marc faber stompin' some bools again ...
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
AI
