The Daily Reckoning
Boston, Massachusetts
Wednesday, July 14, 2004
Bastille Day
The Daily Reckoning PRESENTS: When we last saw Dr. Marc
Faber, he was sitting on Barron's roundtable, the bi-annual
gathering of the world's top investment minds. Today, he
tells us where to put our money...
AN EVENTUAL INEVITABLE CRISIS
by Marc Faber
Whereas the bulls are convinced that the market will rise
strongly for the rest of the year on the back of what they
perceive to be "great economic news", the bears feel that
the market is on the edge of a collapse.
There is a third possibility, which would be particularly
unfavorable for the hedge fund industry. The markets could
enter a long and tedious trading range. I am leaning
towards the view that, for most markets, including
developed and emerging stock markets, as well as for bonds
and commodities, we saw the highs for this year in the
January to March period.
From here on, I think that additional gains will be minimal
and that the rewards will not compare favorably to the
eventual downside risk. But, as was the case in Asia where
most markets peaked out between 1990 and 1994, and were
then followed by a trading range with a downward bias until
the real collapse occurred in 1997/98 (a full seven years
after most markets had topped out, and the final collapse
manifesting itself in a devastating asset and currency
slump), it is also possible that U.S. asset prices (homes
and stocks) can continue to hold on to their gains for some
time. It's even possible that they make marginal new highs
given the monetary conditions currently in place and the
willingness of the U.S. monetary authorities to take
extraordinary measures to prevent asset deflation from
spreading.
Still, I believe that, as John MacKay stated, "legislators
are as powerless to abrogate moral and economic laws as
they are to abrogate physical laws". Therefore, I am
convinced that only a very serious crisis can correct some
of the blatant imbalances that our global economic system
has created. In other words, what we are dealing with at
present is a battle between the economic policymakers and
the "market." Guess which side I would bet on in the final
battle!
So, at the very least, investors should gradually take out
some insurance against what, in my opinion, is an eventual
inevitable crisis, by being well diversified in every
aspect of the investment universe.
The reason I am advocating diversification is that when
quoting Leo Tolstoy's description of the situation in
Moscow when Napoleon reached the outskirts of the city,
both inflationists and deflationists were right at the same
time. Naturally, I am leaning towards an overweight
position in hard assets over paper money and financial
assets, knowing full well that, in a crisis, hard assets
might also decline in value (except possibly for gold and
other precious metals), but likely less so than financial
assets.
Being diversified in terms of the "investment universe"
also means holding assets in different jurisdictions. I
have repeatedly advised our American readers to hold
accounts outside the U.S. I am well aware that this has
become increasingly difficult, and, under pressure from the
U.S. authorities, some Swiss banks are extremely reluctant
to accept such accounts. (If they do accept such accounts,
they must not give U.S. residents advice by telephone, fax
or e-mail; therefore, almost full discretion or periodic
visits may be advisable.)
Singapore is, however, a viable and safe alternative to
Switzerland. Still, the fact that the U.S. authorities have
made the opening of overseas accounts so difficult should
serve as a warning signal of things to come - that is,
foreign exchange controls.
In terms of financial assets, I would overweight Asian
equities, due to their lower valuations when compared to
U.S. equities and the relatively favorable macroeconomic
conditions in Asia (current account surpluses and
undervalued currencies).
But, as I have pointed out before, whereas Asia may
eventually de-couple economically from the U.S. business
cycle, there is still a very close financial connectivity
in place, with the result that at present the Asian markets
track the movement of the S&P rather closely. Moreover, the
overheated Chinese economy will have to slow down
considerably at some point and could lead to some
disappointments among the perennially bullish Asian
investors.
In terms of commodities, I would be careful about buying
markets where there are large speculative positions
outstanding. In a recent issue of the outstanding Global
Equity Strategist report, James Montien of Dresdner
Kleinwort Wasserstein argues that "despite the talk of
unwinding of the global reflation trade, we have only seen
the tip of the iceberg", and that "outstanding positions
and leverage remain enormous." Montien warns that, "when
these trades finally snap, the devastation is unlikely to
go unnoticed", and that "oil looks like it might become the
next 'China'". I concur with James Montien's views and I am
now also concerned that, despite long-term favorable
fundamentals, the oil market could, in the near term, sell-
off quite badly.
The only commodities I still like are coffee, which has
recently broken out on the upside, sugar and orange juice,
which is extremely depressed. In particular, sugar and
orange juice would seem to offer a favorable ratio between
potential returns and risks.
Finally, every investor should consider that, the longer
the monetary- and credit-driven speculative party lasts,
the worse the eventual outcome will have to be. So, the
higher the markets soar and the more speculative they
become, the more precautions will be advisable.
Regards,
Marc Faber
for The Daily Reckoning
Editor's note: Dr. Marc Faber is the editor of The Gloom,
Boom and Doom Report. Headquartered in Hong Kong for 20
years and now based in northern Thailand, Dr. Faber has
specialized in Asian markets and advised major clients
seeking down-and-out bargains with deep hidden value,
unknown to the average investing public.