Faber excerpts from the 2005 Barron's RoundTable (he doesn't really mention his stance on oil):
Faber: To say that economic and corporate growth in the U.S. were good is a joke. Measured in Polish zloty, the U.S. economy contracted by 19% last year. In the U.S. there has been massive credit creation. The quality of growth has been extremely low because growth has been due largely to debt expansion, leading to asset inflation. In the 1960s inflation manifested itself in rising real wages. In the 'Seventies it showed up in rising consumer and commodity prices. In the 'Eighties it was mostly in Japanese real estate and Japanese assets, and in the 'Nineties in rising equity values. Since 2000, inflation has been most apparent in rising real-estate prices.
In 2004 everything went up: the art index by 29%, real estate in some countries dramatically. The Ukraine stock-market index went from 1700 to over 7000. With rising asset values, people have more money to spend. But that's no way to build sustainable economic growth.
Q: What will happen this year?
Faber: Something will give. For once, I'm afraid, everything will drop. The only asset that is undervalued is the U.S. dollar. In the long term it is a doomed currency, but now it has a good chance to appreciate. If the dollar is strong, as I expect, GDP growth will be disappointing because a strong dollar means tighter monetary conditions. The consensus is far too optimistic about the U.S. economy and about growth in China.
Faber: Wages could rise by 3.3%, but that might be offset by rising inflation. We will experience, maybe not in 2005 but in the future, the limits of monetary policy. You can print money but also have asset inflation, which one day creates an affordability problem. People simply can't afford to buy the assets. In Hong Kong after 1997, assets inflated and consumption declined despite falling interest rates.
It would be very wrong to think this illusionary wealth creation, which stems from debt expansion leading to asset inflation, will continue forever. And by the way, the American consumer is very important, but he's not the only consumer in the world. In terms of luxury goods, Asia ex Japan accounts for 11% of Gucci's global sales. Japan accounts for 20%, while the Americas account for 21%. In the case of Hermes, Asia ex Japan accounts for 16%, Japan for 30% and the Americas for only 14%.
Faber: We shouldn't look only at the quantity of the expansion but at the quality of the expansion. Asset inflation has driven financial earnings up. Also, in the early 1980s, the manufacturing sector earned five times more than the retail sector. Now retailing earns about as much as manufacturing in the U.S. But retailing is not a long-term driver of economic growth or a value creator. It's just consumption, and countries don't become rich from consumption. They become rich from investment.
Faber: It's quite possible earnings are down in 2005. Add wage pressures and inflationary pressures, and bingo! you have down profits.
Faber: In 2004 the Dow Jones Industrial Average was down 4.51% in euros. The S&P 500 was up 8.99% in dollars, but just 0.9% in euros. What will the U.S. do this year in euros? That is the question. If the dollar strengthens, as I believe, U.S. stocks will go down. If the Fed decides to reverse itself and ease again, the market might rise in dollar terms but will fall against hard currencies. My strategy is to short some U.S. stocks and be long other markets in the world. Last year Middle Eastern and some African markets, even Asia and Japan, had fantastic performances. The Nikkei was up 21% in euros. Indonesia was up 21%. Thailand didn't perform well, but the other Asian markets did.
All asset prices are expensive. Bonds are not a great value, nor are industrial commodities. A friend of mine in Switzerland just sold a house for $25 million that was bought for $1 million or less in the 1970s. That reflects a loss of the purchasing power of money. Still, Asia has undervalued currencies, undervalued asset prices and relatively low stock prices compared with the U.S. I would be long Asia and short the U.S.
Q: Marc, your 2004 picks were terrific, too, except for your recommendation to short the U.S. homebuilders. Faber: Last summer the stocks went down. I had picked Centex, Hovnanian, Toll Brothers and Lennar, and I covered my shorts. I haven't re-shorted them, but I want to. That's a short for this year.
We live in a world where huge changes are taking place. The inclusion of so many countries in the European Union has meant huge gains for asset and real-estate values in Eastern Europe. In the past two years stock markets in Ukraine, Romania, Bulgaria, Poland and the Czech Republic all went through the roof. But there are still some values, such as Istanbul real estate. This fabulous city will grow a lot and join Europe eventually. In western Europe there is one city with inexpensive properties. That's Berlin.
Zulauf: But it's completely overbuilt.
Faber: That's my point. You buy real-estate markets when they are totally overbuilt, not when there is a shortage of property and prices are in the sky. Looking at Asia, China has a propensity to import from other countries. Hu Jintao, the president, has traveled extensively. He has been to Africa and Latin America. China has an opportunity to develop a relationship with Africa, which has natural resources, land and agricultural products. China has consumer goods, and can dispatch millions of Chinese to build bridges and infrastructure. The Chinese already control the economies of the Philippines, Indonesia, Malaysia. They option almost 10% of their oil supplies from Sudan. They built a pipeline between central Asia and China, connecting in Iran. A lot of oil will be shipped through pipelines.
