six prediction of marc faber

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    "The future belongs to physical assets"

    If you think the stock boom is the best thing going, think again. Dr
    Marc Faber, a close watcher of business cycles and long-term asset
    price bubbles, thinks financial assets may do less well than
    commodites in the not-too-distant future.

    N Mahalakshmi in Mumbai
    Published : September 29, 2003

    He is a congenital contrarian. When the markets yell boom, he looks
    for the seeds of doom. His big claim to fame was predicting the
    Asian crisis of 1997 and the tech bust of 2000.

    He makes his predictions looking through a rearview telescope, by
    studying market behaviour and business cycles over the past.

    Meet Dr Marc Faber, 57, economic historian, former managing director
    of Drexel Burnham Lambert (HK), and author of a dramatically-titled
    monthly investment newsletter called The Gloom, Boom & Doom Report -
    named after the market's tendency to oscillate between irrational
    exuberance and extreme pessimism.

    Says Dr Doom: "Once a major investment theme goes ballistic (gold in
    the late 1970s, the Japanese stock market in the late 1980s and
    Nasdaq in March 2000), and then ends with a severe bust, the
    leadership always changes, as investors finally shift to new sectors."
    It is this premise on which Marc Faber's predictions are built. So
    what is he gloomy, bullish or bearish about now? He is extremely
    bullish on Asia over the long term, primarily on account of the
    enormous potential of the Chinese economy (and India).

    But his contrarian nature assets itself, and he says that since the
    whole world is looking at Asian markets favourably, there could be
    reason to worry.

    Asian economies: A snapshot

    The real surprise among his predictions is the asset class he advocates.
    Even though stocks remain the most glamorous asset class to talk
    about, Faber predicts that real money is not going to be made in the
    stock markets, but elsewhere. He is bullish on commodities,
    including gold, silver and oil, among others.

    The main reason for the assessment: As more and more money chases a
    limited amount of commodities, their prices will have to rise. The
    almost unlimited printing of money by central banks, particularly
    the US Federal Reserve, will make financial assets lose sheen
    compared to hard assets, he believes.

    The following is a synthesis of an exclusive interview Faber gave to
    The Smart Investor, with insights added from his latest book
    Tomorrow's Gold.

    Hard assets will do better than financial assets
    According to Faber, it is difficult to find stocks around the world
    that look cheap or which could go up 10 times.

    In the mid-1980s in Asia, when the markets were lying low and shares
    were selling at five times earnings and yielding seven to eight per
    cent, stocks were incredibly cheap.

    Ditto with Latin America in the late 1980s, when markets were
    depressed because of hyper-inflation, causing an erosion in the
    value of the currency. One could then buy the entire stock market in
    Argentina for $700 million.

    "That I don't see anywhere in the world. There is too much liquidity
    sloshing around the world and there are too many treasure pumpers,
    looking for stocks to buy."

    On the other hand, all commodities, including gold and silver, are
    poised for a secular bull run driven by increased consumption demand
    from the Asian region, particularly from China and India.

    Favourable demand - resulting from an increase in per capita
    consumption in Asian economies, particularly heavily populated
    countries like China and India - and the prevailing low prices of
    commodities set the stage for a secular rise in commodity prices.

    Global economic recovery and the depreciation of financial assets
    due to excessive printing of money will make commodities appreciate
    in relative terms. Besides, real estate also throws some good
    investment opportunities, says Faber.

    COMMODITIES: Never before in the history of capitalism have
    commodities been as inexpensive compared to the consumer price index
    or to financial assets than they are now after a 20- to 30-year bear
    market, says Faber in his book.

    Some may disagree, but Faber says that all commodity bull markets
    start with a low that was put in place by oversupply. The present-
    day glut in many commodities will one day be replaced by tight
    supply or a sharply falling US dollar could lead to a rise in
    commodity prices.

    Today's situation is very similar to what happened in 1969-70, the
    eve of one of the greatest commodity booms.


    Then too commodity prices were very depressed compared to equities,
    and experts argued that crude oil prices, which then hovered around
    $1.70 a barrel, would fall to less than $1 in the 1970s because the
    market was so glutted.
    No one could, at that time, imagine that oil prices would approach
    $50 a barrel on the spot market in 1980, and that gold and silver
    would rise more than 20 times over a decade.

    While there may not be a repeat of the 1970s, commodity prices today
    are even lower than they were in the beginning of the 1970s.

    So if there should be, as the optimists claim, a synchronised
    economic recovery, then in all likelihood commodity prices will
    increase sharply - primarily for industrial commodities which are
    extremely depressed, and where inventory levels are rather low - as
    in copper, lead, aluminium, tin, zinc and nickel.

    For individual investors, the way to participate in the coming
    commodities bull market is to buy commodity futures and roll them
    over periodically.

    Apart from gold and silver, which are at the beginning of a long-
    term bull market, there may be better intermediate opportunities in
    commodities that are far more depressed such as coffee, sugar,
    rubber, wheat, corn and cotton, says Faber in his book.

