A tribute to Marc Faber, part one: US dollar, Nasdaq, gold and oil
Dr Marc Faber once said that any journalist could write a positive or negative article about him by picking out his good or bad calls. But just as Nury Vittachi could sit down in the late 1990s and pen a whole book that sided with the postive view of Faber, AME Info has scanned over 100 articles and reached a similar opinion.
Sunday, March 16 - 2008 at 00:05
So what did Dr Doom get wrong in the 2000s? Not a great deal really, but actually his biggest error was a repeat of the error of pessimism he committed in the 1990s about the length and durability of the US stock market upturn.
What he missed entirely was that the start of the Second Gulf War in spring 2003 would be a 'Bottom War’, marking the bottom of the US stock downturn that began in early 2000. He thought US stocks were down and would fall still further.
His record on the US dollar was much better, and in February 2003 he was perfectly correct in saying: 'In the course of 2002, we have repeatedly warned that US dollar weakness was only a matter of time.
'Since the summer of 2002, the dollar has weakened considerably and we feel that the 1995-2002 bull market has definitely come to an end and that, after a brief technical rally, more dollar weakness should be expected in 2003, as the US economy continues to disappoint.’
What actually happened was that the nominal US stock market rally was then supported by the declining value of the US dollar, and the value of US equity investments if denominated in non-US dollar currencies drifted sideways.
So in that sense Faber’s pessimism about the performance of US equities throughout the 2000s was proven correct as US stocks went nowhere in foreign currency terms.
'When the Nasdaq reached in March the 5000 level, this Index consisted of about 4,800 stocks with a market capitalisation in excess of US $6 trillion. Based on combined Nasdaq earnings estimates for the year 2000 of US$25bn, these stocks had, in March 2000, collectively a P/E of about 240!
'Now, let us assumes that the Nasdaq with its $6 trillion valuation can grow its earnings at a compound rate of 20% per annum for the next 10 years 'without interruption.' At the end of the period, in 2010, let us also assumes that the P/E of the Nasdaq will be twice its earnings growth rate (of 20% per annum). In other words the Nasdaq will sell for 40 times earnings.
'Since the S&P 500 sells for about 28 times earnings, the assumption of a P/E of 40 for the Nasdaq is quite realistic. Under this scenario, the Nasdaq's current $25bn in earnings will grow to $155bn in 10 years time and with a P/E of 40, these $155bn would have a value of $6.2 trillion. In short, even under this extremely and, in my opinion, totally unrealistic scenario, the Nasdaq would at best be in 10 years time where it was in March of this year.’
With the benefit of hindsight this is a superb application of sober investment analysis to the dot-com boom folly that still held some investors fixed like rabbits in a car headlights in late 2000. And as we now know even seven years later the Nasdaq was still only worth half of its 2000 peak.
'Today, I should like to advocate the purchase of a group of stocks, which has over the last 20 years been the worst under-performer. This group consists of gold mining companies around the world, all of which have a combined stock market capitalisation of only $30bn.
'In other words, you could buy the world's entire gold mining industry for just $30bn. A bargain when you consider that Cisco and Microsoft alone had earlier last year a combined stock market capitalisation of more than $1 trillion, and that Amazon.com was valued at its peak at $35bn.
’Every year in the 1990s, physical gold demand has exceeded the annual supply of approximately 2,500 tons - valued at present at about $35bn - by about 300 to 500 tons. Compare this to the annual supply of bonds in the world, which amounts to about $3.5 trillion and it becomes evident, how small the supply of gold is.
'Then consider this. In the year 2000, Indians bought about 850 tons of gold. In other words, in India, where the GDP per capita is only $300 per annum, every man, woman and child bought almost one gram of gold each. If gold became one day as popular as platinum or the Nasdaq is at present, and every person in the world bought just one gram of gold, it would generate an annual demand of 6,000 tons, which is about 2.5 times its annual supply from mines.’
Probably nobody has written a better assessment of the fundamental case for investment in gold, and at the same time Faber also correctly called for an emerging market stock rally based on a resurgent China that also had an important message for the commodity markets in general:
'As more and more foreign companies start to produce in China, its domestic economy will remain robust and lead to rising property prices in the long run. In this respect, I believe that Shanghai properties are one of the most interesting investments at the present time.
