The Daily Reckoning - Flight To Garbage (Marc Faber)

verfasst von Firmian, 31.01.2004, 00:40

-->Flight To Garbage

The Daily Reckoning

London, England

Wednesday, 28 January 2004

---------------------

*** Nobody knows anything... economists know less than zero
about everything...

*** If the dollar were a mistress... U.S. consumer
confidence soars! - yet the markets are unimpressed...

*** Housing as strong as money is cheap... coffee... the wave
of the future... and an Update.

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"Nobody knows anything"... they say in Hollywood. Because no
one can predict which film will be a hit... and which will
be a flop.

But people know even less in politics, finance, investment,
or economics.

Economists pretend to project next year's GDP... or estimate
pension fund requirements 20 years ahead. But they cannot
even tell you the price of oil tomorrow... or next
week... let alone 5 years in the future.

At what rate will a man be able to refinance his
house... what price will he pay for a gallon of gasoline? No
one can say. And without these critical components, the
rest of the future is as mysterious as a George Bush
campaign speech."Taking up the tasks of history... we live
in a time apart..." he told us. We have no more idea what
he meant that what the price of gold will do tomorrow.

Today's economists know less than zero about everything.
Because what they think they know about the present is as
full of falsehood and flattery as a seducer's promise.

All the numbers an economist has to work with are bound
into the soft mud of dollars. He can feel the mire squish
up between his toes. He can sling it around... but he cannot
get it to stand still long enough to use it as a reliable
measure. What is a dollar? No one can say. In 1971, it took
41 of them to buy an ounce of gold. Now it takes ten times
as many - even though gold went into a bear market in 1980
and still has not recovered.

One day a man can take a few dollars and buy a share of
stock; the next day he will need twice as many. Oddly, the
stockholder feels richer... while his purchasing power has
been cut in half!

When the dollar price of doughnuts or dishwashers rise...
consumers become agitated. They call upon the Fed to 'do
something' about this inflation which cuts into their
family budgets. But let housing prices go up, and the same
people are delighted. The less house they get for their
dollars... the more eager they are to make the trade.

If the dollar were a mistress, she would be the source of
heartache. For she is fickle, unreliable, uncertain and
inconstant. Still, this is the same sweetheart after whom
so many people lust; they can't seem to get enough of her.
They've been warned; she's a harlot... a phony... a
jezebel... a painted woman with a sleazy past... who will
break their hearts and steal their wallets. Still, they
take her into their homes and hearts and ask no questions.

The dollar has become a universal hussy. She wooed and won
over consumers, investors, and central bankers the world
over. And everywhere she goes, she makes a scene: Foreign
nations run huge trade surpluses with the U.S., then end up
with surplus dollars... that enter their banking systems.
Thus, America's Fed becomes central bank to the entire
world, dictating monetary policy for all the world's
economies. China's money supply (M2), for example, rose at
a nearly 20% rate in December - mostly as a consequence of
absorbing U.S. dollars. Is it any wonder that China is
enjoying a boom? Is there any doubt about how it will end?

A fool and his money are soon parted, it is said. But
before they split up, they are invited everywhere. For the
present, Americans and their dollars are invited to every
party.

Nobody knows anything... but so what? Let the good times
roll!

Over to Addison with more of what is happening now...

---------------

Addison Wiggin in Paris...

- Yeehoo! U.S. consumer confidence rose this month to its
highest level since July 2002. Back then, of course, Wall
Street was still 15 months away from its bottom, and the
imperial dollar stood 40% up vs. today's euro exchange
rate.

- But pay no mind... the U.S. Conference Board's index of
consumer confidence recorded 96.8 in January - a big ol'
leap from December's 91.7. Meanwhile, economists surveyed
by Blue Chip Economics meanwhile reckon the U.S. may grow
by 4.6% this year. And the monthly average of new jobless
claims fell last week to 344,500 - the lowest since
February 2001. The good times are back!

- Only they aren't. At least, Mr. Market didn't seem to
think so. Success breeding arrogance as it does, he seemed
to expect even better numbers. The Dow promptly lost 79
points to 10,609... the S&P slipped 10 to 1,155... and the
Nasdaq plunged 36 to 2,116.

- Meanwhile, the dollar's second attempt to rally in two
weeks came to an abrupt halt yesterday. The euro rose a
centime or so to $1.26 - reclaiming a good chunk of the
three cents it had lost since Friday.