    Also, the performance of the emerging markets has a strong
    correlation with the performance of the US Commodity Research Bureau Index.

    Rising commodity prices have always been favourable for emerging
    markets, while declining prices have led to economic problems and
    poor performances.

    Thus, if commodity prices are at the beginning of a multi-year rise,
    then investors should be overweight in emerging markets -
    particularly the resource-rich ones, he explains.

    GOLD: According to Faber, the demand for gold will be driven by
    higher demand for jewellery as countries become more prosperous and
    people start purchasing more gold.

    Also, he points out that some investors look at gold as an insurance
    against stocks (or defensives). So gold actually performs better
    when stocks crash.

    In 2001, gold bottomed out as low as $258 and started to move up
    because some smart people realised that there was more money chasing
    every ounce of gold than before.

    "The gold market is perhaps smelling now that it is not deflation,
    but inflation that will come in the US next," says Faber. Currently,
    gold is ruling at a seven-year high.

    REAL ESTATE: The best environment for the housing market would be a
    weak economy and a poorly performing stock market that would keep
    interest rates low or even lead to further declines. People can then
    shift money out of poorly performing equities into property.

    However, the humongous increase in US mortgage debt for residential
    real estate and the fact that a weak economy would finally take a
    toll on personal income gains and employment could ultimately lead
    to fall in property prices.

    As Faber has elaborated in his book, in a number of Asian emerging
    economies, property prices tumbled after the Asian crisis as a
    result of collapsing demand, repossessions and currency depreciation.

    Prices then stabilised in 1998 and 1999 and, more recently, have begun to rise.

    Therefore, with prices for luxury condominiums in cities such as
    Kuala Lumpur, Jakarta, Manila and Bangkok hovering between US$1,000
    and US$1,500 per square metre, the Asian property markets would seem
    to offer both relatively high current rental yields as well as the
    potential for future capital gains.

    The world is experiencing a colossal change in economic geography.
    Cities like Shanghai, Beijing, Moscow, Ho Chi Minh, Bangalore and so
    on are developing very quickly and becoming far more important
    economically and, therefore, real estate prices will rise there in the long term.

    Conversely, cities like Hong Kong, that thrived as long as China and
    Russia remained closed societies, because they served as trading and
    financial intermediaries, will underperform.

    Faber believes that US residential real estate will not be the next
    major investment theme whereas property prices in some emerging
    markets such as in Asia, Eastern Europe, Russia and even Latin
    America, could yield very high returns in the next five to ten

    Asia will beat all other regions
    According to Faber, after 1997 all Asian markets have actually been
    quite a disaster.

    As a result, they have become quite undervalued in the period 1998-
    2002. "Now, they have built the base from where bull markets may start," he says.

    In the last two years, international investors have purchased a
    record amount of US assets in the form of direct investment and
    portfolio flows.

    Recently, this has subsided somewhat. So money flowing to the US
    will be invested elsewhere. Undoubtedly, some will find its way into
    Europe and Japan, but the valuations of equities are so much lower
    in emerging economies that some will also flow into this asset

    Whereas the earnings picture in the US is still very murky, in
    emerging markets the corporate earnings cycle is improving, driven
    less by exports than domestic demand.

    The latter is driven by excess liquidity, accumulated savings not
    being spent, and the emergence of a rapidly expanding consumer
    credit market (as in India), says Faber in his book.

    A better pricing environment for commodities and commodity-related
    products seems to be underway. Faber favours emerging markets that
    will benefit from a pick-up in commodity prices, including Russia,
    Indonesia, Malaysia, Thailand and the Philippines.

    According to Faber, emerging market economies today are the lowest
    cost producers in practically every sector of the global economy.

    Oil and gas in West Asia, minerals in Russia and South Africa,
    software in India, electronics in China, textiles in Bangladesh,
    shoes and coffee in Vietnam, steel in Brazil, pulp and paper in
    Indonesia and healthcare, entertainment and cosmetic surgery in
    Thailand - all can be produced or provided in these countries far
    cheaper than anywhere else.

    The point is that the more the economic climate deteriorates around
    the world, the more likely it is that the lowest-cost producers will
    perform relatively well, as they will be the last to go out of business.

    The only caveat to this statement is obviously that this will only
    be true as long as global trade doesn't collapse under new-found
    American protectionism!

    Besides, Faber says that most emerging economies have made
    substantial progress in terms of infrastructure, modern business
    methods have proliferated, management has improved and standards of
    living have in many instances leapt forward.

    Till now the Asian economies have depended heavily on the US for
    both exports and FDI. Going forward, Asia will be much more
    integrated into the Chinese economy.

    The Chinese economy will be rather favourable for the entire region,
    as each country will increasingly benefit from its competitive

    "Over the long-term some sectors like manufacturing will remain a
    growth sector and will continue to squeeze out other manufacturers
    around the world, particularly in the western world. If I look
    forward to the next 10 years, Asian assets will appreciate either
    through currency appreciation or through appreciation of stock
    markets or a combination thereof," says Faber.

    However, he is pessimistic about Asia, particularly on the Chinese
    economy in the near-term.