'In India, I can see that the software industry will continue to grow. The Indian software industry will not only penetrate the domestic market but it will also gain market share from software providers in Europe and the US thanks to its cost advantages.'
No review of Faber’s popular column on AME Info could be complete without also looking at his assessment of the oil market which in 2004 forecast continued strength in the oil market, and as with the earlier gold item gives a superb summary of the bullish long term case for oil. In fact, as far back as 2000 he suggested that oil would hit $100 a barrel.
In 2004 he said: 'Since its last major low in 1998 at $12 (when 'The Economist’ published a very bearish piece about oil), crude oil prices have climbed to around $50 at present. The question, therefore, arises whether oil prices are headed for a sharp fall, as most analysts seem to think, or whether far higher prices could become reality in the years to come.
'Over the last two years we have repeatedly explained how rising demand for oil in Asia would likely lead to higher prices - this especially because we took the view that the oil producing countries in the world were unlikely to be in a position to increase their production meaningfully.
'At $50, one might, however, be tempted to think that oil prices are substantially over-bought - certainly from a near term perspective - and ready to decline again. Therefore, I have noted that numerous market participants have been shorting oil futures in the hope of a sharp fall…Still, I maintain the view that we may see sometime in future far higher prices than anybody envisions.
'But, what is important to understand is that whereas the 1970 oil price increases were coming from a supply shock, which was driven by OPEC cutting its production all the while large production excess capacities existed, the current oil bull market is purely a function of increased demand coming principally from Asia at a time global oil production has practically no spare capacity which could lead to much higher production than the current 80 million barrels per day. So, whereas we can say that the 1970s oil shock was 'event driven', today's oil price increase is structural in nature.’
It is hardly any wonder that Marc Faber remains a popular commentator with his successful investment calls far outweighing his occasional mistakes.
What he missed entirely was that the start of the Second Gulf War in spring 2003 would be a 'Bottom War’, marking the bottom of the US stock downturn that began in early 2000. He thought US stocks were down and would fall still further.
His record on the US dollar was much better, and in February 2003 he was perfectly correct in saying: 'In the course of 2002, we have repeatedly warned that US dollar weakness was only a matter of time.
'Since the summer of 2002, the dollar has weakened considerably and we feel that the 1995-2002 bull market has definitely come to an end and that, after a brief technical rally, more dollar weakness should be expected in 2003, as the US economy continues to disappoint.’
What actually happened was that the nominal US stock market rally was then supported by the declining value of the US dollar, and the value of US equity investments if denominated in non-US dollar currencies drifted sideways.
So in that sense Faber’s pessimism about the performance of US equities throughout the 2000s was proven correct as US stocks went nowhere in foreign currency terms.
Nasdaq spot-on
He was also right as regards the Nasdaq. In October 2000 his AME Info column noted: 'This Nasdaq 5000 level may very well turn out to be as much of a 'milestone' in financial history as the Nikkei 39,000 level reached in December 1989.'When the Nasdaq reached in March the 5000 level, this Index consisted of about 4,800 stocks with a market capitalisation in excess of US $6 trillion. Based on combined Nasdaq earnings estimates for the year 2000 of US$25bn, these stocks had, in March 2000, collectively a P/E of about 240!
'Now, let us assumes that the Nasdaq with its $6 trillion valuation can grow its earnings at a compound rate of 20% per annum for the next 10 years 'without interruption.' At the end of the period, in 2010, let us also assumes that the P/E of the Nasdaq will be twice its earnings growth rate (of 20% per annum). In other words the Nasdaq will sell for 40 times earnings.
'Since the S&P 500 sells for about 28 times earnings, the assumption of a P/E of 40 for the Nasdaq is quite realistic. Under this scenario, the Nasdaq's current $25bn in earnings will grow to $155bn in 10 years time and with a P/E of 40, these $155bn would have a value of $6.2 trillion. In short, even under this extremely and, in my opinion, totally unrealistic scenario, the Nasdaq would at best be in 10 years time where it was in March of this year.’
With the benefit of hindsight this is a superb application of sober investment analysis to the dot-com boom folly that still held some investors fixed like rabbits in a car headlights in late 2000. And as we now know even seven years later the Nasdaq was still only worth half of its 2000 peak.
