.
Adding more fuel to his fire of gloom was his warning that regardless of the policies followed by the US government and its agencies, the American consumer was in a recession, which will only deepen.
“Expansionary monetary policies, which caused the current credit crisis in the first place, are the wrong medicine to solve the current problems. They can address the symptoms of excessive credit growth, but not the cause,” he noted.
Expansionary fiscal and monetary policies will, after a bout of deflation, lead to much higher inflation rates, which will have a negative impact on the valuation of equities in real terms, he observed.
“But what options does the Federal Reserve have with a total credit market debt to GDP (Gross Domestic Product) of more than 350 per cent?” he asked rhetorically.
And if that was bad enough, he raised the spectre of war looming on the horizon, noting that geopolitical tensions were on the rise. He predicted that commodity shortages, especially of oil, would lead to increased international tensions and to what he called resource nationalism.
The shortage of oil would be caused not only by increased demand from China and India, but also the Middle East. “Not only do they (the Middle East) produce oil, they produce too many babies,” he said in one of the few light moments of his dialogue.
The good doctor, however, had some upbeat investment advice: In Asia, avoid real estate in financial centres, but look at things such as soft commodities, which, while volatile, are on an upward trend.
There are also opportunities in pharmaceutical and hospital management companies, and in banks, insurance companies and brokers, especially in emerging economies.
Opportunities also abound in plantations and farmlands in Indonesia, Malaysia, Latin America and the Ukraine. He also advised investors to go long on gold and corporate bonds but to dump US government bonds.
However, what was lacking at the talk were solutions to the current crisis. And answers. When can we see the light at the end of the tunnel? How long is the tunnel that we are in? – Today
link
2 December 2008
Not a genius: Buy Gold ~ Marc Faber
Days after Marc Faber advised every American to hold his gold outside of the United States, he comes back to the issue of the yellow metal in his latest client newsletter:
Faber describes the scale of wealth destruction over the last 12 months (and around the world) as complete and unprecedented. Ed Harrison (Credit Writedowns) describes Faber's thinking to mean that the government is going to reflate in order to avoid depression, and that means gold is more valuable. The government could even confiscate your gold again very soon.
Faber
Stocks around the world are down by 50%, property prices have collapsed and commodities are in some cases down by 50% or more. World stock market capitalisation is down by approximately 50%, which equals losses for equity holders of around $30 trillion. Add to this the losses from non-government bond portfolios, CDOs, MBSs and assets such as ships (the Baltic Dry Index is down by more than 90%) the losses that investors and businessmen have taken are simply colossal.
Commodity, losses have been staggering especially for industrial commodities whose demand is driven by industrial production and capital spending. Nickel is down from a May 2007 peak at $53.452 per ton to around $10, although he adds, individual commodities can have widely diverging performances the same way in the stock market different sectors and stocks do not reach peaks and troughs at the same time.
A key difference this time, as compared to prior liquidity injections and fiscal measures by the US Fed and Treasury that lead to bear markets (such as seen in 1973-74), is the huge leverage built up in the system since 1980 (afterall, in 1973, derivatives hardly existed and securitisation was largely absent).
Hence, when credit growth began slowing in 2007 and when asset markets sold off, a huge deleveraging process was triggered, which then brought about further price falls and caused further deleveraging. Volatility also increased to record highs, not just for equities but also for commodities, currencies and bonds.
To navigate successfully between all these volatile and often unpredictable market movements you need to be a genius, notes Faber. Or else, look for a safe heaven such as physical gold (gold miners and silver could, however, outperform for a while).
In any event, an environment of negative real interest rates is gold friendly and will be highly inflationary in the long run.
…The arguments for holding gold and worrying about inflation are still valid and I do think that gold is a good hedge against that eventuality. Faber makes a very good argument for why inflation may be the endgame.
However, so far, the deflation scenario is the one that seems to be taking hold - lower commodity prices, lower asset prices, and eventually lower consumer prices. As debt levels are high, this is the scenario to fear.
Faber describes the scale of wealth destruction over the last 12 months (and around the world) as complete and unprecedented. Ed Harrison (Credit Writedowns) describes Faber's thinking to mean that the government is going to reflate in order to avoid depression, and that means gold is more valuable. The government could even confiscate your gold again very soon.
Faber
Stocks around the world are down by 50%, property prices have collapsed and commodities are in some cases down by 50% or more. World stock market capitalisation is down by approximately 50%, which equals losses for equity holders of around $30 trillion. Add to this the losses from non-government bond portfolios, CDOs, MBSs and assets such as ships (the Baltic Dry Index is down by more than 90%) the losses that investors and businessmen have taken are simply colossal.
Commodity, losses have been staggering especially for industrial commodities whose demand is driven by industrial production and capital spending. Nickel is down from a May 2007 peak at $53.452 per ton to around $10, although he adds, individual commodities can have widely diverging performances the same way in the stock market different sectors and stocks do not reach peaks and troughs at the same time.
A key difference this time, as compared to prior liquidity injections and fiscal measures by the US Fed and Treasury that lead to bear markets (such as seen in 1973-74), is the huge leverage built up in the system since 1980 (afterall, in 1973, derivatives hardly existed and securitisation was largely absent).
Hence, when credit growth began slowing in 2007 and when asset markets sold off, a huge deleveraging process was triggered, which then brought about further price falls and caused further deleveraging. Volatility also increased to record highs, not just for equities but also for commodities, currencies and bonds.
To navigate successfully between all these volatile and often unpredictable market movements you need to be a genius, notes Faber. Or else, look for a safe heaven such as physical gold (gold miners and silver could, however, outperform for a while).
In any event, an environment of negative real interest rates is gold friendly and will be highly inflationary in the long run.
…The arguments for holding gold and worrying about inflation are still valid and I do think that gold is a good hedge against that eventuality. Faber makes a very good argument for why inflation may be the endgame.