    "While most analysts and fund managers are wildly optimistic on
    Asia, I expect a correction in the financial markets now."

    Investors should not invest in China right now, as it is very
    difficult to make money. "As an investor it is very disturbing for
    me that China is written about in every magazine and the whole world
    is only thinking about how to participate in China in terms of
    investments when foreign direct investments are at such a high
    level. I would rather invest currently in an economy when there is
    no FDI and has just started rising," says Faber.

    His main principle is to invest in the phase zero or phase one of an
    emerging economy and not phase three - where everyone is joining the

    "The Chinese economy will have some problem next year as industrial
    production growth slows down and some sectors have overheated. What
    disturbs me about China is that we always have to distinguish
    between economic development, short-term development, long-term
    development and financial markets development. Near term I am not
    very optimistic about the Chinese economy."

    According to Faber, between 1800 and 1915 America had 15 economic
    and financial crises and a civil war.

    Yet the country did exceedingly well and became the largest power in
    the industrial world in the early part of the 20th century.

    But in a rapidly growing economy there will always be excursions
    into prosperity and excursions into depression. So it is natural
    that one day China will have a setback, Faber explains.

    India will outperform on a relative basis
    Faber says he is reasonably positive specifically on India primarily
    because of the outsourcing opportunity.

    Faber explains: In the next 10 years on a relative basis India could
    do well simply because the hollowing out of the manufacturing sector
    in the west has already occurred, first through Japan, then through
    South Korea and Taiwan and over the last 10 years through China.

    Manufacturing employment has already shrunk dramatically in the US
    as a percentage of total employment (15 million out of 285 million
    people). The service sector is larger. Due to new technology, many
    more services have become tradable services than ever before.

    So, the outsourcing process is still in its infancy and that is the
    next big shift. Lots of services can be transferred to lower cost
    countries like India which have a very large educated population.

    Faber is primarily bullish on the Indian technology and
    pharmaceutical sector. Besides, he believes that India is globally
    competitive in some manufacturing sectors as well. India may not be
    clubbed with South East Asian countries which are losing marketshare to China.

    Going forward, India's tourism sector could also see robust growth
    if the airports are restructured and bureaucratic hassels are done
    away with, especially for tourist visas.

    On equity valuations, Faber says, "Even the Indian markets have
    lagged behind in dollar terms, taking into consideration the decline
    of the stock market from its high and the depreciation of the rupee.
    I am positive about India."

    The dollar is doomed
    The US dollar, which is now almost as overvalued as it was in the
    mid-1980s, is likely to have started a multi-year bear market.

    However, this bear market is unlikely to be as dramatic as the
    1970s - when the dollar fell by almost 70 per cent against European
    hard currencies - as neither Europe nor Japan nor any emerging
    economy would wish to have their currency appreciate by much more
    than another 10-15 per cent against the US dollar.

    Therefore, the most likely scenario will be that all currencies will
    depreciate against a basket of commodities, including gold and silver.

    "We could see an environment one day when the central banks will say
    we are uncomfortable holding so much dollar assets - so they will
    either repatriate, or let their currencies appreciate," says Faber.

    The Asian and US markets will decouple
    Will Asian markets sink if the US economy and markets do not perform
    well as it happened in 1994(when there was a mass outflow of funds
    away from Asia on account of redemption pressures faced by US
    funds)? Or is there a possibility of emerging markets tanking in
    case American markets do not fare well?

    Perhaps not. Faber believes that the stock market correlation
    between the US and Asia is more a near-term correlation than a long-term correlation.

    If you look at America in 1990 and now it is up about six times in
    terms of the S&P index and about four times on the Dow Jones and
    more on the Nasdaq Composite.

    In the same time, the Japanese market was down 70 per cent. In the
    long run, thus, there was no correlation at all as emerging markets
    went down and were a poorly performing asset class. "So, going
    forward, too, decoupling is a possibility," says Faber.

    Currency appreciation will not affect competitiveness
    Faber does not believe that the weakening of the dollar against
    Asian currencies will affect the latter's competitiveness in any significant way.

    "Strong economies have strong currencies. If a weak currency were of
    any help, Latin America would have the richest currency in the world," he says.

    The cost difference between Indian IT and Chinese manufacturing
    compared to America is so huge that the Indian rupee would have to
    go up four times to make a difference to competitiveness, he explains.

    And in the meantime, Indian companies would become more efficient as
    an appreciating currency will force them to do better. Having said
    that, Faber believes that a currency appreciation in Asian countries
    will not happen unilaterally for any country but for the region as whole.


    Hard assets will outperform financial assets
    Asian economies will do better than the western world, including the United States
    Chinese economy will see a correction in the near-term
    Oil prices will rise in the long-term driven by an increase in
    consumption in Asia, particularly China
    Gold prices will rise driven by an increase in jewellery consumption
    and investors switching from financial assets
    Dollar will lose in value while Asian currencies will appreciate relative to the dollar
    US and Asian markets will see decoupling
    Indian information technology and pharma sectors will do well
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