Gold tipped in 2001
But his most brilliant call was undoutedly to buy gold in early 2001, way ahead of most other market commentators and following a 20 year bear market that had left the gold market in a mood of deep depression and dispondency. It was an incredibly radical call, and first appeared in an article in February 2001 with a groundbreaking fundamental analysis of the gold market.'Today, I should like to advocate the purchase of a group of stocks, which has over the last 20 years been the worst under-performer. This group consists of gold mining companies around the world, all of which have a combined stock market capitalisation of only $30bn.
'In other words, you could buy the world's entire gold mining industry for just $30bn. A bargain when you consider that Cisco and Microsoft alone had earlier last year a combined stock market capitalisation of more than $1 trillion, and that Amazon.com was valued at its peak at $35bn.
’Every year in the 1990s, physical gold demand has exceeded the annual supply of approximately 2,500 tons - valued at present at about $35bn - by about 300 to 500 tons. Compare this to the annual supply of bonds in the world, which amounts to about $3.5 trillion and it becomes evident, how small the supply of gold is.
'Then consider this. In the year 2000, Indians bought about 850 tons of gold. In other words, in India, where the GDP per capita is only $300 per annum, every man, woman and child bought almost one gram of gold each. If gold became one day as popular as platinum or the Nasdaq is at present, and every person in the world bought just one gram of gold, it would generate an annual demand of 6,000 tons, which is about 2.5 times its annual supply from mines.’
Probably nobody has written a better assessment of the fundamental case for investment in gold, and at the same time Faber also correctly called for an emerging market stock rally based on a resurgent China that also had an important message for the commodity markets in general:
'As more and more foreign companies start to produce in China, its domestic economy will remain robust and lead to rising property prices in the long run. In this respect, I believe that Shanghai properties are one of the most interesting investments at the present time.
'In India, I can see that the software industry will continue to grow. The Indian software industry will not only penetrate the domestic market but it will also gain market share from software providers in Europe and the US thanks to its cost advantages.'
Investment classic
Indeed, by the middle of 2001 Faber had made the critical market judgments that would be the subject of his own classic investment book, 'Tomorrow’s Gold’ published at the end of 2002. This book correctly forecasted the bull market in commodities, particularly for oil and gold and the growth of emerging markets.No review of Faber’s popular column on AME Info could be complete without also looking at his assessment of the oil market which in 2004 forecast continued strength in the oil market, and as with the earlier gold item gives a superb summary of the bullish long term case for oil. In fact, as far back as 2000 he suggested that oil would hit $100 a barrel.
In 2004 he said: 'Since its last major low in 1998 at $12 (when 'The Economist’ published a very bearish piece about oil), crude oil prices have climbed to around $50 at present. The question, therefore, arises whether oil prices are headed for a sharp fall, as most analysts seem to think, or whether far higher prices could become reality in the years to come.
'Over the last two years we have repeatedly explained how rising demand for oil in Asia would likely lead to higher prices - this especially because we took the view that the oil producing countries in the world were unlikely to be in a position to increase their production meaningfully.
'At $50, one might, however, be tempted to think that oil prices are substantially over-bought - certainly from a near term perspective - and ready to decline again. Therefore, I have noted that numerous market participants have been shorting oil futures in the hope of a sharp fall…Still, I maintain the view that we may see sometime in future far higher prices than anybody envisions.
Oil outlook
’First of all, if we look at oil prices in real terms - that is oil prices adjusted for inflation - the real prices is right now still about 50% lower than it was at its January 1980 peak. In fact, oil is now not much higher than it was in the early 1970s, when the last big oil bull market got underway.'But, what is important to understand is that whereas the 1970 oil price increases were coming from a supply shock, which was driven by OPEC cutting its production all the while large production excess capacities existed, the current oil bull market is purely a function of increased demand coming principally from Asia at a time global oil production has practically no spare capacity which could lead to much higher production than the current 80 million barrels per day. So, whereas we can say that the 1970s oil shock was 'event driven', today's oil price increase is structural in nature.’
It is hardly any wonder that Marc Faber remains a popular commentator with his successful investment calls far outweighing his occasional mistakes.