However, so far, the deflation scenario is the one that seems to be taking hold - lower commodity prices, lower asset prices, and eventually lower consumer prices. As debt levels are high, this is the scenario to fear.
5 September 2008
Kicking The Debt Habit Cold Turkey
Kurt Kasun
September 3, 2008
Things are about to get really bad. Rotating bubbles are now becoming rotating sector recessions as the positive feedback loops, created as money and credit growth ballooned over the last 25 years, have reversed and are now becoming negative feedback loops. I expect to see those 25 years of excesses to dramatically unwind over the course of the next few years. The evaporation of paper wealth will be breathtaking. A "buy on the dips" mentality has been replaced by "sell on the rallies." Declining house values will further hinder the finance sector which will impede the real economy, causing asset prices to further plunge. The tipping point for debt creation's positive impact has been reached and we can expect economic convulsions similar to what a drug addict experiences after kicking the habit "cold turkey."
"The credit crunch is morphing from an American-centered financial crisis into a global economic crisis," according to David Bowers of Absolutely Strategy. The policy of creating more money than could be put to productive use in the real economy that allowed rising asset prices would more than compensate for a lack of ‘real' wage gains in the real economy and for consumers to continue to borrow and spend more than they earn at an accelerating pace failed once the excess money began to flow to commodities rather than to real estate or stock prices.
Growth is now demonstrably slowing in all parts of the world. Central Banks around the world will be embarking on a campaign of lowering their interest rates. Participants in the US stock market, fresh off an artificially trumped up GDP restatement (trumped up due to the stimulus package and severe understatement of the GDP deflator), will take a while to realize that gains in the dollar are due to relative underperformance of other currencies and a massive liquidity contraction. The gains will be short-lived and will result in pain and agony as those investors are lured into another bear trap that will reveal itself once much of the sidelined money comes back into the market.
The fall in commodity prices will be wrongly interpreted as a reason for the economy to rebound and for stocks to rally. While the dollar will likely continue to rise over the short term it is ultimately destined to suffer the same disastrous fate as the other fiat currencies of the world. After the sucker's rally has run its course over the next few weeks or so, the reality of an unserviceable and un-payable debt overhang will set in and the second wave of financial calamity will ensue. This time around it will be the result of the effects emanating from the negative feedback loop coming from the real economy.
Scott Bugie of Standard & Poor's writes that the second phase of credit crunch could be severe: "The credit crunch is entering a second, 'post-subprime' phase where banks' loan books deteriorate more rapidly and capital-raising efforts might become harder, says Scott Bugie, credit analyst at Standard & Poor's. Loan book deterioration is starting to hit a wider array of financial institutions, as credit losses migrate from subprime into other sectors of household finance, such as credit cards, Alt-A and prime mortgages, and auto loans well into 2009,' he says.
Other mainstream economists are have also been sounding the warning trumpets: "The US is not out of the woods. I think the financial crisis is at the halfway point, perhaps. I would even go further to say the worst is to come," according to Professor Ken Rogoff who was chief economist at the IMF from 2001 to 2004 and who now teaches at Harvard. He goes on to say, "We're not just going to see mid-sized banks go under in the next few months, we're going to see a whopper, we're going to see a big one - one of the big investment banks or big banks."
In 2002 Dr. Marc Faber, author of the GloomBoomDoom Report and highly-sought guest for CNBC and Bloomberg TV, wrote a book titled, Tomorrow's Gold-Asia's Age of Discovery. Those who read the book and followed Faber's investment advice to invest in commodities and Asian and other emerging market equities have significantly outperformed those who primarily invested in US stocks (tech, consumer and financials). But Faber had recently cautioned against this "short dollar trade" as it had become stretched and crowded. He presciently warned investors late last year. More recently, referring to commodities, he said "Prices have made a peak...Whether that is a final peak or an intermediate peak followed by higher prices, we don't know yet. It could go lower."
He echoed similar sentiments in a Bloomberg TV interview this morning. I found his most recent market commentary, issued on August 20, 2008 titled, "Contracting Global Liquidity," quite compelling. He uses several charts to demonstrate how liquidity is contracting, the dollar is strengthening, commodities are declining, and what the relationships that exist between them predict for the future. He writes:
"In sum, credit growth and liquidity are contracting, a vicious economic downturn is about to unfold (China could surprise on the downside and put additional pressure on commodity prices) and asset markets are still high by historical standards and, therefore, remain vulnerable. I would use equity rallies as a selling opportunity and further weakness in gold as a buying opportunity for long term holders with significant cash and cash flows."
Faber has an enviable track record over the long, intermediate and shorter term. Not many investment strategists can boast of getting the market right over these three terms. He is an open-minded contrarian who is not afraid to change his views. He was way in front of the investment community predicting the rise of China and commodity prices six years ago. He correctly wrote that the US currency and stock markets would relatively outperform others last year. And he got the April-May S&P 500 rally to 1440 right also.
The one longer-term trend Faber appears to have the most confidence in is the "long gold/short the DJIA" trade that has been working, despite the recent pullback, since 2001. Over the intermediate term he is a looking for what can be described as nothing less than a US stock market crash, perhaps by the end of this year.
Rather than the US markets leading the rest of the world higher, the evidence points toward the rest of the world leading US markets lower. The global slowdown had begun in earnest. The US is now more dependent on world growth than the world is reliant upon the US. This is especially true since the US consumer is seeing his credit cut off and US banks and financial institutions suffer the effects of the second wave of the credit crunch. Once the relief rally has run its course and investors see that the US economic rebound has not staying power and only worn out consumers trying to pay off 25 years of accumulated debt, the dollar will rejoin the ranks of the other fiat currencies and resume its decline versus the price of gold.
