Marc Faber soes not think the dollar will drop that much against the Euro and yen, but still is very bullish on gold.
THE CATALYST!
By Marc Faber
Although we are, in fact, in a deflationary environment for
manufactured goods, principally because of the rising
supply of "cheap" consumer goods from China - a shift has
taken place in the last two years from a bull market for
equities to inflation of hard assets: residential real
estate and commodities.
But whereas it would appear that housing inflation in the
U.K. and the U.S. is nearing an end, commodity prices
appear to have completed a multi-year base and are poised
for further gains.
According to the Office of Federal Housing Enterprise
Oversight, a federal agency that regulates Fannie Mae and
Freddie Mac, its index of prices for single-family homes
rose just 0.84% in the third quarter, compared to a rise of
2.39% in the second quarter. Moreover, with the exception
of a brief period following the September 2001 terrorist
attacks, this index has been rising at a rate of about 2%
per quarter during the past two years as declining interest
rates boosted house prices.
The report by the Office of Federal Housing actually found
that home prices fell in seven states in the third quarter,
which compares to price falls in only three states in the
second quarter. Similarly, prices fell in 33 of the 185
metropolitan statistical areas studied, compared to 22 in
the second quarter. Still, compared to a year ago, house
prices rose by 6.2%, which is far higher than the annual
average increase of 4.6% since 1980, but is down
significantly from the recent 12-month appreciation peak of
9% recorded in the first quarter of 2001.
According to the National Association of Realtors,
assembling their reports from a different set of data, home
prices rose 9.8% in the 12 months ended in October 2002 -
the fastest such pace since 1987.
The point remains...at present, housing prices are rising
far more rapidly than incomes, a phenomenon that is
obviously not sustainable in the long run, as affordability
will become a problem sometime in the future - at least in
areas where prices are rising by close to 20% per annum.
So, whereas the flight into real estate may be nearing an
end, the outlook for commodities is far more appealing. It
is worth noting that despite weak global economic
conditions and weak stock markets around the world, the CRB
Commodity Futures Index has risen by more than 20% this
year.
Commodity prices have also been in a bear market for more
than 20 years and, in the age of capitalism, have never
been as low as just recently.
Therefore, once fundamentals improve, prices could run away
on the upside. For example, if synchronized growth around
the world should materialize - a scenario about which we
have serious reservations, but which is nevertheless a
possibility for the short to medium term given central
bankers' propensity to print money - then obviously the
demand for all commodities should improve and drive prices
higher.
But more importantly, with people like Mr. Bernanke at the
Fed, and actually even being a serious candidate for future
chairman of the Federal Reserve Board, depreciation of the
dollar and a rise in commodity prices is almost guaranteed
- particularly if the economy weakens.
In fact, Bernanke's declaration to the National Economists'
Club in Washington that "The U.S. government has a
technology called a printing press," didn't go unnoticed by
the believers in sound money (gold), who subsequently
pushed gold prices through an important resistance level.
[Editor's note: Gold traded to $351 at the opening in Hong
Kong this morning...and has gained $36 in the last month,
or roughly since Bernanke made his speech. Next stop? Who
knows, but $414 is the ten-year high set on February 5,
1996...no doubt, an important level to watch. Addison.]
It is unlikely the U.S. dollar will depreciate
significantly against the euro and the Japanese yen,
although I am of the view that the bearish sentiment
towards Europe is overdone. For one, I am a believer that
the inclusion of the ten countries from Central Europe and
the Mediterranean (Hungary, Poland, the Czech Republic,
Slovakia, Slovenia, Lithuania, Estonia, Cyprus, and Malta)
into Euroland will be highly beneficial in the long run. It
will add to Euroland about 70 million people who will be
only too eager to work for far lower salaries than Western
Europe's union-controlled workers. There is finally hope
that the workers' union power in Western Europe will be
badly shattered and that growth prospects for this economic
zone of more than 450 million people will be very exciting.
Nevertheless, it is not likely that the Euro will
appreciate by more than another 10% or so against the U.S.
dollar in 2003, since the beneficial impact from this
European enlargement will only be felt very gradually.
Equally, it is unlikely that the Japanese yen can
appreciate much against the U.S. dollar, given Japan's own
economic problems.
Therefore, it is more likely that the dollar will
depreciate against hard asset prices, including
commodities.
Furthermore, Barry Bannister, in a very comprehensive study
on commodities for Legg Mason Wood Walker Inc., shows how
per capita oil consumption soared in Japan in the 1950s and
1960s, and later in South Korea from the mid-1970s up to
recently.
In other words, when countries industrialize, the demand
for commodities inevitably increases very rapidly.
Economies that are based on manufacturing and the
production of goods tend to be heavier users of industrial
commodities than service-based economies. Therefore, if the
rapid pace of industrialization in China continues, and
picks up in India and Vietnam, then per capita demand for
oil and other commodities is likely to increase very
dramatically and drive all commodity prices much higher.
Lastly, commodity prices have always had a tendency to
spike up during wars. With the prospects of a war in the
Middle East increasing, we would not be surprised by a
strong rise in commodity prices in 2003.
Thus, the following potent combination makes for a fairly
convincing case that we're on the eve of an explosive rise
in commodities prices: the 20-year commodities bear market
coming to an end; characters like Mr. Bernanke at the Fed;
rising budget deficits not only in the U.S., but also in
other industrialized countries; rising demand for
commodities in Asia; and the possibility of a nasty and
long-lasting conflict in the Middle East, which may in the
end involve the entire region, including Saudi Arabia and
Iran.
Indeed, if commodity prices do continue to rise, then
interest rates will rise and bond prices will decline.
Interest rates and the CRB Index are closely correlated -
that is, when commodity prices rise, interest rates tend to
follow, and vice versa. The recent rise in commodity
prices, which so far has not been accompanied by rising
interest rates, is therefore unprecedented and would
suggest that, sooner or later, commodity prices will
collapse once again in a serious bout of deflation...or
interest rates will suddenly increase meaningfully.
I am leaning towards the latter scenario, thanks to Mr.
Bernanke, who reflects very much the thinking of mainstream
American policy-makers and self-promotional economists -
such as CNBC's Larry Kudlow - who continue to believe that
easy money and aggressive interest rate cuts can solve all
the world's economic ills and that a new, powerful equity
bull market is just around the corner!
If commodity prices are indeed at the very beginning of a
secular bull market, as I believe, then such a rise will
inevitably be accompanied by rising interest rates.
In fact, the very big surprise for American economic
policy-makers, investors, and consumers who have just been
on a borrowing spree could be that, in 2003 and 2004,
interest rates will rise quite considerably and "kill" the
refinancing boom that has taken place in the last couple of
years as a result of rapidly declining interest rates. If
interest rates were to rise, refinancing activity would
inevitably slow down...and with it "consumption" growth.
Peace on Earth,
Marc Faber,
for The Daily Reckoning
P.S. I might also point out that refinancing activity could
decline even if interest rates didn't rise but just stayed
at their present level, as it is likely that most
homeowners have already refinanced their homes.
Editor's note: Dr. Marc Faber, editor of The Gloom, Boom
and Doom Report, has been headquartered in Hong Kong for
nearly 20 years, during which time he has specialized in
Asian markets. Dr. Faber is a member of Barron's Roundtable
and a major contributor to: |
