Marc Faber: India rather than the USA

Here is a quote from Marc Faber and a bit of bio info, extracted from INR News:

"If a gun were put to my head and I was asked to choose between two options - putting all my assets into the US or into India - I would choose Indian equities, Indian real estate, and Indian art. The reason behind this choice is partly my strong conviction that US assets will continue to decline relative to assets overseas, and partly because I can see that India may be at the beginning of a lasting economic take-off phase" ...

...From 1978 to February 1990, Marc Faber was the Managing Director of Drexel Burnham Lambert (HK) Ltd. In June 1990, he set up his own business, MARC FABER LIMITED which acts as an investment advisor and fund manager.(Marc Faber - A Simpleton's Guide to Economics and Investment Markets, part II )

By INRnews Correspondent

Dr Faber's comments on Indian urbanisation, the need for new infrastructure, and comparison with China, are also very interesting.

Weathering the storm

The bankers have shown their hand - they fear deflation more than inflation. Pumping-in cash and cutting rates will keep us going through the economic squalls that they created by the same lax monetary policy. If you believe the monetarists, there will be a price to pay, but as long as this crisis management succeeds, the damage will be insidious rather than cataclysmic: money will slowly rot.

Now that we know the opposition's strategy, what do we do? My guess is, hold cash, wait for further crises of confidence, and buy tangible assets, or assets backed by tangibles, at bargain prices.

That's why I think Buffett and Soros have been so clever in acquiring more rail stock in recent months. Railways are a natural Benjamin Graham choice: mature, income-producing investments. There are big barriers to entry - think of nineteenth-century land speculation and skulduggery, and add-in eco protests, modern politics and the unavailability of coolie labour. Rail has advantages over road, especially as so much freight now is containerised and port-to-city; but from an investor's perspective it is also solidly thing-based.

Other experts are into tangibles also. For example, Marc Faber likes real estate in emerging economies - and possibly in depressed areas of developed countries, and Bill Bonner has farmland in Argentina (the Chinese love beef). And then there's various types of commodity.

I think we'll be back to putting money into things we can understand.

Following the markets today

As I hoped and more than half expected, the major Western markets are recovering from some of their fright. The FTSE has passed 6,000 again and at the time of writing, the Dow is back above 13,000. Those chest pains will eventually be laughed off as a bout of indigestion, and it'll be back to the fags and booze after a while.

The subprime mess was well-telegraphed, if ignored by many, and although we still don't know the full cost, it seems that yet again, the central banks are willing to pump money into the system, rather than reform it. Marc Faber's view that the crisis should be allowed to burn through and eliminate some of the players, is too gritty for the banking establishment.

My take on this is that it's an opportunity for those still in the market to quietly come out without panicking everybody else. The rise of the dollar and the temporary sharp falls in precious metals, are reminders that in a crisis, cash is king; though given Ben Bernanke's statement about dropping dollars from helicopters, maybe king for a day.

Risk avoidance leads to stronger dollar

That's the analysis of Kathy Lien at DailyFX.com yesterday:

These days, cash is a valuable commodity since a liquidity crisis means a lack of cash. The sharpness of recent moves and the lack of liquidity have probably pushed more traders to liquidate positions than to add funds. Flight to safety continues to send the dollar higher against every major currency with the exception of the Japanese Yen as more victims of the subprime and liquidity crisis surface.

There's a possibility of an interest rate reduction:

...the biggest question on everyone’s mind is when the Federal Reserve will cut interest rates. The market is current pricing 75bp of easing by the end of the year. There has also been speculation of an intermeeting rate cut.

But:

Like many central banks around the world, the Fed has been reluctant to lower rates because they feel that the markets need to be punished for their excessive risk appetite. Furthermore, they have said that they need to see market volatility have a “real impact” on the economy.

This, she thinks, is becoming apparent:

With major losses and bankruptcies reported throughout the financial sector, we expect companies to layoff staff left and right. [...] For the people in the “real economy,” their 401ks have taken a harsh beating while their mortgage interest payments are on the rise. It is only a matter of time when we see economics reflect that. The bad news is already pouring in with housing starts hitting a 10 year low and manufacturing activity in the Philadelphia region stagnating. Since the beginning of the year, the weak dollar has provided a big boom to the manufacturing sector. Now that the dollar has strengthened significantly, activity in the manufacturing sector should also begin to slow.

US economy over-dependent on housing sector

The Daily Reckoning Australia summarises Dr Kurt Richebacher's analysis: the US economy depends on the housing sector to a dangerous degree, so even a stall in housing will have a big effect.

"...property bubbles have historically been the regular main causes of major financial crises. During its bubble years in the late 1980s, Japan had rampant bubbles in both stocks and property. While the focus is always on the more spectacular equity bubble, hindsight leaves no doubt that the following economic disaster was mainly rooted in the property bubble. Both bubbles burst in the end, but the property deflation has continued for 13 years now, with calamitous effects on the banking system."

I suspect we have a similar problem here in the UK.

Here is tomorrow's news

An online newspaper from the Northern Marianas (south-east from Japan), dated Friday, gives some quotes from Peter Schiff, including this startling (and measurable) one:

"People call us the biggest economy in the world but it’s false, we’ll be lucky to be in the top 20 in two years’ time."

According to the World Bank and ranked by 2006 GDP, the 20th country is Switzerland; by purchasing power parity, it's Iran; by Gross National Income (Atlas method) it's Turkey. Doesn't look likely, so far.

But by gross national income per capita, on a purchasing power parity method, the 20th country is Belgium; and by GNP per capita (Atlas method), it's Germany. Maybe we're getting somewhere now.

In this list of countries by external debt, the USA comes top (over $10 trillion), with the UK in second place (over 8 trillion), and I'm sure we'd rather swap places here with Greece in 20th position ($301.9 billion); but that doesn't take into account the relative sizes of our economies. I'm still searching for a list of countries by net external debt, related to GDP. Help would be appreciated!

On a list of public debt to GDP, the USA is in 32nd place (64.7%), and the UK is in 61st place (42.2%). The Lebanon (209%) and Japan (175.5%) are the top two on this sinner's list.

As they say, comparisons are odious.

More on Dow stock valuation

Further to the assertion that stocks are reasonably valued, and Marc Faber's answer that we have an "earnings bubble" that is skewing p/e (share price compared to earnings, i.e. dividends) calculations, here is an essay by David Leonhardt in the International Herald Tribune (14 August) on historical p/e ratios.

A couple of extracts:

...the stocks in the Standard & Poor's 500 have an average P/E ratio of about 16.8, which by historical standards is normal. Since World War II, the average ratio has been 16.1. During the bubbles of the 1920s and the 1990s, the ratio shot above 30...

Graham and Dodd argued that P/E ratios should compare stock prices to "not less than five years, preferably seven or ten years" of profits...

Based on average profits over the past 10 years, the P/E ratio has been hovering around 27 recently. That's higher than it has been at any other point during the past 130 years, except for the great bubbles of the 1920s and the 1990s. The stock run-up of the 1990s was so big, in other words, that the market may still not have fully worked it off...

In the long term, the stock market will almost certainly continue to be a good investment. But the next few years do seem to depend on a more rickety foundation than Wall Street's soothing words suggest.

A drop from a p/e ratio of 27 down to 16.8 would imply a share price drop of 37%.

Thanks to Michael Panzner for spotting this and putting it onto his Financial Armageddon site.