- Defying generally accepted laws of nature (gravity, for
one, is an example), the housing market keeps rising.
Yesterday, the National Association of Realtors (NAR) said
that December existing home sales rose by nearly 7%. And
for the year, sales of existing homes made a new record.
Over six million homes changed hands in 2003, beating
2002's mark of 5.56 million. Prices also rose at 7.5% - the
fastest rate since the hostages were released in Iran (1980
for you history buffs).

-"Demand for housing is robust," says Strategic
Investment's Dan Denning, keeping a sharp eye on the
housing market for us."By the NAR's count, inventories
fell 7.3% in December. That leaves 4.3 months supply at the
current sales rate. Based on those numbers, there's no
reason to think housing prices couldn't keep going up... and
that home sales will stay strong in 2004." New home sales
data for December will be released this morning. Most
economists surveyed by Reuters are expecting December's
numbers to come in over 1 million units.

-"All of this is pretty convincing," writes Denning,"if
you don't look beyond the surface: Housing demand is
strong. Supply can hardly keep up with it. Home prices are
rising and rates are low. The boom will continue, driven by
new buyers, refinancing at low rates, and demographics
(esp. boomers buying second homes.)

-"But underneath the surface," Dan continues,"lies
economic reality: Housing activity is strong because money
is cheap. It all hinges on low interest rates. The boom in
housing is being driven by a credit binge... where the
newest buyers are the biggest credit risks. In other words,
if you just looked at the supply dynamic, you might be
convinced that everything is fine. But the closer you look
at demand, the more you see it's been artificially
stimulated and is now drawing in riskier and riskier
borrowers. That can't last forever."

-"Imagine Mr. and Mrs. Orange County buying their home
some years ago for $500,000," writes Daily Reckoning reader
David Cantwell (who moonlights as the Managing Director for
the Orange County, California office of Studley, a leading
national commercial real estate firm)."They put $100,000
down and have a mortgage debt of $400,000. Some years
later, they sell their home for $1 million. They 'made'
$500,000. Using this new money, and smitten by low interest
rates, Mr. and Mrs. OC go buy a bigger home for $1,200,000.
With all that extra money, they decide to put only $400,000
down on the new home. They now have a new mortgage debt of
$800,000. They use the balance to buy cars, electronics,
vacations and other things that will have little monetary
value, if any, in just a few years.

-"What happened to Mr. and Mrs. OC's balance sheet?" Mr.
Cantwell wonders aloud, getting out the magnifying glass
for a closer look."First, one does not get richer selling
a house that was worth a million dollars for a million
dollars. There was no increase in value, the home doesn't
have any more value than before; it just costs more. It's
the same house. It would cost a million dollars to buy it
back.

-"Second," Cantwell continues,"they have more than
doubled their property tax liability (going from
~$6,000/year to ~$14,400 per year). Third, they have
doubled their debt from $400,000 to $800,000. Fourth, since
they spend some of the equity on other items (that
depreciate to almost zero value in a few short years) they
reduced both their cash and consequently net worth. Fifth,
the selling costs were about $66,000. So, while they have a
better house, and some neat stuff, they have twice the
debt, twice the payments, twice the property tax liability,
and reduced their net worth by over $66,000 (more if they
bought things that depreciate in value quickly) and
increased their mortgage debt by 100%. Are Mr. and Mrs. OC
better off?

-"Many, of course, will be tempted to dismiss this
analysis because 'real estate always goes up'..." Of
course, it does.

---------------

Bill Bonner back in London...

*** Our old friend Marc Faber suggests the same investment
as our new friend Hugh Hendry: buy coffee. The price of
coffee hit $3.40 in 1977. Since then, it's been in a bear
market... with a recent price of 68 cents. Friends of ours
in Nicaragua told us they didn't even bother to pick their
coffee anymore... it wasn't worth the effort. In many areas,
coffee growers have given up. They've pulled out the coffee
bushes to plant soybeans and other crops.

"The Chinese will drink more coffee in the future," said
Marc to Barron's."If China on a per-capita basis started
consuming as much coffee as Taiwan and South Korea, they
would take up the entire world production."

Other Faber recommendations: buy oil producers... short the
homebuilders.