September 3, 2008
Things are about to get really bad. Rotating bubbles are now becoming rotating sector recessions as the positive feedback loops, created as money and credit growth ballooned over the last 25 years, have reversed and are now becoming negative feedback loops. I expect to see those 25 years of excesses to dramatically unwind over the course of the next few years. The evaporation of paper wealth will be breathtaking. A "buy on the dips" mentality has been replaced by "sell on the rallies." Declining house values will further hinder the finance sector which will impede the real economy, causing asset prices to further plunge. The tipping point for debt creation's positive impact has been reached and we can expect economic convulsions similar to what a drug addict experiences after kicking the habit "cold turkey."
"The credit crunch is morphing from an American-centered financial crisis into a global economic crisis," according to David Bowers of Absolutely Strategy. The policy of creating more money than could be put to productive use in the real economy that allowed rising asset prices would more than compensate for a lack of ‘real' wage gains in the real economy and for consumers to continue to borrow and spend more than they earn at an accelerating pace failed once the excess money began to flow to commodities rather than to real estate or stock prices.
Growth is now demonstrably slowing in all parts of the world. Central Banks around the world will be embarking on a campaign of lowering their interest rates. Participants in the US stock market, fresh off an artificially trumped up GDP restatement (trumped up due to the stimulus package and severe understatement of the GDP deflator), will take a while to realize that gains in the dollar are due to relative underperformance of other currencies and a massive liquidity contraction. The gains will be short-lived and will result in pain and agony as those investors are lured into another bear trap that will reveal itself once much of the sidelined money comes back into the market.
The fall in commodity prices will be wrongly interpreted as a reason for the economy to rebound and for stocks to rally. While the dollar will likely continue to rise over the short term it is ultimately destined to suffer the same disastrous fate as the other fiat currencies of the world. After the sucker's rally has run its course over the next few weeks or so, the reality of an unserviceable and un-payable debt overhang will set in and the second wave of financial calamity will ensue. This time around it will be the result of the effects emanating from the negative feedback loop coming from the real economy.
Scott Bugie of Standard & Poor's writes that the second phase of credit crunch could be severe: "The credit crunch is entering a second, 'post-subprime' phase where banks' loan books deteriorate more rapidly and capital-raising efforts might become harder, says Scott Bugie, credit analyst at Standard & Poor's. Loan book deterioration is starting to hit a wider array of financial institutions, as credit losses migrate from subprime into other sectors of household finance, such as credit cards, Alt-A and prime mortgages, and auto loans well into 2009,' he says.
Other mainstream economists are have also been sounding the warning trumpets: "The US is not out of the woods. I think the financial crisis is at the halfway point, perhaps. I would even go further to say the worst is to come," according to Professor Ken Rogoff who was chief economist at the IMF from 2001 to 2004 and who now teaches at Harvard. He goes on to say, "We're not just going to see mid-sized banks go under in the next few months, we're going to see a whopper, we're going to see a big one - one of the big investment banks or big banks."
In 2002 Dr. Marc Faber, author of the GloomBoomDoom Report and highly-sought guest for CNBC and Bloomberg TV, wrote a book titled, Tomorrow's Gold-Asia's Age of Discovery. Those who read the book and followed Faber's investment advice to invest in commodities and Asian and other emerging market equities have significantly outperformed those who primarily invested in US stocks (tech, consumer and financials). But Faber had recently cautioned against this "short dollar trade" as it had become stretched and crowded. He presciently warned investors late last year. More recently, referring to commodities, he said "Prices have made a peak...Whether that is a final peak or an intermediate peak followed by higher prices, we don't know yet. It could go lower."
He echoed similar sentiments in a Bloomberg TV interview this morning. I found his most recent market commentary, issued on August 20, 2008 titled, "Contracting Global Liquidity," quite compelling. He uses several charts to demonstrate how liquidity is contracting, the dollar is strengthening, commodities are declining, and what the relationships that exist between them predict for the future. He writes:
"In sum, credit growth and liquidity are contracting, a vicious economic downturn is about to unfold (China could surprise on the downside and put additional pressure on commodity prices) and asset markets are still high by historical standards and, therefore, remain vulnerable. I would use equity rallies as a selling opportunity and further weakness in gold as a buying opportunity for long term holders with significant cash and cash flows."
Faber has an enviable track record over the long, intermediate and shorter term. Not many investment strategists can boast of getting the market right over these three terms. He is an open-minded contrarian who is not afraid to change his views. He was way in front of the investment community predicting the rise of China and commodity prices six years ago. He correctly wrote that the US currency and stock markets would relatively outperform others last year. And he got the April-May S&P 500 rally to 1440 right also.
The one longer-term trend Faber appears to have the most confidence in is the "long gold/short the DJIA" trade that has been working, despite the recent pullback, since 2001. Over the intermediate term he is a looking for what can be described as nothing less than a US stock market crash, perhaps by the end of this year.
Rather than the US markets leading the rest of the world higher, the evidence points toward the rest of the world leading US markets lower. The global slowdown had begun in earnest. The US is now more dependent on world growth than the world is reliant upon the US. This is especially true since the US consumer is seeing his credit cut off and US banks and financial institutions suffer the effects of the second wave of the credit crunch. Once the relief rally has run its course and investors see that the US economic rebound has not staying power and only worn out consumers trying to pay off 25 years of accumulated debt, the dollar will rejoin the ranks of the other fiat currencies and resume its decline versus the price of gold.
2 August 2008
Making Sense of the Bear Market
by William Thomson
Investment Round Table from Business Times Singapore.
PARTICIPANTS
Moderator:
Anthony Rowley, Tokyo correspondent for The Business Times.
Panellists:
Marc Faber, an investment adviser and publisher of the Gloom, Boom and Doom Report.
J Mark Mobius, president of Templeton Emerging Markets Fund Inc, and director and executive vice-president of Templeton Worldwide Inc.
Ethan Harris, managing director and chief US economist at Lehman Brothers, New York.
Ernest Kepper: A former official of the International Finance Corporation and Wall Street investment banker who now heads an Asian financial consultancy.