A year ago we recommended industrial commodities, chiefly oil, based on rising demand in Asia. Demand will continue to expand. India is a country people don't talk about much, but this is the next big thing. Because of new technologies, we can ship more and more high-value services to low-cost countries. The world will end up with its call centers in Western Europe and the U.S. and research and development in India and China.
Schafer: India already has huge drug-industry R&D and many Ph.D.s.
Faber: Many new jobs in Asia pay above average. That pushes up per-capita income and leads to an emerging middle class and an emerging class of rich people. There is a transfer of wealth each time capital spending and industrial production move to Asia, because along with them go knowledge and technology. That boosts incomes in Asia, to the detriment of the U.S. and also Western Europe.
Gabelli: But the whole world grows as a result.
Faber: Yes, but which asset classes will go up the most if we have a global boom, and which will go down the least if we have a global bust? I would rather invest in Asian assets that are relatively inexpensive than in expensive assets represented by the S&P 500 and the financial markets of Western Europe. In Asia most countries have trade and current-account surpluses. Corporations have paid back debt, and currencies and financial markets are significantly lower than they were in the early 1990s. If the Dow Jones Industrial Average were lower today than in 1990, it would be priced at 2400. In dollar terms, many Asian stocks trade for 10 to 12 times earnings and yield around 5%.
The most overlooked asset class is Indian real estate because it is so difficult to develop, given the regulatory environment. The world still has lots of opportunities, and real estate in some unusual areas is an attractive proposition.
Q: What about commodities?
Faber: They are attractive over the long term, but some commodities, especially industrial commodities, might have peaked for now. The same with soybeans. Perhaps the most interesting thing about rising commodity prices is this: When commodity prices go up, international tensions increase. If America or Israel bomb Iran, you can be sure the Chinese won't be pleased if they have large oil contracts with the Iranians. China must assure itself of sufficient supplies of resources, not only oil. It is now the largest user of copper and by far the largest user of iron ore. The big question today is whether the Chinese economy is slowing down. The growth in industrial production went from 21% a year to 15% a year. But it would be most unusual, in an economy growing as rapidly as China's, not to have a hard landing from time to time. Also, some industries have huge overcapacity and inventory overhangs. In air-conditioning, inventory levels are up to nine million units unsold from a previous two million. In the long run, China easily could grow by 6% to 8% a year, which still is huge. India could grow by 6% a year, Vietnam by 6% to 8%.
Q: What about in the short run?
Faber: If the Chinese economy slows more than is generally perceived and if the dollar strengthens somewhat, I'd short all industrial commodities for the next six months. The price of gold is still inexpensive long term. If you compare gold to oil, gold is undervalued. If you compare it to the S&P, gold is significantly inexpensive. As for stocks, I am long Asian stocks that pay relatively high dividends. Last year I recommended Bangkok Dusit Medical Services, a hospital-management company that owns hospitals in Thailand. The market cap is around $400 million.
Q: The stock went up 136% through December. Faber: The company is consolidating other hospitals, and earnings this year will rise significantly. The stock trades for 10 times expected earnings of 1.67 baht, or four cents a share, and yields about 5%. Similar companies in Singapore sell for more than 20 times earnings, and a good Indian chain, Apollo Hospitals, sells for more than 30 times earnings. Health-care costs in all of Asia are low, so people can afford to go to the hospital. Also, foreigners are going to Asian hospitals to be treated because the cost is 80% lower than in the U.S. or in Switzerland. The Thai stock market was strong in 2003, but last year it was disappointing. Thai Reinsurance has been weak because of the tsunami. The stock sells for 4.10 baht, or 10 cents, which is about 10 times earnings. It has an 8% yield and a market cap of around $120 million. It's a well-run company.
Schafer: Is the dividend secure?
Faber: Yes. The stock might be down a little but you'll get your 8%. Last year I also recommended sugar, coffee and orange juice. Coffee and sugar went up by 59% and orange juice by 41%. Coffee still is attractive, though I wouldn't buy it. Other commodities went down: soybeans by 30%, corn by 16%, wheat by 18% and cotton by 40%. I would buy corn here. All you need is a little bad weather and crop prices could be much, much higher. The South African rand collapsed between 1998 and 2001. In '98 $1 equaled 6 rand; in 2001 $1 equaled 14 rand. Then when commodities prices began to take off and South African interest rates started rising, the rand strengthened again. Now it's back to 6 per dollar. At this exchange rate, however, South African industry is basically bankrupt. It can't compete against China. If you believe the dollar can rebound, you should short the rand, which easily could weaken to 7 or 8 to the dollar. I also recommend shorting the pound sterling. I like the dollar for the next six months, though long term it's difficult to like the dollar. |