And one more:"In India, the geopolitical situation is
improving. India and Pakistan are beginning to talk about a
peace arrangement for Kashmir. In the last two years in
India, there have been more business privatizations than in
the previous 30 years combined. I would buy the India
Capital Fund, of which I am a director. The Indian stock
market has been very firm. We could have some profit taking
in emerging markets that easily could send stocks down 30%.
If you aren't prepared to accept that, don't touch them. In
the longer term, the most attractive opportunity in India
is the real-estate market. It hasn't been developed for the
past 50 years." (More from Faber below... )

*** Ah... India...! Our friend Michel is convinced that
India, not China, represents the wave of the future. We
have begun to study the matter in our own precise manner.
We picked up a copy of India Today to see what is going on.
As near as we can tell, an important election is coming up.
The contest pits an aging, vaguely free-market
conservative, Atal Behari Vajpayee, against a less-aging,
vaguely social democratish Italian-born woman who just
happens to have been married to Rajiv Gandhi, grandson of
Jawarharlal Nehru before he was murdered in 1984. Vajpayee
seems to have the edge, for the moment. The economy is
booming. But Sonia has the legendary family connection. Her
ex-husband's family's socialist policies brought much
misery to India... but the masses are just as blockheaded on
the subcontinent as they are in America.

***"Today the Far East has most of the world's fast-
growing economies, generates more than half the world's
annual savings, is the principal force driving the
expansion of international trade, and holds two-thirds of
the world's foreign exchange reserves in its central
banks," writes our old friend Martin Spring.

"And that is only the beginning. Today, only one of the
world's four biggest economies is in Asia. But by the
middle of this century, three of the four will be there.

"The investment bank Goldman Sachs recently forecast that
if current 'growth-supportive' policies are maintained,
then by 2040, China should overtake the U.S. to become the
world's biggest economy. India should be the third largest,
while slow-growing Japan will retain its position at the
top table.

"By mid-century, the Chinese should have living standards
equivalent to those of Americans today, Indians equivalent
to those of Italians today."

More on this tomorrow...

*** A quick update on the Cannibal of Rotenberg. Poor Mr.
Meiwes told the jury that he was sorry he ate Mr. Brandes.
There, we guess that does it; he's admitted his mistake.
That should satisfy the pecksniffs.

---------------------

The Daily Reckoning PRESENTS: 2003 was a remarkably kind
year to investors. Will 2004 prove as amiable? Dr. Marc
Faber thinks not:"The entire global investment community,"
writes Dr. Faber below,"has been seduced... into believing
that all asset classes will continue to appreciate in
2004..."


FLIGHT TO GARBAGE
By Marc Faber

A commentator characterized the year 2003 as an investors'
"flight to garbage." Indeed, some assets perceived to be of
lower quality, such as Ecuadorian and Brazilian debts,
Argentinean and Venezuelan stocks, as well as money-losing
high-tech companies, enjoyed huge price gains in 2003.

In fact, 2003 will enter the financial history books as the
year in which all asset classes - including equities in
developed as well as emerging markets, government as well
as any kind of corporate bonds, industrial commodities,
precious metals, real estate, and art - increased in value.

That is, of course, with the exception of the U.S. dollar,
which slumped not only against gold (mentioned here as a
currency, whose supply cannot be increased ad infinitum by
some intellectually dishonest central bankers), the euro,
and the currencies of the resource-based developed
economies of Australia, New Zealand, and Canada, but also
against the currencies of more"controversial" economies
such as Brazil and South Africa.

As a result of the slumping U.S. dollar, the performance of
U.S. equities in 2003 was nowhere near as"fantastic" as
the media have suggested. It is true that, in U.S. dollar
terms, the Dow Jones Industrial and the S&P 500 rose in
2003 by 25% and 26%, respectively; but in Euro terms, these
gains were just 4% and 5%. Admittedly, the Nasdaq, and
especially the Philadelphia Semiconductor Index (SOX), did
better, rising by 50% and 76%, respectively, in terms of
the U.S. dollar and by 25% and 46%, respectively, in Euro
terms, but this was hardly a match for the emerging market
gains (in U.S. dollars) of 138% in Thailand, 131% in
Brazil, 119% in Venezuela, and 104% in Argentina.

Moreover, if we look at the performance of the Nasdaq since
the Euro bottomed out in October 2000 at 82.27, the recent
rise appears to be more muted in a longer-term context than
the bullish camp is trying to convey to the"dollar
weakness unconscious" investment community.