A tribute to Marc Faber, part two: Calling the US housing top
The second of a two-part series looking back at the recent financial predictions by Dr Marc Faber, the man who also warned investors for months about the coming 1987 crash. This article looks at how Faber correctly called the top in the US housing bubble far earlier than most commentators in his AME Info column.
Monday, March 24 - 2008 at 12:18
In June 2005 he waded into the debate, pointing to the uneven distribution of property price gains in the US and the fact that market bulls were taking comfort from the fact that since 1952, the value of household real estate holdings had never declined.
While that may be true, he said, 'We must take into account that every year the stock of homes is increasing. Consequently it is only natural that the value of household real estate has a rising tendency. Still, whereas the value of household real estate has never declined in nominal terms, it has declined in real terms and for selected markets on numerous occasions.’
When real price gains were strong in 1971/72, 1979/80, 1986/87, inflation adjusted prices declined in 1971, 1974, 1981/82 and in 1990/91. 'Therefore, following the extended period of real price gains we had since 1997, it is more than likely that prices will decline at least in real terms at some point in the future,’ he said.
'Now, however, there is a problem with the housing market. If the US economy continues to strengthen, interest rates, which are negative in real terms, will have to rise considerably and this could lead - if not to a housing crash - at least to a less buoyant market.’
Dr Doom made this prediction two years before the US housing crash that enveloped the nation from the middle of 2006. Another seminal forecast greeted the appointment of Ben Bernanke in place of Alan Greenspan at the Federal Reserve.
In November 2005, Faber thought: 'So, at latest by the middle of next year, I would expect the Bernanke money printing press to shift into high gear. This should lead to more consumer price inflation, a weakening US dollar and tumbling bond prices.’
He added: 'Granted, long term treasuries could rally somewhat from here for the next few months, but new interest rates lows are most unlikely. With Bernanke at the Fed, disaster will strike sooner or later and long term bonds will plunge precipitously….’
In June 2007 the US bond market reversed a 17 year trend and Faber’s call on the market seemed remarkably astute, if a little ahead of its time. Gold and precious metals continued to be his favorite asset class for the long term, if only because monetary inflation made a higher gold price certain in his view.
Middle East investors loved to read about gold and Faber’s opinions are always eagerly sought about the yellow metal. But it was not often that he had much to say about the region and its markets.
That changed in June 2006 when the recent sell-off in the Middle Eastern bourses attracted his attention as seeming to be remarkable, because it had occurred at a time of increasing liquidity and near-record oil prices.
Thus, while liquidity was still strong, it was not strong enough to support an exponential growth in stock market prices. And once stock markets lost their upward momentum then the same multiplier effect that had pushed them upwards moved into reverse, and they had fallen back sharply. Ergo, Middle Eastern economies had experienced a tightening of monetary conditions in 2006 almost without realising it.
Yet even our Dr Doom reckoned that the regional stock market crashes might have gone too far, and in his AME Info column he forecast a 'rebound in Arab bourses by 20-30% over the next few months, although new all-time highs are out of the question.’
For the Saudi bourse his prediction was spot on, the UAE took another year and only after Faber had repeated his forecast at a seminar in Dubai, which appeared to spark a local rally.
He continued be be a major gold bug, arguing in October 2006: 'Despite its correction from $730 to the current level, gold is still up 12% year-to-date compared with a gain of 7% for the S&P 500. I continue to believe that over the next few years gold and silver will significantly outperform US financial assets. In fact, I am leaning increasingly towards the view that both buyers of bonds and equities could get it badly wrong.’
The result would be 'a more meaningful downside correction starting soon, or even a nice little crash’, he said.
'In addition, the US dollar has begun to weaken significantly against the Chinese RMB, which could add to inflationary pressures. So I am far less optimistic after the recent strong US stock and bond market performance than the complacent buyers of bonds and stocks. There are many factors affecting US financial assets that could in future have a negative impact on their pricing.’
While that may be true, he said, 'We must take into account that every year the stock of homes is increasing. Consequently it is only natural that the value of household real estate has a rising tendency. Still, whereas the value of household real estate has never declined in nominal terms, it has declined in real terms and for selected markets on numerous occasions.’
