Marc Faber: Fed’s QE2 Could Trigger Market Correction

Sunday, October 31st, 2010

Marc Faber, publisher of the Gloom, Boom & Doom report, discusses the potential impact of further quantitative easing (QE2) by the U.S. Federal Reserve in a Bloomberg interview on Oct. 36 (clip below).

Correction Triggered by QE2?

Faber sees Democrats–”sadly enough”–would get a shot at still retaining the majority, which would mean the monetary and fiscal policy will most likely stay on its current course.

Equity has done well in Sep. and Oct months; however, Faber thinks the markets are stretched in the inflation trade, and weak dollar, high commodity and precious metal prices, along with high equity valuations, all suggest a correction is overdue.

Now, with QE2 being largely priced in, anything less than $1 trillion from the Fed would disappoint the markets and may trigger a correction in U.S. stocks, which could result in more quantitative easing.

But the correction should provide a buying opportunity for investors leading to an up cycle, instead of another bear market.

Equity Better for the Next Decade

Looking at investing for the next ten years, equities, emerging economies in particular, would be a relatively better place to invest than U.S. government bonds, and cash.  However, Faber advises against financial, auto, and aircraft.  He’s been in the high tech sector and likes Microsoft (MSFT).

Precious Metals Due for Pullback

Faber is currently recommending agriculture commodities, and the accumulation of precious metals.  On precious metals, he thinks they are overdue for “some kind of correction” by year end, and expect the next leg up in 2011.

Dollar Near An Inflection Point

Faber says dollar is oversold, while in contrast, some of the foreign currencies such as Yen and Franc are overbought.  So, an inflection point could be near for a short-term dollar rally which could temporarily push down asset prices.

He warns investors to be very careful about shorting dollar and long assets as the trade has become quite crowded.

Expect a Strong Pullback of Chinese Economy

Although not quite gloom and doom, Faber does expect a “strong pullback” on the Chinese economy due to its many imbalances.

According to Faber, the 0.25% interest rate hike effective Oct. 20 by the PBoC is “meaningless,” because of skyrocketing property prices, and the cost of living inflation has gone up much more than the official figure.

He notes food prices have seen high inflation, and because of low GDP per capita where food would account for a high percentage of total expenditure, Faber estimates that the typical consumer inflation rate in countries like China, India, and Vietnam should be around 8 to 18 percent per year.

My Take on China Inflation

The inflation rate in China was last reported at 3.60 percent in September of 2010, climbing at the fastest pace in two years.  However, there are some hidden rampant inflation such as 50% on apparel, 20% on food, as reported by BusinessWeek.

Many analysts as well as academics also question how China could have such relatively moderate inflation rate given its double-digit growth and upward pressure on wages.

There’s also another indicator–growth of money supply–which historically has strong correlation with inflation.  China’s money supply, M1 and M2, has expanded by 56 percent and 53 percent respectively over the past two years. Currently, with the various tightening measures, both measures are still growing at an annual growth rate of about 20 percent.

Furthermore, the continuing massive rural-to-urban migration will likely keep pushing up rents and food prices, and wages are expected to rise around 8 percent this year.

As consumer inflation is typically a lagging indicator, China may experience continuing higher CPI.  That means Beijing is facing an increasingly difficult task of containing inflation, while maintaining sufficient growth to prevent a mass civil unrest.  As such, there will likely be more tightening measures, which would put the markets on a few roller coaster rides in the next two years or so.

Nevertheless, since Chinese policymakers seem keenly aware of the risk involved and are already taking actions (which is the key), I believe China is heading towards more sustainable growth.  However, if China’s “on a treadmill to hell” as Jim Chanos says, you can bet that the United States will be dragged along for the ride as well.

Video Source: Bloomberg via YouTube

Tags: Accumulation, Agriculture Commodities, Asset Prices, Bear Market, China, Commodities, Emerging Economies, Federal Reserve, Foreign Currencies, Franc, Gloom, India, Inflection Point, Marc Faber, Market Equity, Monetary And Fiscal Policy, Msft, Precious Metal Prices, precious metals, Pullback, Qe2, U S Government Bonds, Valuations
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Agriculture Takes Center Stage for Prominent Investors Jim Rogers and Michael Burry

Thursday, September 16th, 2010

Here on the Wall Stree Cheat Sheet we have been paying much attention to the developing enthusiasm in the agriculture sector. In a Bloomberg interview aired this morning, Michael Burry, one of the stars of Michael Lewis’ The Big Short, labeled agriculture as one of his top trades.  Burry is a noted value investor who earned strong returns as the Tech Bubble collapsed, and even more out-sized returns on his short bet against the housing market in the time preceding the subprime collapse.  Burry provided this insight into his latest trade:

“I believe that agriculture land — productive agricultural land with water on site — will be very valuable in the future….I’ve put a good amount of money into that.”

This weekend on his personal blog, Jim Rogers wrote a quick little note about how “Asia will drive agriculture commodities higher“:

There’s 3 billion people in Asia and most of them have not had a very good standard of living in the past 200 years. That is changing and changing very rapidly. They are going to eat more, they are going to wear more clothes.