William Thomson, Chairman of Private Capital Limited, Hong Kong and adviser to Axiom Alternative Funds, London
OVERVIEW
Since the sub-prime mortgage crisis burst upon the US a year ago, there have been market rallies and claims that the worst is over, only to be followed by fresh plunges in values and sentiment. Are we near the bottom now, or just at the start of a long, slow meltdown? Our experts take the latter view.
Where can investors find a safe haven in this sea of trouble and uncertainty? Gold is still a good refuge, suggests one expert, who expects the price go as high as $2,500 an ounce.
More fundamentally, our experts see developing markets in Asia and beyond as the promised land that will emerge relatively strong from a potentially massive destruction of wealth in the old world. The needs of these emerging markets for food and natural resources will be strong, so farmland and plantations could be good investments.
Anthony: I'm delighted to welcome such a strong panel - a mark of how seriously you gentlemen view the current global financial and economic situation. It's especially pleasing to welcome back some old friends - Marc Faber, Mark Mobius, Ethan Harris and William Thomson.
Anthony: Marc, let's start with you. Are we looking at a financial system "avalanche" rather than a technical bear market, in equities and bonds?
Marc: I believe that the secular bull market in equities and bonds, which lasted from 1981/82 to anywhere between 2000 and 2007 has come to an end and that a water torture bear market has begun. If an enormous quantity of money is printed by central banks equities may avoid a severe bear market of say 40% to 50% but a trading range would still follow and no net gains - certainly not in real terms - would be achieved.
Mark: This may become the case in the US where there is a big risk of a "meltdown" of the financial system, bought on by a lack of confidence. However, emerging markets, equities have corrected more due to poor market sentiment and contagion from what is happening in the US, rather than any major deterioration in fundamentals.
Ernest: I say this is an 'avalanche.' I am anticipating a fall in equity prices in the range of 40 to 50% relative to the peak--- much more severe than the 25% fall which we see in a recession.. Two main reasons are that major economies other than the US will have severe interruptions in growth and that the consumer - especially US. consumers who most likely have gone further into debt than their credit cards would allow by making a home equity loan or taking on the second mortgage will most likely be under pressure to repay. It appears that the U.S. consumer's debt burdened situation will put him in a "no way out" financial quandary with a fall in home prices, fall in equity prices, rising inflation and a reduction in jobs. I expect this scenario to unfold over the next 12 to 18 months.
Bill: In no way can this be seen as a normal bear market. This is undoubtedly the worst financial crisis in the developed world since the 1930s. The only period remotely similar was the bear market of 1973-75, which was itself a part of the extended 1966-82 bear market in US shares. That bear market was driven in part by a 13 fold increase in oil prices from 1972 to 1980. This time we have had a 14 fold increase in oil prices from the $10 low of 1999. Last time we had massive inflation of 20 percent per annum. That has not yet arrived but may well be in the pipeline.
However, in my view, the situation is far worse this time since the US financial system is extraordinarily stretched and stressed. Last time we only had the minor bankruptcies of Franklin National Bank and Continental Bank to contend with. Then there were no derivatives. This time, they amount to more than 10 times world GDP and a greater multiple of bank capital. Within that total the most toxic ones are those unlisted, opaque, over the counter variety amounting to over $50 trillion, again multiples of US bank capital.
The revolution in market finance that began with the deregulation of the 1980s may be about to eat its young, as we have seen with the putative bailouts of Fannie Mae and Freddie Mac; if nationalization goes ahead the US visible national debt increases by $5 trillion and is effectively double. The US would no longer qualify to join the Euro!
The US budget deficit could be on the verge of exploding upwards. Including war costs, it is already over 4 percent of GDP. The economic slowdown and Presidential candidate Obama's plans for healthcare, whist noble and justifiable, even after tax increases, could send the deficit north of $1 trillion or 7 percent of GDP by 2010.
Anthony: What do you think the total "wealth loss" might be as a result of recent crises (in terms of falls in market cap, sub-prime losses and other losses by banks and investment banks, derivatives market losses in general)? Does anyone really know - or is the whole thing too opaque to estimate?
Ethan: Estimating the losses of financial institutions is extremely difficult, but something in the $500 bn to $1 trillion range makes sense. The good news is that much of that has already been revealed at the major money centre institutions and they have been able to recapitalize. It is also important to not double count--when a mortgage defaults the loss is the difference between the loan size and what is recovered, and we should not add to that the individual pieces at each stage of ownership of the loan. To put the losses in perspective, the total value of assets owned by US households is $72 bn and the net worth of US households is $56 billion. Moreover, many of the losses are borne outside the US. Thus the second round losses--the drop in the stock and housing market--is larger and a bigger threat to global growth.
Bill: When Chou En-Lai was asked by Henry Kissinger if he thought the French Revolution had been a success he responded 'it's too soon to tell'. That applies to the current situation. But we could be looking at $6 trillion in mark downs of housing wealth, $3-4 trillion in stock market losses if we get a 25-35 percent mark down in the market - and it could be worse - and then we have the losses of the banking system. So we are talking about possibly $10 trillion as compared with a GDP of $13 trillion. Proportionally, I would look for the UK to suffer similarly. It's not chicken feed!
Marc: Right from the start my estimate of the losses was about USD 1 trillion in the US alone. However, if we add the losses from a decline in housing wealth and stock market wealth the losses are a multiple of that.
Ernest: Overall, the fallout could easily be in the many trillions of dollars. No-one really knows (especially central banks and finance ministries) -- but if we quickly add some basic financial areas where there are already are losses to those we can expect it is easily 2-3 trillion.