When asked about the performance of President Bush over
2003, the elderly but jovial Jewish taxi driver who took me
to John F. Kennedy Airport in New York following the yearly
Barron's roundtable exclaimed enthusiastically that Bush
was the"greatest American president ever."

Taken somewhat aback by this firm and unshakable support
for the present U.S. government, and at the same time
concerned that I might be offloaded somewhere in an alley
on my way to the airport if I said anything wrong, I
hesitantly, and as diplomatically as possible, asked my
driver, who proved to be smart and honest, why he felt so
positive about Mr. Bush's administration. (He was evidently
smart, since, while listening to Simon and Garfunkel tapes,
he was smoothly and skillfully negotiating the fastest way
to the airport: he took the Queensborough Bridge coming
from the West side heading into Third Avenue, then went
north on Third Avenue and turned left into 57th Street
before turning right on to the bridge - thus avoiding the
usual traffic jam on the Queensborough Bridge entrance at
58th Street. And he proved to be honest, since the total
fare was just $29 - $35 with tip, which is the lowest fare
I have ever been charged to go from New York City to JFK.)

"Bush doesn't take any BS from anyone in the world," he
replied."And look at the stock market... it's up!"

Fearing a confrontation, and concerned about missing my
flight, I remarked in a conciliatory way that the dollar
had declined in value, concurrently with the stock market's
rise, thereby largely neutralizing - currency adjusted -
any stock market gain. But this stock market gain/dollar
weakness issue didn't seem to strike a chord with my
driver, whose only concern seemed to be to enjoy additional
price gains on his home and his stock portfolio in U.S.
dollar terms.

After checking in at the airport, I reflected further on my
driver's views, which I initially considered to be rather
naïve. But then it struck me that the entire global
investment community has been seduced by strong economic
indicators (published by governments, we must remember,
which have a political agenda) and easy monetary policies
into believing that all asset classes will continue to
appreciate in 2004.

The commodity bulls believe that we are at the beginning of
a long-term secular bull market for raw materials and
precious metals, while the stock bulls believe that the
rise since October 2002 is the first leg in a multi-year
stock bull market. Home buyers believe that the housing
industry will continue to thrive and expand and never again
be a cyclical industry in the way it has always been, and
at the same time the"deflationists" remain convinced that
deflation will lead to a resumption of the bond bull
market. So, wherever you go and to whomever you speak,
everybody around the world is very optimistic about some
asset class or some kind of"very special situation."

In addition, every investor you speak with is convinced
that he is savvier and smarter than the public, and that he
will know, just minutes before it turns down, when to get
out of his favorite market, stock or commodity! In other
words, every investor seems to be suffering from the
massive delusion that he is an above-average investor who
will be able to"beat the crowd."

Yet it should be clear to any rational thinker that
commodities, and especially the precious metals, cannot
forever rise in price while at the same time interest rates
decline and bonds continue to appreciate. At some point,
continuously rising commodity prices must lead to higher
inflation rates and depress bond - and probably also equity
- prices. Conversely, bond prices can only continue to rise
if global economic growth disappoints and deflationary
forces reassert themselves.

The year 2003 was unusual in as far as all asset classes
rose in price - that is, with the exception of the U.S.
dollar. In 2004, we expect asset markets again to show
diverging performances.

In my opinion, the surprise of 2004 could be renewed
economic weakness, which would be temporarily negative for
commodity prices and likely also for extended stock markets
(developed and, especially, emerging markets) and sectors,
which in 2003 performed superbly, such as home builders and
semiconductors.

In the meantime, the U.S. dollar has become very oversold
and sentiment is as negative about the U.S. dollar as it is
positive about the U.S. stock market. Time for a contrarian
to take the other side of the trade - that is, long U.S.
dollars and short the U.S. stock market???


Regards,

Marc Faber,
for The Daily Reckoning

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gesamter Thread:

• The Daily Reckoning - Flight To Garbage (Marc Faber) - Firmian, 31.01.2004, 00:40
  • Dt. Fassung vom Investor-Verlag - Firmian, 31.01.2004, 00:42
    • Danke - wie immer sehr interessant! Gruss und schönes Wochenende wünscht - Tofir, 31.01.2004, 00:55