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Strategies & Market Trends : The Epic American Credit and Bond Bubble Laboratory -- Ignore unavailable to you. Want to Upgrade?

To: dara who wrote (69821)	9/17/2006 12:11:36 PM
From: redfrecknj	Respond to of 110194

Lee Lichterman at Marketswing has an excellent synopsis: "Faber 45 minute presentation notes... Pointed out size of China and how it is land locked with many neighbors vs USA . China has many hostile neighbors to contend with (Japan, Russia and US bases overseas etc) vs USA only has Canada and Mexico making policy easier. Pointed out that USA is 40% self efficient on oil vs Japan and China who are #1 and #2 for oil import needs. Pointed out that who ever controls Taiwan controls the oil imports for both China and Japan which is why we are hearing so much about Taiwan over the last few years. USA siding with Japan has forced China to seek alliances with Russia. Kazakstan and other former Soviet Asian countries are allying with China as well and if a coalition is made with Iran as well, though they are still in early stages, China dn this alliance could control 40% of world’s population and much of the oil supply. China and Africa are almost natural allies and are becoming close friends. Africa has raw resources and no manufacturing, China has few resources and most of the world’s manufacturing thus they fit together well, especially now that USA has pissed off just about the whole world. Pointed out that prices in commodities are showing short supply. Almost all wars in history were due to commodity stress and thinks we may see it again, not immediately but someday in the not too distant future. Pointed out from Napoleon to modern day war started over commodities and then commodity prices went even higher once shooting started. Moved on to Fed policy and US Debt... Fed was worried about Deflation during 70% NASDAQ crash. They got easy and created monetary overhang and though have tightened recently, fed policy is still too loose. As seen on chart I can’t copy, from 1950 to 1980 GDP and debt grew at same rate. From 1980 onward, debt to GDP ratio grew from 120% to over 300%. 2000 to 2005 debt grew 12 trillion dollars but GDP grew only 2.1 trillion thus we have a 600% debt to GDP ratio. Based on current debt levels, the system should be collapsing. This leaves Fed no choice but to print and print and print to keep the system running and prevent collapse. The problem is that they can not control where all this money flows. Pointed out much of this went to Real Estate borrowing bubble, pointed out real estate to asset ratio is at all time high. These people then created even more debt by mortgage extraction and fueled spending. Recently prices have stagnated but home extraction is still going on to some degree despite refinance index being down. As long as either housing gains can be extracted, stocks go up or some other asset class can be played, people have no incentive to save. The asset gains have kept savings low and consumption high. Eventually pipers will have to be paid. Median households have seen no wage gains in real terms especially when gauged with prices of necessities. Most typical people are worse off that in the 1990s. On to trade balance..... It is not just a trade deficit with China but with everyone in the world. Net asset balance for USA vs overseas was positive for USA until 1987. This measures assets owned by US overseas vs others having here. USA has 10 trillion overseas but overseas owns 12 trillion of assets in the US. This change was gradual up until 2000. It has spiked upward since and is getting worse fast due to Fed monetary expansion policy. This is a HUGE shift in wealth and the dollar should show this eventually. The more the Fed prints, the worse it will get and more of our wealth will be shifted overseas. This is not a short term view and investments can move one way or the other but long term, USA investment should underperform overseas investments. On to China..... Everyone thinks that the USA is the engine of consumption for the world. China has a huge deflation engine going. In the past, things were too expensive for most Chinese to own. When car prices deflated from $12K to only $3000.00, more Chinese could afford them. 84% of all car buyers in China are first time car buyers. This is happening in all assets, TVs, stereos, etc. If we measured the economy on goods sold and not dollar value of goods, then China would represent 60% of all assets purchased n the world. The per capita consumption of goods in China is lower than the USA and so is India. However this huge expansion going on that involves Billions of people will change the world. Per capita consumption of oil is very low but is changing rapidly. India has 1 billion people. but only uses.8 barrels of oil per person and China with 3.8 Billion people only 1.8 barrels per person. In the USA we only have 300 million people, we went from 1 barrel per person to 27 barrels a person during our boom. In Japan, they went from 1 barrel per person to 17 barrels per person during their boom. Imagine in the future if China and/or India reach any where close to the USA consumption rate now that they are starting their boom period of industrialization and middle class growth that will start driving and consuming plastics etc. Even with replacement to other energy source, the simple numbers of people will ensure oil prices will be higher and this is not a business cycle but a price cycle. There just isn’t enough oil to do this. He says we will likely see a 30-60 year commodity bull market. We are at the beginning of this cycle and will see corrections but long term, the commodity bull will run longer than most think. Copper could drop back to $2 a pound but in general, prices will hit new higher highs. Coming from such low levels in 2000, prices could get very very high. In the previous commodity bulls, prices corrected 70% but then went to new highs. Same with Stocks as seen in the 1987 crash but new highs from there. We will have sector rotation in commodities just like we have sector rotation in stocks. We haven’t seen price run ups in Agricultural commodities yet and he also still likes gold. Interesting chart showed that oil prices match yields... until now. With oil prices up, he thinks yields will go up as well. With oil demand rising in China, oil prices will rise as well, especially if India increases demand as well. He thinks Bernanke will be printing money, commodity prices will rise and that yields will skyrocket. He said to buy a bond and put it on the wall for your kids to show how the dollar lost its value and bonds can become worthless. He thinks Bond market is wrong and commodity market is right. He thinks we will have a different kind of bear market than most expect. He is not looking for 70% correction like 1929 but pointed out that there are two other types of bear markets. One is like the 1960s that goes sideways where you lose in real terms but in nominal terms is flat. We could also have an upward market in nominal terms as Bernanke prints money like crazy. This will make the stock market look like it is going up but in real terms, it will be dropping. He pointed out the DOW Jones priced in Gold and how it shows we have been dropping despite higher levels in dollar terms. He said we could have a DOW that makes new highs but Gold would be 10 times higher along with other commodity prices. Most will think things are going well as they see the DOW making new highs but will be losing in real terms (inflation adjusted for newbies). He said if the DOW goes to 36000 then gold will be at $5000 an ounce. He ended by paraphrasing that China and INdia are shifting the demand supply curve to the right and that Bernanke stating he will do extraordinary measures like dropping money from helicopters will change the future. Commodities are the way to deal with this. This started the Q&A portion of the presentation. Q - What is the impact of China having a trillion dollars in foreign exchange reserves from their trade surplus? A - He thought that China has made a mistake in accumulating so many US dollars. He did give them credit for not dumping gold at the bottom like the Europeans did however. They are doing better as they accumulate hard assets , concessions around the world and thinks they will add more gold in their reserves over time. Q – All commodities fell below 200 DMA recently like a hot knife through butter. In the past, they approached 50 DMA or 200 DMA but bounced back. Any comments? A – Some commodities may peak out like many items in any bull market before other items. IN previous commodity bull market, corn and Wheat peaked out in 1973 while others didn’t top until 1977 and gold in 1980. Right now he likes Gold and Silver better than industrial commodities. He doesn’t think there will be a global recession but we may have a overall slowdown that could impact industrial production. If this happens, most currencies are paper money so he likes hard money if the world leaders decide to print to fight the slowdown. I couldn’t copy all the charts and I may have missed some stuff because I don’t type so fast but hopes this helps those that couldn’t listen". marketswing.com