The two US mortgage backers losses are in the trillions -- the loss to the 10 million privately owned real estate homeowners is also in the trillions. When you estimate in the range of a US$ 250 billion loss in each of the following sectors -- equities, consumer debt instruments (such as car loans, credit cards and student loans which have also been repackaged and sold as asset-backed securities), corporate bonds, specialized insurance companies which guaranteed bonds and mortgages to collateral mortgage instruments, the loss in tax revenue to states from real estate taxes, the bankruptcy of a major broker whose revenue has been based on charging fees rather than earning income from addressing and dealing with credit risk, the bankruptcy on one or more hedge funds, construction company losses and bankruptcies of and derivatives, it will be a multi trillion dollar loss.
Anthony: Do you think that inflation or deflation is the greatest threat facing the global economy - i.e. commodity price inflation versus the collapse in asset values (real estate and stocks etc).
Marc: We are in the midst of an unprecedented credit growth slowdown and this will hit all asset classes - one after the other, as liquidity tightens up and as de-leveraging becomes the order of the day. First home prices came down, then financial stocks and now commodities, material and energy stocks, and art prices will follow. Bonds will eventually also tumble. In the meantime it is likely that consumer price inflation will accelerate.
Mark: In view of aggressive monetary expansion by the US, the risk of inflation is probably greater. In emerging markets, another big risk is also the abandonment of the market economy philosophy and a cessation of privatization of state owned companies.
Bill: This is the great debate. The losses are deflationary but the monetary and fiscal policies are hugely inflationary. So far the secondary effects of wage inflation are the dogs that have not barked yet, but the unions are clearly getting restive in Europe and the pressures are so intense on US wage earners that it surely must just be a matter of time before they try and restore some of their lost incomes.
Ultimately, governments never repay their debts in real terms. I look for the US to try and inflate its way out of its mess whilst, all the time, denying it is happening and quoting the manipulated inflation data. But one only needs to look at the private estimates of M3 growth to see that it has been growing at 18 percent per annum, double what it was when they stopped publishing the information and double the worst time in the stagflationary 1970s.
Ernest: Probably inflation initially. But as the avalanche builds and recession hits oil-importing countries, the combination of a severe US recession and a global slowdown will shift the focus away from inflation to the slipping demand for real goods which will lead to a reduction in prices when supply exceeds demand. There will be downward pressure on labour markets, rising unemployment, while at the same time commodity prices fall in accordance with reduced demand. Equity market prices are presumably based on value, while commodity market prices are the result of supply and demand.
As the Fed approaches a zero interest rate policy, its ability to have an impact on the economy will be reduced. This is because the Fed has been playing a bigger role in financial stability issues rather than growth issues.
Anthony: How safe is US government debt as an investment now, given the stress of financing financial system bail-outs?
Ethan: It is absurd to think that US government debt is not "safe." The potential liabilities the government is taking on are small relative to the size of government debt and even in a worst case scenario, debt as a share of GDP is unlikely to approach the highs of the US 15 years ago or in other major economies such as Japan and Italy. Moreover, the Fed earned its lesson from the 1970s and is very unlikely to allow a sustained inflation acceleration.
The big challenge for US debt is not new: it is the huge surge in costs as the baby boom generation retires. In terms of the dollar, it is also wrong to focus on US government liabilities. What matters to the dollar is the overall borrowing requirement of the economy -- that is the current account deficit. The current account deficit is improving as exports surge and imports stagnate. The deficit is still too big, but at least it is moving in the right direction. Looking ahead, further improvement is likely as Americans rediscover the virtues of conventional saving, rather than relying on asset price appreciation to accumulate wealth.
Marc Faber: A big risk of meltdown of the (US) financial system.
Mark Mobius: A water-torture bear market has begun.
Ernest Kepper I say this is an avalanche.
William Thomson: In no way can this be seen as a normal bear market.
Ethan Harris: It is absurd to think that US government debt is not safe.
Marc: Since the government can print money US debt is 100% safe. What is, however, not safe is the US dollar. So, investors may eventually get their money back in a currency - the US dollar - which will hardly be worth anything.
Mark: Looking at the U.S. fundamentals, the perceived safety of U.S. government debt is under stress which is why central bankers have been diversifying their reserves. Of course in a general loss of confidence then such debt could become risky.
Bill: You will be repaid in US dollars with less purchasing power than when you subscribed. Whilst this crisis continues and the management of the White House and the Fed remain unchanged, the US dollar is a poor bet and a worse investment.
Ernest: While US. Treasuries have not been particularly rewarding buys, mainly because of excessive debt loads, it is default swaps and derivative products plus counter-party risk management instruments and arrangements on the market by foreign countries that raise concern.
Anthony: What is the safest thing to "hold onto" in this avalanche - gold, other commodities, cash etc?
Marc: For the next three months the US dollar should be fine. On weakness physical gold should be bought as it is the only "honest" currency. I would avoid industrial commodities. Farmland and plantations should also be relatively attractive.
Mark: I would still maintain that the best strategy would be to have a diversified portfolio between equities, bonds, commodities and cash. We continue to find fundamentally stock companies trading at attractive prices as a result of the global market correction.
Ethan: Investors should remain conservative in this environment. Even commodities are not a panacea. For example, the surge in oil prices in the face of a clear weakening in oil demand, suggests part of the run-up this year is unsustainable.
Bill: Gold, in my opinion, is the asset of last resort. It is no one else's liability and has shown its value in crises over the millennia. That situation remains unchanged. It is still cheap relative to oil on a historical basis and is only 40 percent of its all time high on an inflation adjusted basis. New supplies coming onto the markets are constrained by high costs and a lack of mining skills after a generation when no new graduates entered the sector.
Given the global geopolitical tensions added to the banking crisis, gold remains a superb insurance policy. Before the present cycle exhausts itself I would not be surprised to see gold reach all time highs on an inflation adjusted basis i.e., $2500. Silver is also interesting here since it is a minor precious metal with expanding industrial applications. On an inflation adjusted basis it is even cheaper than gold. There are an ever expanding range of instruments to tap the commodity space with ETFs and ETNs - long and short. There are also natural resource funds of hedge funds.
