Saturday, February 14, 2009 0 comments ++[ CLICK TO COMMENT ]++

FinancialSense interview with Marc Faber

Jim Puplava of Financial Sense interviewed Marc Faber this week (MP3 audio interview here and Windows Media streaming here.) Here are my thoughts on his his key comments:

  • I'm not going to go into it but I don't share his views of the US government. Marc Faber isn't a fan of the current government and isn't generally a fan of central banks. Like most sharing similar views, like Jim Rogers, I find his views to be hypocritical and unrealistic. But then again, countless investors are not well versed in politics or even economics. I mean, we just had nearly everyone worship the Maestro with disastrous consequences--although I'm not as critical of him as many others. Similarly, we had many warning about the trade imbalance but it is impossible for the government to do anything. Only the free market can fix things. The government can't force consumers to increase their savings rate no more than they can prevent private investors from selling CDS on mortgage bonds.
  • Marc Faber doesn't see recovery at the end of the year. Even if the economy recovers, he expects it to taper out afterwards. My view is similar.
  • He sees US$ strengthening against other currencies, but not necessarily against gold.
  • Thinks inflation won't be an issue for the forseeable future but seems to think that inflation is a huge threat in the future. I agree with him that inflation is not a problem for the time being; but disagree and don't see high inflation in the future (unless there is a war/emabargo/etc or if the govt does it on purpose)
  • He mentions that USA won't be similar to Argentina (I agree.) I would also add that anyone comparing the current US scenario to Germany (1930's) is also crazy. People using those extreme examples clearly are overlooking the structural differences. Note that US inflation never rose anywhere near Germany in the 1970's
  • I share almost identical views as Marc Faber when it comes to the world economy. Marc Faber mentions how cyclical economies (China, commodity-exporting countries, etc) outperform during booms, as in the last 5 years, but underperform during recessions, like now. This isn't a surprise to me but many who overloaded on emerging markets now know why Brazilian stocks often trade at a p/e less than 10.
  • Marc Faber doesn't trust China's numbers and thinks it is already contracting. He says that China is doing the wrong thing by stimulating sectors with overcapacity. I agree and that's one reason I'm bearish on China. I suspect the Chinese government knows that this won't help matters in the long run but is likely throwing money at the problem to cushion the blow and prevent unrest related to unemployment. Their only hope is to boost consumption and get a service sector going (service sector employes more than manufacturing and they really need this.) In my opinion, until there is clarity with China, one should avoid all cyclicals and anything that depends heavily on China.
  • Says stocks aren't that cheap given how market cap to GDP in real terms is high compared to past peaks like 1966, 1973, and same as in 1929. He says commodities are cheap compared to equities. Faber says that CRB, the commodity index, adjusted for inflation is low compared to equities. I completely disagree with his view of commodities but do agree with him that stocks aren't cheap, although Warren Buffett disagrees. My problem with Faber's commodity argument is that there is no reason whatsoever for commodities to retain purchasing power over time. In contrast, stocks will retain purchasing power if the economy grows (stocks are a claim on economic profits.) Each commodity is very different from another but most of them have continuously deflated over time or become nearly obsolete (worth zero.) For example, leather was a popular commodity in the 1930's but is a minor one now. Conversely, uranium is more valuable now than in the 1930's (I'm not even sure if it was discovered back then.) Many key commodities have deflated over time--this, even when demand keeps going up. I think anyone that bets on a commodity expecting it to hit its prior peak in inflation-adjusted terms is going to lose their shirt one day. There is no reason sugar, for example, has to hit its all time peak (I believe it was in the 70's, if adjusted for inflation.) If anything, sugar can stay low and even go to zero (if artificial sugar completely replaces it.) Jim Rogers always says that commodities are "safer" than stocks but anyone that invested in crude oil in the last year probably lost far more than if they owned a senior oil&gas company.
  • In one of his polemic attacks on government, Faber suggests that the best stimulus for the US would be if half the government employees were laid off, taxes were cut, and tax holidays were instituted (presumably for the wealthy.) Needless to say, I disagree. A lot of these views of such thinkers tend to be quite hypocritical. For instance, many such thinkers always criticize governments providing services, but tend to stay silent when China or India or similar countries increases government services. So which is it? Should the government be instituting healthcare, welfare, and the like; or should it not be?
  • Says it's possible for slow economic growth with rising inflation. It didn't seem like he was favouring this view; seemed like he way just throwing this view out there.
  • Marc Faber says that US government bond yields may have hit a bottom in late 09. This is a tough call. I'm neutral to bullish on US govt bonds--not because I consider them a good but because of my deflationary concerns. Calling interest rates is extremely difficult and it's hard to say what will happen. Jim Grant once suggested that yields may have hit a bottom in 2003 but he turned out to be completely wrong. Similarly, many who shorted Japanese bonds in the late 90's were "washed off" as Stephen Roach would say. A yield of 2% to 3% for a 10 year bond is really low if and only if inflation is somewhat high. If we get periods of mild delfation along with low inflation then that is a great return.
  • Likes gold but says it is expensive relative to industrial metals. He says gold expropriation in the US is a remote possibility and says it's better to own some overseas. Gold expropriation is more likely than one may imagine simply because the majority of citizens could care less about it. If you took a popular vote or a jury in a court of law had to rule, they can easily favour seizing gold. However, I think this is highly unlikely. It happened during the 1930's because USA was on a gold standard. My feeling is that if USA wasn't on the gold standard, the government wouldn't have banned gold. Remember, although some may disagree, the point of gold exproporation in the 1930's wasn't to improve the government's balance sheet. USA was a creditor nation, was sucking in huge quanties of gold through trade, and was sitting on a ton of gold so I believe that the expropriation was to control the currency, which was based on a gold standard. (I guess one can argue that presently, given how USA has a weak balance sheet and a trade deficit, in a very extreme scenario, it might seize the gold to pay off creditors while printing money to pay citizens (this would occur if the creditors don't want US$.) Although that's possible, very few outside the gold community cares much about gold. I'm sure creditors would prefer to take ownership of real estate, woodlands, oil, or something like that. People living in America or Canada don't realize it but the natural land in USA is very precious compared to many other parts of the world, nearly all of them heavily populated and short of resources.)
  • Marc Faber suggests that future wars won't be conventional wars but, rather, dirty wars. He says that Russia or China may supply some intermediary who causes problems for USA. I hope it never happens and I find it unlikely unless USA falls into a trap (has to be a major political mistake, far worse than Bush's adventure in Iraq or taking over in Vietname from the French.) But if such a situation develops, it is probably the beginning of decline of USA. It will severely harm economic growth and, more importantly, USA is founded on openness and liberties and would face serious political problems. As it stands, there are billions of dollars of illegal drugs, weapons, counterfeit goods, banned exotic goods, etc that flow into USA ever year; there are thousands of illegal immigrants who enter the country; and so on. A state-funded saboteur or mercenery can easily enter the country and poison the water supply, for example.
  • Marc Faber also says that, because of government intervention, he used to issue multi-year macro outlooks but is becoming more short-term-oriented. I guess he is becoming more of a short-term trader. I personally would find his views less useful if he focuses on the short-term. The problem for me is that I'm not a trader and, most importantly, I don't use technical analysis, which tends to be favoured by shorter term investors.


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