Monday, October 20, 2008 0 comments ++[ CLICK TO COMMENT ]++

Marc Faber October 20th Bloomberg Interview

One might be bored of reading too many Marc Faber references lately on this blog but Bloomberg has a lengthy interview that captures his present world view. I think it's well worth checking out for those not familiar with Marc Faber; and for those familiar, well, there are some nice insights as well as his investment thoughts. I personally think he is less useful during bear markets (I consider bears to be useful during bull markets and bulls to be interesting during bear markets--I know, the opposite of most people.)

In any case, here is a summary of his key points. I don't think it does justice to his colour commentary ;) but for those short on time...


(bullet points are in no particular order)


  • Is out of the market for the most part: He says he is mostly in cash, with gold behing his largest holding (equities less than 10% of portfolio.) He views gold as more of an insurance holding.
  • Market oversold and sees potential for a rally but no new (real) highs: I'm not into technical analysis but Marc Faber does use it. He says market is oversold and can rally but doesn't think there will be any new highs (in real terms.) If the government prints lots of money--so far it hasn't in my opinion--the market can hit new nominal highs but in real terms it won't go anywhere.
  • Gold may not do well near-term: Points out that gold has held up reasonably well compared to equities or commodities. Sees the potential for rotation out of gold into commodities, if commodities rally.
  • World world in recession: Doesn't buy Chinese numbers and thinks that China would be lucky to post 5% GDP growth (versus the 9% reported by government.) Same for India. He says the whole world is literally in a recession.
  • Credit bubble in USA; investment bubble in emerging markets (EM): This (i.e. investment bubble in EM) is an important point that seems to have been missed by many EM and commodity bulls over the last few years. I have stayed away from EM mainly due to this view. There may not be a debt bubble in many (but not all) emerging market nations, but there are bubbles in real estate, manufacturing, buildings, and so on. If you are investing in EM, you better be prepared for any blow-ups in one of more of these bubbles. For instance, anyone investing in China (or doing a bullish commodity bet based on China-to-da-moon theory) needs to be able to handle any shocks from a limited collapse in manufacturing.
  • EM cyclical and will underperform during slowdowns: Pretty much obvious to anyone with any sense of history. EM is very cyclical given that those countries depend heavily on manufacturing or resource extraction. EM wil outperform USA during booms and underperform during busts. I remember quite a few dissing US returns in the last few years without realizing that EM returns are more volatile.
  • Reason for US$ strength: Faber claims that the main reason for the US$ strength is due to the shrinking current account deficit (people like me claim that the main reason is due to capital flight to safety.) He says that the shrinkage in US current account will be bearish for assets and bullish for US$. The current account deficit injects liquidity into the system and pushes asset prices higher (the case in the last 8 years or more). A shrinking current account sucks capital out of the system (what's happening now.)
  • Not a big fan of central banks or governments: LOL that's an understatement. He blames central banks and governments for many of the problems. Marc Faber follows Austrian Economics but I have to point out that part of the problem is that, contrary to what anti-Keynesians claim, governments have a habit of trying intervene when things are bad but not when times are good. If you were to follow Keynesian view of government intervention, you should only be helping when things deteriorate, and step back when things are booming. Yet no one does that; so I would claim the process hasn't bee executed well.
  • Thinks bailout of LTCM was a huge mistake: Says that some of the core problems are due to the bailout of LTCM. This is an interesting insight not mentioned by many. I agree with him here. If you are a free market guy to any appreciable degree, you should let firms fail due to their mistakes (except in extreme circumstances--this is where I stray from pure free-market supporters.) As Faber alludes to, by saving LTCM, a signal was sent to market players saying that leverage was great and if you ran into problems someone would bail you out. Marc Faber says that the problems (if you let firms collapse) wouldn't have been as large back in 1998 as now.
  • World wealth contracted by almost 50%: It's actually amazing when you think about it: the world's wealth dropped by almost 50%. Many readers may only be thinking about stocks, but remember that bonds, commodities, real estate, among others, have also declined substancially. This is history-making stuff. We are talking once in a hundread year stuff. The fact that the stock market is down 20% for the year isn't a big deal (it's a nasty bear market that comes around every 10 years or so.) But it is rare for huge swaths of wealth, not related to the stock market, to tumble 30% to 50%. Even the lowly currencies of the word, who one might have thought would not move much, have had some massive declines.
  • Workers less affected than the wealthy: This is a very interesting point and is perhaps why I, who is more of a worker than an investor, am less concerned than many others. Faber speculates that most of the suffering will be borne by the wealthy, who generally control most of the wealh in any country. He expects the workers to be affected less. I believe this is especially true given that (i) this is a financial, not an economic, crisis, and (ii) most of the wealth accrued to the wealthy and investors in the last 10 years.
  • Bullish on corporate bonds: Now for some investment picks... He likes corporate bonds, some of which yield 15%. I agree with this suggestion. The corporate balance sheet, not just in America but most places, is very good. Of course, I'm not talking about the over-leveraged companies from the LBO boom, but, rather, the typical corporation.
  • Bullish on Singapore assets: He mentions a bunch of Singapore assets that he likes, some of which are trading at 1/3 of net asset value. I don't know if I have the names right but he suggested some Singapore securities: REITs in general, Thai hold?, Metroholding, Hiflux?, Faose?, banks in general... he also suggests Turkish fund?... It's not clear what he was referring to but he said whatever you buy, you will likely do well in 10 years (I'm not sure if this was a reference to his picks or just investments in general.)

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