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Marc Faber on CNBC and Bloomberg

UPDATE: Fixed Bloomberg video link

UPDATE II: I found some insightful nuggets in the Marc Faber interview with Bloomberg. Some may not like an extremist like him but he always presents a different perspective. While you are at it, if you feel like it, you might also want to check out this Jim Rogers rant. Nothing insightful except for his comment that he has covered all his shorts of homebuilders, Fannie, and financials, except the investment bank shorts. Since the only two investment banks left are Morgan Stanley and Goldman Sachs, I interpret this to mean that he thinks these two still have some ways to drop. I can see this happening because these two need to de-leverage and any such move will result in share price declines (instead of selling assets, you can try to take on more equity as Goldman Sachs recently did, but that dilutes shareholders.)

Well, Marc Faber is super bearish right now but that's nothing new from Dr. Doom. Do note that he is sometimes wrong and macro calls are hard to nail. Also note that he is a bear and hence is generally negative on most things. There are two interviews he has given recently:

Bloomberg (click on link on top-right)
CNBC (thanks to The Big Picture for original mention)



On the CNBC interview, where he likens the Federal Reserve to a drug dealer giving out free money, he sees potential for a big slump. For what it's worth, I do not share the same negative views of the FedRes. It's up to the individual or the business to decide whether to use cheap money and leverage themselves. Blaming the FedRes shifts responsibility from the individual to some faceless government entity.

"Next year, if the economy in the U.S. is as weak as I think it would be, the trade and the current account deficit will continue to contract," Faber said. "When global liquidity contracts, it's not a good time for financial assets."


This is probably the most important macro theme that will unfold over the next five years. Basically the opposite of the last 5 years, where the US current account deficit was expanding and the US$ declining, would likely occur. This is good for the fiscal situation in America but it's bad for investments. US savings rate will go up and the US$ should go up, if this scenario plays out. This is a tricky situation to invest. The US$ would appreciate but financial assets like stocks and bonds may not (financial asset performance depends on how Americans recycle their increased savings.) Commodities, which are generally inversely related to the US$, will likely get hit as well. This likely means that foreigners will find US$-denominated assets more attractive (this is the opposite of the last few years, where Americans found foreign assets more attractive due to the declining US$.)


In the Bloomberg interview, he says he is bearish on China and India as well. I share his views on emerging markets. I don't think I am as bearish on the US economy as he is. One of the reasons is because American corporate balance sheets (excluding financial firms) are solid so companies aren't skating on thin ice like they typically do going into slowdowns.

``I don't believe this is going to be solved in six months to a year,'' Faber said.

Faber also forecast the Standard & Poor's 500 Index will rally to as high as 1,350 points following the approval of the bailout plan because stocks are ``oversold.'' That level is about 14 percent higher than the gauge's close yesterday.

Still, ``I'm not playing that rally,'' he said. ``I'd rather think that stocks are not particularly cheap. We don't have a valuation bubble. We have an earnings bubble. In 2009, earnings will disappoint.''


His earnings comment is very important. If earnings are actually at a peak then valuations are not as cheap as they seem.

``Economies like China that grow very rapidly can have significant adjustments,'' Faber said. ``I'm not negative for the long term. It's just that from a cyclical point of view the Chinese economy could turn out to be weaker than what analysts are telling you.''

India is also ``not problem-free,'' Faber said. He forecasts the Bombay Stock Exchange's Sensitive Index, or Sensex, will fall below 10,000. The Sensex is down 33 percent this year.

``I think new all-time highs in markets are most unlikely for the time being,'' Faber said. ``So I'm not particularly interested to play the market at the present time.''


I think the consensus is coming around to a bearish view. I feel that the consensus is still too bullish on China. Even though everyone admits that the Shanghai and Hong Kong stock markets are down significantly, many still detach their economy from the performance of stocks and are assuming that the economy will do well. I think many are going to be shocked to see a material slowdown. If I'm not mistaken, around 8% growth is a recession in those countries--you need around that much to create jobs for new entrants--and I can see China getting close to that. China will likely face its first recession since 1990.

It is important for those not familiar with emerging markets to understand the fact that a recession does not necessarily mean negative GDP growth in those countries. You just need to look at China and observe when the last negative GDP growth number was posted. Numbers are cooked by the government but even discounting that, I don't think China would have posted negative GDP growth in the last 30 years (I'm only looking at annual numbers.)
Back in 1990--arguably the last recession--real GDP growth was 3.8% but I don't think it will be that bad this time and expect closer to 8%. China has never had a negative GDP growth rate since 1976.


As for India, it can easily face an inflationary bust. It is one of the few high-growth emerging markets running a fiscal deficit and a current account deficit (in contrast, China, Russia, and Brazil have fiscal surplus and current account surplus (I didn't check recently but that was the case over the last few years.)) Foreigners have been financing everything for a while now, and if they stop channeling money into India, expect asset prices to plummet. On a P/E basis, India has been one of the most overvalued markets in recent years and can easily decline beyond what most expect (especially if earnings turn out to be peak unsustainble earnings.)


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