Anthony: Amongst equities and bonds, what (if anything) is there to go for now? Emerging markets versus advanced markets?
Marc: I think for the next three months the US will continue to outperform emerging markets - as it has done already this year - and this not because the US market went up but because it went down less than emerging markets. I also think that Japan will outperform the US and other markets. High yielding equities in Asia, including Singapore REITs, should be okay but up-side potential is limited.
Mark: There's always something to buy. While global growth is slowing down and inflation has been increasing, emerging markets are still expected to grow at a much faster rate than developed markets. They, thus, representing an investment opportunity. Moreover, 'frontier' markets are also looking interesting.
Bill: I believe we are entering a new phase in the global economy, one with increased government regulation, controls and spending. The old Thatcher-Reagan supply side revolution is likely to take a breather and a return to modified Keynesian policies is a possibility.
This is driven by the increased scepticism in developed economies about globalization, largely because the rewards have not been adequately distributed. This accords with the likelihood that the 36 year cycle in US Presidential elections will probably make the Democrats the leading party of government in the coming years with all that means for interference in the economy - and inflation.
The extent to which the growing scepticism of globalization in developed economies affects the future growth of emerging markets cannot be determined at this time. At the margins growth may be reduced slightly but the fundamental factors changing the shape of the global economy are too strong to be derailed. Emerging markets remain a field of great opportunity, especially after recent declines in countries like China, India and Vietnam. Others with essential commodities are exciting. Powered by Chinese and Indian investment, Africa could have a renaissance. Those with financial imbalances like those in Eastern Europe should be avoided.
KEY POINTS
This is the worst financial crisis since the 1930s and equity prices have more room to fall.
All told, the total losses could run into trillions of dollars.
High inflation is likely to persist, at least for some months.
Investors can seek refuge in precious metals and selected emerging markets.
William R. Thomson
Chairman of Private Capital Ltd.
William Thomson, Chairman of Private Capital Ltd., an advisory company in Hong Kong. He is also a senior adviser to Franklin Templeton in Hong Kong and Axiom Alternative Funds in London.
Mr. Thomson is not a registered advisor and does not give investment advice. His comments are an expression of opinion only and should not be construed in any manner whatsoever as recommendations to buy or sell a stock, option, future, bond, commodity or any other financial instrument at any time. While he believes his statements to be true, they always depend on the reliability of his own credible sources. Of course, we recommend that you consult with a qualified investment advisor, one licensed by appropriate regulatory agencies in your legal jurisdiction, before making any investment decisions, and barring that, we encourage you confirm the facts on your own before making important investment commitments.
Copyright © 2001-2008 William R. Thomson
Investment Round Table from Business Times Singapore.
PARTICIPANTS
Moderator:
Anthony Rowley, Tokyo correspondent for The Business Times.
Panellists:
Marc Faber, an investment adviser and publisher of the Gloom, Boom and Doom Report.
J Mark Mobius, president of Templeton Emerging Markets Fund Inc, and director and executive vice-president of Templeton Worldwide Inc.
Ethan Harris, managing director and chief US economist at Lehman Brothers, New York.
Ernest Kepper: A former official of the International Finance Corporation and Wall Street investment banker who now heads an Asian financial consultancy.
William Thomson, Chairman of Private Capital Limited, Hong Kong and adviser to Axiom Alternative Funds, London
OVERVIEW
Since the sub-prime mortgage crisis burst upon the US a year ago, there have been market rallies and claims that the worst is over, only to be followed by fresh plunges in values and sentiment. Are we near the bottom now, or just at the start of a long, slow meltdown? Our experts take the latter view.
Where can investors find a safe haven in this sea of trouble and uncertainty? Gold is still a good refuge, suggests one expert, who expects the price go as high as $2,500 an ounce.
More fundamentally, our experts see developing markets in Asia and beyond as the promised land that will emerge relatively strong from a potentially massive destruction of wealth in the old world. The needs of these emerging markets for food and natural resources will be strong, so farmland and plantations could be good investments.
Anthony: I'm delighted to welcome such a strong panel - a mark of how seriously you gentlemen view the current global financial and economic situation. It's especially pleasing to welcome back some old friends - Marc Faber, Mark Mobius, Ethan Harris and William Thomson.
Anthony: Marc, let's start with you. Are we looking at a financial system "avalanche" rather than a technical bear market, in equities and bonds?
Marc: I believe that the secular bull market in equities and bonds, which lasted from 1981/82 to anywhere between 2000 and 2007 has come to an end and that a water torture bear market has begun. If an enormous quantity of money is printed by central banks equities may avoid a severe bear market of say 40% to 50% but a trading range would still follow and no net gains - certainly not in real terms - would be achieved.
Mark: This may become the case in the US where there is a big risk of a "meltdown" of the financial system, bought on by a lack of confidence. However, emerging markets, equities have corrected more due to poor market sentiment and contagion from what is happening in the US, rather than any major deterioration in fundamentals.
Ernest: I say this is an 'avalanche.' I am anticipating a fall in equity prices in the range of 40 to 50% relative to the peak--- much more severe than the 25% fall which we see in a recession.. Two main reasons are that major economies other than the US will have severe interruptions in growth and that the consumer - especially US. consumers who most likely have gone further into debt than their credit cards would allow by making a home equity loan or taking on the second mortgage will most likely be under pressure to repay. It appears that the U.S. consumer's debt burdened situation will put him in a "no way out" financial quandary with a fall in home prices, fall in equity prices, rising inflation and a reduction in jobs. I expect this scenario to unfold over the next 12 to 18 months.
Bill: In no way can this be seen as a normal bear market. This is undoubtedly the worst financial crisis in the developed world since the 1930s. The only period remotely similar was the bear market of 1973-75, which was itself a part of the extended 1966-82 bear market in US shares. That bear market was driven in part by a 13 fold increase in oil prices from 1972 to 1980. This time we have had a 14 fold increase in oil prices from the $10 low of 1999. Last time we had massive inflation of 20 percent per annum. That has not yet arrived but may well be in the pipeline.