When real price gains were strong in 1971/72, 1979/80, 1986/87, inflation adjusted prices declined in 1971, 1974, 1981/82 and in 1990/91. 'Therefore, following the extended period of real price gains we had since 1997, it is more than likely that prices will decline at least in real terms at some point in the future,’ he said.
Global impact
Our Swiss investment adviser also firmly grasped what a US housing downturn meant for the global economy. As far back as June 2004, when the US housing market was booming he wrote: 'US consumption since 2000 was not driven by capital spending and employment gains, but purely by asset inflation in the housing market, which allowed people to take out larger and larger mortgages and spend the additional funds on consumer durables such as cars and consumer non-durables.'Now, however, there is a problem with the housing market. If the US economy continues to strengthen, interest rates, which are negative in real terms, will have to rise considerably and this could lead - if not to a housing crash - at least to a less buoyant market.’
Dr Doom made this prediction two years before the US housing crash that enveloped the nation from the middle of 2006. Another seminal forecast greeted the appointment of Ben Bernanke in place of Alan Greenspan at the Federal Reserve.
In November 2005, Faber thought: 'So, at latest by the middle of next year, I would expect the Bernanke money printing press to shift into high gear. This should lead to more consumer price inflation, a weakening US dollar and tumbling bond prices.’
Bernanke disaster
He described Bernanke as the 'greatest disaster that has ever hit the US bond market’ and believed that 'the worst long term investment will be to own a 30-year US treasury bond with the view to hold it for 30 years’.He added: 'Granted, long term treasuries could rally somewhat from here for the next few months, but new interest rates lows are most unlikely. With Bernanke at the Fed, disaster will strike sooner or later and long term bonds will plunge precipitously….’
In June 2007 the US bond market reversed a 17 year trend and Faber’s call on the market seemed remarkably astute, if a little ahead of its time. Gold and precious metals continued to be his favorite asset class for the long term, if only because monetary inflation made a higher gold price certain in his view.
Middle East investors loved to read about gold and Faber’s opinions are always eagerly sought about the yellow metal. But it was not often that he had much to say about the region and its markets.
That changed in June 2006 when the recent sell-off in the Middle Eastern bourses attracted his attention as seeming to be remarkable, because it had occurred at a time of increasing liquidity and near-record oil prices.
Liquidity trap
His view was that the problem was not liquidity, but that the rate of growth of liquidity had been slowing down. In other words, yes oil money had been pumping into the stock markets of the region. But as Faber noted, the expansion of this cash flow was slowing down, and from the end of 2005 oil production had been declining slightly and prices had stabilised.Thus, while liquidity was still strong, it was not strong enough to support an exponential growth in stock market prices. And once stock markets lost their upward momentum then the same multiplier effect that had pushed them upwards moved into reverse, and they had fallen back sharply. Ergo, Middle Eastern economies had experienced a tightening of monetary conditions in 2006 almost without realising it.
Yet even our Dr Doom reckoned that the regional stock market crashes might have gone too far, and in his AME Info column he forecast a 'rebound in Arab bourses by 20-30% over the next few months, although new all-time highs are out of the question.’
For the Saudi bourse his prediction was spot on, the UAE took another year and only after Faber had repeated his forecast at a seminar in Dubai, which appeared to spark a local rally.
He continued be be a major gold bug, arguing in October 2006: 'Despite its correction from $730 to the current level, gold is still up 12% year-to-date compared with a gain of 7% for the S&P 500. I continue to believe that over the next few years gold and silver will significantly outperform US financial assets. In fact, I am leaning increasingly towards the view that both buyers of bonds and equities could get it badly wrong.’
Bond crisis
Bond buyers would get it wrong, he predicted, because inflation would continue to increase despite a weaker economy and the stock buyers would get it wrong because corporate profits would disappoint.The result would be 'a more meaningful downside correction starting soon, or even a nice little crash’, he said.
'In addition, the US dollar has begun to weaken significantly against the Chinese RMB, which could add to inflationary pressures. So I am far less optimistic after the recent strong US stock and bond market performance than the complacent buyers of bonds and stocks. There are many factors affecting US financial assets that could in future have a negative impact on their pricing.’
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