Thursday, August 21, 2008 0 comments ++[ CLICK TO COMMENT ]++

Sam Zell... Jim Rogers... Marc Faber

Relying on predictions about the future can be harmful to your financial health so you shouldn't read this :) But for those, like me, that like to listen to some speculations about the future, here are some thoughts from Sam Zell, Jim Rogers and Marc Faber. Needless to say, all three contradict each other and hedge their bets by implying that these are just possibilities.

Sam Zell

Sam Zell, who is having a rough time with his Tribune ownership, sees a potential bottom in real estate early next year. He thinks real estate is priced fairly right now and thinks debt is more attractive than equity for the distress situations.

Billionaire Sam Zell said the housing market could start recovering as early as next year and he's focusing on investing in debt rather than equity.

``We believe that the opportunities, particularly in difficult situations, are in the debt,'' said Zell, who made his fortune building the largest publicly traded office and apartment companies in the U.S. ``We have been focused on, not only in real estate but in corporate, identifying debt situations where it is trading at a discount.''


Zell says he's not buying property at the moment.

``I think the real estate market as a whole is fairly priced,'' Zell said. ``I think from a yield point of view, it might be attractive. But I am a capital investor and an entrepreneur, and I need to be able to invest in situations that by virtue of changing them, I can dramatically change value.''

The best American real estate investor is not Donald Trump; it has always been Sam Zell. Now, whether that means he is going to be right or not remains to be seen. Since all these comments are vague, it's hard to know if he is talking about residential real estate or something else.

Jim Rogers

Jim Rogers reiterates his past stance and says that the current commodity correction is temporary. He expects commodities to recover and remains long-term bullish:

``I don't see that it's the end of the bull market,'' the chairman of Rogers Holdings, said in an interview in Bangkok before speaking at an investor conference later today. ``Until either a lot of supply comes on stream or the economy collapses, the bull market will continue,'' he said.

Soybeans, copper, platinum and crude oil have dropped from all-time highs after a rally in the dollar curbed demand for raw materials as a hedge against inflation and concerns increased that economic growth will slow. Sixteen of the 19 commodities in the Reuters/Jefferies CRB Index fell this month, after the index plunged 10 percent in July, the biggest such drop in 28 years.

``I am contemplating whether it's time to get involved in base metals again,'' Rogers, 65, said today. ``I haven't bought any for awhile.''

Marc Faber

In the same Bloomberg article, Marc Faber says that he doesn't know if the commodity correction is temporary or not:

Marc Faber, 62, who told investors to bail out of U.S. stocks before 1987's so-called Black Monday crash said Aug. 15 that commodities may have peaked. ``Whether that is a final peak or an intermediate peak followed by higher prices, we don't know yet. It could go lower,'' he said.

The most striking thing to me is the fact that Faber raises the possibility of this being a final peak. Although he is not turning bearish (yet), I haven't heard him mention any words like "final peak" in the past.

Marc Faber is starting to become superbearish (his stance is starting to resemble some things he said in early 2007--but he was wrong back then). Randall Forsyth of Barron's summarizes Faber's views in his piece about global liquidity:

A declining U.S. current account deficit could lead to a tightening of global liquidity as foreign central banks accumulate less dollar reserves, which are recycled into the global capital markets. The U.S. current account gap has shrunk from a peak over 6% of gross domestic product to under 5% as weakening consumer demand has cut imports while exports remain relatively robust as growth continues in emerging economies and the dollar is cheap.

As the growth of foreign monetary dollar reserves slows, the dollar is boosted and gold and commodities are hurt, Faber points out. Further, he writes:

"I have a friend who is an outstanding economist who thinks that the Asian current account surpluses will shrink in 2009 by about 50% from their peak in 2007. In this scenario, globally liquidity would become extremely tight and would have a devastating impact on asset markets including real estate, commodities, non-AAA bonds and equities. Such a decline in the Asian current account surpluses would cut the U.S. current account deficit by half and lead to a very strong U.S. dollar."

I have been casually following Jim Rogers and Marc Faber for about 4 years now, and it is rare for them to take divergent positions. Similar to Jim Rogers, Marc Faber has, in the past, said that the commodities complex may enter a short-term correction but he was still long-term bullish. However, this is the first time I have seen him mention the possibility of this being a final peak.

As usual, Rogers looks at the situation from a macro supply & demand point of view. He doesn't think supply is coming onstream so the bullish case is intact. Marc Faber, in contrast, tends to rely a bit more on technical analysis, investor psychology and reversion to the mean.

Faber is basically saying that if liquidity contracts, US$ will rally and crush everything. This is a view I have discussed in the past. To sum up, practically every asset--gold, commodities, US stocks, emerging market bonds, emerging market stocks, junk bonds, real estate, art, collectibles--had appreciated from early 2000 to the recent past. The only assets which did not do well were US$ and US Treasuries (Treasuries have rallied recently so they are not an underperformer either.) So if there is one asset that is totally out of favour that no one expects to do well, that is the US$. It is quite possible for all the assets to correct while the US$ rallies. No one expects the US$ to rally because the consensus is that the US current account deficit will keep expanding. But lo and behold, we are starting to see the current account deficit improving--something few expected as recently as 6 months ago--and some are shocked that the US$ is stabilizing--and even gained against a 'commodity super-currency' like the Canadian dollar in the last month! Essentially, a reversal of the cheap liquidity of the last 5 years. If making money over the last few years was easy then losing money over the next few years is going to be easy.

Having said all that, this is all just speculation right now and it's not clear if the US$ will sustain its strength. Also, it's not as if Marc Faber (or anyone else) aren't wrong at times. Like I said, betting on macro can be harmful ;)

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