However, in my view, the situation is far worse this time since the US financial system is extraordinarily stretched and stressed. Last time we only had the minor bankruptcies of Franklin National Bank and Continental Bank to contend with. Then there were no derivatives. This time, they amount to more than 10 times world GDP and a greater multiple of bank capital. Within that total the most toxic ones are those unlisted, opaque, over the counter variety amounting to over $50 trillion, again multiples of US bank capital.
The revolution in market finance that began with the deregulation of the 1980s may be about to eat its young, as we have seen with the putative bailouts of Fannie Mae and Freddie Mac; if nationalization goes ahead the US visible national debt increases by $5 trillion and is effectively double. The US would no longer qualify to join the Euro!
The US budget deficit could be on the verge of exploding upwards. Including war costs, it is already over 4 percent of GDP. The economic slowdown and Presidential candidate Obama's plans for healthcare, whist noble and justifiable, even after tax increases, could send the deficit north of $1 trillion or 7 percent of GDP by 2010.
Anthony: What do you think the total "wealth loss" might be as a result of recent crises (in terms of falls in market cap, sub-prime losses and other losses by banks and investment banks, derivatives market losses in general)? Does anyone really know - or is the whole thing too opaque to estimate?
Ethan: Estimating the losses of financial institutions is extremely difficult, but something in the $500 bn to $1 trillion range makes sense. The good news is that much of that has already been revealed at the major money centre institutions and they have been able to recapitalize. It is also important to not double count--when a mortgage defaults the loss is the difference between the loan size and what is recovered, and we should not add to that the individual pieces at each stage of ownership of the loan. To put the losses in perspective, the total value of assets owned by US households is $72 bn and the net worth of US households is $56 billion. Moreover, many of the losses are borne outside the US. Thus the second round losses--the drop in the stock and housing market--is larger and a bigger threat to global growth.
Bill: When Chou En-Lai was asked by Henry Kissinger if he thought the French Revolution had been a success he responded 'it's too soon to tell'. That applies to the current situation. But we could be looking at $6 trillion in mark downs of housing wealth, $3-4 trillion in stock market losses if we get a 25-35 percent mark down in the market - and it could be worse - and then we have the losses of the banking system. So we are talking about possibly $10 trillion as compared with a GDP of $13 trillion. Proportionally, I would look for the UK to suffer similarly. It's not chicken feed!
Marc: Right from the start my estimate of the losses was about USD 1 trillion in the US alone. However, if we add the losses from a decline in housing wealth and stock market wealth the losses are a multiple of that.
Ernest: Overall, the fallout could easily be in the many trillions of dollars. No-one really knows (especially central banks and finance ministries) -- but if we quickly add some basic financial areas where there are already are losses to those we can expect it is easily 2-3 trillion.
The two US mortgage backers losses are in the trillions -- the loss to the 10 million privately owned real estate homeowners is also in the trillions. When you estimate in the range of a US$ 250 billion loss in each of the following sectors -- equities, consumer debt instruments (such as car loans, credit cards and student loans which have also been repackaged and sold as asset-backed securities), corporate bonds, specialized insurance companies which guaranteed bonds and mortgages to collateral mortgage instruments, the loss in tax revenue to states from real estate taxes, the bankruptcy of a major broker whose revenue has been based on charging fees rather than earning income from addressing and dealing with credit risk, the bankruptcy on one or more hedge funds, construction company losses and bankruptcies of and derivatives, it will be a multi trillion dollar loss.
Anthony: Do you think that inflation or deflation is the greatest threat facing the global economy - i.e. commodity price inflation versus the collapse in asset values (real estate and stocks etc).
Marc: We are in the midst of an unprecedented credit growth slowdown and this will hit all asset classes - one after the other, as liquidity tightens up and as de-leveraging becomes the order of the day. First home prices came down, then financial stocks and now commodities, material and energy stocks, and art prices will follow. Bonds will eventually also tumble. In the meantime it is likely that consumer price inflation will accelerate.
Mark: In view of aggressive monetary expansion by the US, the risk of inflation is probably greater. In emerging markets, another big risk is also the abandonment of the market economy philosophy and a cessation of privatization of state owned companies.
Bill: This is the great debate. The losses are deflationary but the monetary and fiscal policies are hugely inflationary. So far the secondary effects of wage inflation are the dogs that have not barked yet, but the unions are clearly getting restive in Europe and the pressures are so intense on US wage earners that it surely must just be a matter of time before they try and restore some of their lost incomes.
Ultimately, governments never repay their debts in real terms. I look for the US to try and inflate its way out of its mess whilst, all the time, denying it is happening and quoting the manipulated inflation data. But one only needs to look at the private estimates of M3 growth to see that it has been growing at 18 percent per annum, double what it was when they stopped publishing the information and double the worst time in the stagflationary 1970s.
Ernest: Probably inflation initially. But as the avalanche builds and recession hits oil-importing countries, the combination of a severe US recession and a global slowdown will shift the focus away from inflation to the slipping demand for real goods which will lead to a reduction in prices when supply exceeds demand. There will be downward pressure on labour markets, rising unemployment, while at the same time commodity prices fall in accordance with reduced demand. Equity market prices are presumably based on value, while commodity market prices are the result of supply and demand.
As the Fed approaches a zero interest rate policy, its ability to have an impact on the economy will be reduced. This is because the Fed has been playing a bigger role in financial stability issues rather than growth issues.
Anthony: How safe is US government debt as an investment now, given the stress of financing financial system bail-outs?
