Interesting interview of Marc Faber by Jim Puplava.
netcastdaily.com on RealPlayer
My summary for those that don't want to listen for the hour but well worth the effort.
He examines the long term trends and of course concludes that the US market is not going anywhere for a long time. He is sceptical of the bottom arriving in financial assets. He points out that the next bull market will not be in stocks that have just complete their boom and reversed in this current bear market. We haven't reached bottom because there has not been a capitulation, outflows from the market have not been sustained as they were . This recession is unusual because real estate and the consumer haven't retrenched. These have to occur before the bottom is reached. The weak market market participants have to be eliminated and the excesses cleaned out. Indeed there has been a huge expansion of credit in the mortgage market. The excesses have been made worse not better by the Fed's action. There is no pent up demand coming out of this recession because there has been no retrenchment by the consumer. We have borrowed from future growth. Auto sales are at record highs but the stock market knows that it is a car bubble and prices the auto shares at low valuations. We are driving a record number of new cars and can keep them for the next four years without trade in. The collapse of valuations of companies involved in subprime lending shows that they are in trouble and the bear market will end when the govt has to bail out one of these companies, like FNM or JPM. It will be a big shock for the stock market. Central bankers all over the world are supplying money like water and this money will flow somewhere. Money has been buying real estate and could buy commodities.
China opened to the world business in 1978 and nothing happened until the late 1980s. Time is required to set up production and distribution networks. China is now the low cost exporter of goods and is exporting deflation in the manufacturing sector to the whole world. He compares the opening of China to that of US midwest in 1830's which by the 1870's led to a collapse in agricultural products which bankrupted European agriculture. This same lag was caused by the time required to place the necessary distribution systems in place.
The type of deflation we had in the 1930's is unlikely today. In Latin America in 1980s depression, they printed money and created large budget deficits, causing simultaneous depression and hyperinflation and the currency collapsed. Domestic price levels rose but because the currency exchange value collapsed prices become very low to holders of other currencies. There, deflation resulted from the currency collapse. By contrast In the US in the 1930s there was price level deflation but the currency remained strong. You can have an adjustment in the price level of domestic economy or in the trade level of your currency.
Current US imbalance will lead to problems. But can the Dollar decline against the Euro or the Yen? Against what will the dollar collapse? Central banks have been selling gold. The brain damaged central bankers have been a good negative indicator of where to place your money. Their selling of gold is the strongest signal for commodities. Given that the dollar is unlikely to collapse against the other tradeable currencies, the dollar will appreciate against hard assets. This has happenened with real estate. In the last year the economy has grown by $170 Billion on a $10 trillion GDP economy at the increase of debt by 2 trillion and this does not add up in the long run. The boom of the late 1990s still has a lot of unfinished business. The consumer has to retrench build up his liquidity and create pent up demand. It is that demand and liquidity that fuels the next boom.
Leadership: After a bubble bursts leadership changes in the markets. Technology which has led the market in the 90's will not lead in the next bull market. New market leadership has not yet occurred or been observed by the public. A burst market is almost permanent death. Housing in America is not a bad investment, not in NY or Boston or SanFran etc. but the typical house in the countryside is not overvalued. It is possible that this market can rise for a while. After it bursts money can shift to another region or market of the world. Eventually money will shift to Thailand, Indonesia (Bali is probably very cheap now), Chinese real estate and companies.
He expects a trading range of 8-11,000 DOW and 800-1100 NASDAQ range, may be lower but it will take time. as seen by the eventual bottom of other bubbles.
Per capita consumption of gold in India is 1 g. If everyone consumed at this level in the world demand would be 3X the 2500 tons mined yearly production. Gold supply can't be tampered with while paper can be created.
The bear market is being postponed by the action of the Fed. In due course the price of gold will go up very dramatically. The Euro zone with Poland and Czech will create a vibrant economic zone which long term is beneficial for the Euro. But at moment there is no strong case to buy the Euro. Also the Yen. The Chinese rmb is under valued currency as is gold.
China will have economic and political crises but buy condos or office buildings in China, real estate in VietNam.
Low price level in Asia. Would look at real estate in NZ, Australia, Argentina, eastern Europe, Croatia. Farmland or country real estate. Argentina may default on their debts but unlikely to void real estate ownership.
He makes a wonderful argument for contrarian investing. Travel alone. When everyone has discovered a market and bought in, there is no one left to buy. When everyone is fixed on one thing it creates an opportunity somewhere else. Commmodities have been neglected since 1980. Relative to financial assests commodties are very cheap.
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