Ethan: It is absurd to think that US government debt is not "safe." The potential liabilities the government is taking on are small relative to the size of government debt and even in a worst case scenario, debt as a share of GDP is unlikely to approach the highs of the US 15 years ago or in other major economies such as Japan and Italy. Moreover, the Fed earned its lesson from the 1970s and is very unlikely to allow a sustained inflation acceleration.
The big challenge for US debt is not new: it is the huge surge in costs as the baby boom generation retires. In terms of the dollar, it is also wrong to focus on US government liabilities. What matters to the dollar is the overall borrowing requirement of the economy -- that is the current account deficit. The current account deficit is improving as exports surge and imports stagnate. The deficit is still too big, but at least it is moving in the right direction. Looking ahead, further improvement is likely as Americans rediscover the virtues of conventional saving, rather than relying on asset price appreciation to accumulate wealth.
Marc Faber: A big risk of meltdown of the (US) financial system.
Mark Mobius: A water-torture bear market has begun.
Ernest Kepper I say this is an avalanche.
William Thomson: In no way can this be seen as a normal bear market.
Ethan Harris: It is absurd to think that US government debt is not safe.
Marc: Since the government can print money US debt is 100% safe. What is, however, not safe is the US dollar. So, investors may eventually get their money back in a currency - the US dollar - which will hardly be worth anything.
Mark: Looking at the U.S. fundamentals, the perceived safety of U.S. government debt is under stress which is why central bankers have been diversifying their reserves. Of course in a general loss of confidence then such debt could become risky.
Bill: You will be repaid in US dollars with less purchasing power than when you subscribed. Whilst this crisis continues and the management of the White House and the Fed remain unchanged, the US dollar is a poor bet and a worse investment.
Ernest: While US. Treasuries have not been particularly rewarding buys, mainly because of excessive debt loads, it is default swaps and derivative products plus counter-party risk management instruments and arrangements on the market by foreign countries that raise concern.
Anthony: What is the safest thing to "hold onto" in this avalanche - gold, other commodities, cash etc?
Marc: For the next three months the US dollar should be fine. On weakness physical gold should be bought as it is the only "honest" currency. I would avoid industrial commodities. Farmland and plantations should also be relatively attractive.
Mark: I would still maintain that the best strategy would be to have a diversified portfolio between equities, bonds, commodities and cash. We continue to find fundamentally stock companies trading at attractive prices as a result of the global market correction.
Ethan: Investors should remain conservative in this environment. Even commodities are not a panacea. For example, the surge in oil prices in the face of a clear weakening in oil demand, suggests part of the run-up this year is unsustainable.
Bill: Gold, in my opinion, is the asset of last resort. It is no one else's liability and has shown its value in crises over the millennia. That situation remains unchanged. It is still cheap relative to oil on a historical basis and is only 40 percent of its all time high on an inflation adjusted basis. New supplies coming onto the markets are constrained by high costs and a lack of mining skills after a generation when no new graduates entered the sector.
Given the global geopolitical tensions added to the banking crisis, gold remains a superb insurance policy. Before the present cycle exhausts itself I would not be surprised to see gold reach all time highs on an inflation adjusted basis i.e., $2500. Silver is also interesting here since it is a minor precious metal with expanding industrial applications. On an inflation adjusted basis it is even cheaper than gold. There are an ever expanding range of instruments to tap the commodity space with ETFs and ETNs - long and short. There are also natural resource funds of hedge funds.
Anthony: Amongst equities and bonds, what (if anything) is there to go for now? Emerging markets versus advanced markets?
Marc: I think for the next three months the US will continue to outperform emerging markets - as it has done already this year - and this not because the US market went up but because it went down less than emerging markets. I also think that Japan will outperform the US and other markets. High yielding equities in Asia, including Singapore REITs, should be okay but up-side potential is limited.
Mark: There's always something to buy. While global growth is slowing down and inflation has been increasing, emerging markets are still expected to grow at a much faster rate than developed markets. They, thus, representing an investment opportunity. Moreover, 'frontier' markets are also looking interesting.
Bill: I believe we are entering a new phase in the global economy, one with increased government regulation, controls and spending. The old Thatcher-Reagan supply side revolution is likely to take a breather and a return to modified Keynesian policies is a possibility.
This is driven by the increased scepticism in developed economies about globalization, largely because the rewards have not been adequately distributed. This accords with the likelihood that the 36 year cycle in US Presidential elections will probably make the Democrats the leading party of government in the coming years with all that means for interference in the economy - and inflation.
The extent to which the growing scepticism of globalization in developed economies affects the future growth of emerging markets cannot be determined at this time. At the margins growth may be reduced slightly but the fundamental factors changing the shape of the global economy are too strong to be derailed. Emerging markets remain a field of great opportunity, especially after recent declines in countries like China, India and Vietnam. Others with essential commodities are exciting. Powered by Chinese and Indian investment, Africa could have a renaissance. Those with financial imbalances like those in Eastern Europe should be avoided.
KEY POINTS
This is the worst financial crisis since the 1930s and equity prices have more room to fall.
All told, the total losses could run into trillions of dollars.
High inflation is likely to persist, at least for some months.
Investors can seek refuge in precious metals and selected emerging markets.
William R. Thomson
Chairman of Private Capital Ltd.
William Thomson, Chairman of Private Capital Ltd., an advisory company in Hong Kong. He is also a senior adviser to Franklin Templeton in Hong Kong and Axiom Alternative Funds in London.
Mr. Thomson is not a registered advisor and does not give investment advice. His comments are an expression of opinion only and should not be construed in any manner whatsoever as recommendations to buy or sell a stock, option, future, bond, commodity or any other financial instrument at any time. While he believes his statements to be true, they always depend on the reliability of his own credible sources. Of course, we recommend that you consult with a qualified investment advisor, one licensed by appropriate regulatory agencies in your legal jurisdiction, before making any investment decisions, and barring that, we encourage you confirm the facts on your own before making important investment commitments.
Copyright © 2001-2008 William R. Thomson
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