[aa]And here, “US Farm Income Up 24% in 2010,” Rogers is quoted:

“It’s going to be the 29 year old farmers who have the Lamborghinis.” It is either time to get a tractor or set up a Lamborghini dealership in Iowa.”  [aa]

These are two investors with outstanding track-records fully on board the agriculture trade.  The world population is growing at 1.17% per year. The simple underlying logic for owning agriculture companies is that a growing world population will require more food to sustain itself over time. At a 1.17% growth rate starting with a total population of 6.79 billion (according to the 2009 United Nations estimate), we will add nearly 80 million people to the planet this year.

Even with significant growth in total arable land around the world, we cannot keep up with the birth rate. According to the Food and Agriculture Organization in 1961 the world had 0.42 hectares of arable land per person. Yet, by 2002 this number had fallen to 0.23 hectares per person. In order to continue producing enough food for our growing population, we have increased the productivity of our lands. Fertilizer is one essential component in maximizing our productivity.

Why the major interest in the sector now? Well this map provides a great visual for that story:

(click to enlarge)

Tags: Agriculture Commodities, Agriculture Companies, Agriculture Land, Agriculture Sector, Agriculture Trade, Arable Land, Birth Rate, Burry, Center Stage, Jim Rogers, Lamborghini Dealership, Lamborghinis, Michael Lewis, Old Farmers, Personal Blog, Productive Agricultural Land, Top Trades, Total Population, Value Investor, World Population
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Marc Faber Bullish on Agriculture, Natural Gas, Indian Banks & Real Estate

Monday, December 21st, 2009

The following are highlights from part two of the three-part interview Dr. Marc Faber did on Indian television channel, December 19, 2009.

Dollar & Gold

The dollar has been weak, but in Europe, the ECB is also a money printer.  The euro has many problems as well as other currencies that have strenthened against the dollar.  This is one factor supporting the price of gold even though dollar has rallied.

Globally, we have about $7 trillion in foreign exchange reserves, up from one trillion in 1996, but the price of gold has not gone up seven times over that period of time.

Asian central banks, including Japan, hold 70% of the world’s foreign exchange reserve with less than 2% of their reserves in gold.  So, a lot of central banks will likely follow the Reserve Bank of India shifting some money into gold further supporting gold.

Key Bullish Commodities

Faber remains “very positive” about sugar, but believes there are two commodities right now that stand out in terms of being “incredibly depressed”:

1. Wheat – at its 200 years low, real inflation adjusted
2. Natural gas – “very cheap” right now

Though it is not very easy for individual investors to play in these commodities, Faber recommends essentially looking at all agriculture commodities. which have all come down, but not rallied as much as industrial commodities, such as copper and oil.

Best Way to Invest in India

The banks in the West are mostly over-leveraged with huge exposure in the residential and commercial real estate sectors.  In contrast, the Indian banks are “relatively sound”, as they did not play in the speculative CDO or the mortgage backed securities markets. With 700 million population and growing, India represents a hugh opportunity for the well-run banks.

Faber likes real estate in emerging economies, Asia and particularly, India. With an accelerated nation urbanization, and far less leverage, Faber sees a big opportunity in Indian real estate sector in the long run.

Note: Bloomberg reported that in a separate interview, Faber indicated Indian stocks could have a correction of 20% to 30% due to valuation.  Nevertheless, he remains upbeat about the long-term potential for India “because of the domestic consumption play.”  Banks, infrastructure and mining stocks are among sectors he favors.

Part 1:

Part 2:

Part 3:

Source: Indian TV via YouTube (here, here and here), December 19, 2009.

Tags: Agriculture Commodities, Asian Central Banks, Bank Of India, Cdo, Commercial Real Estate, Commodities, Dr Marc Faber, Emerging Economies, Emerging Markets, Exchange Reserve, Foreign Exchange Reserves, Gold, Gold Commodities, India, Indian Banks, Indian Television, Individual Investors, Industrial Commodities, Mortgage Backed Securities, Natural Gas, oil, Price Of Gold, Real Estate Sectors, Reserve Bank Of India, Securities Markets, Television Channel, Well Run
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Hugh Hendry: Commodities Stocks to Remain Weak?

Tuesday, December 16th, 2008

Hugh Hendry, the eloquent and outspoken CIO, Eclectica Asset Management, in an appearance on CNBC’s PowerLunch (Dec. 10) shares his thoughts on agriculture commodities stocks such as Potash, and Syngenta.

Among other things, Hendry makes a forthright confession that he was wrong earlier this year to make the call to be long commodities stocks. He continues on to say that when he realized he was wrong, he promptly sold them too. Hendry runs a long-only Agriculture fund, as well as his primary hedge fund, and has been controversial in some of his choices to oppose his funds’  mandates at times in favour of cash or government securities.

His main quid pro quo is his caution that although commodity stocks  could revisit highs, we could be waiting as many as 10 years for it. Its a must watch.

In a 7-minute segment earlier the same day, Hendry discussed the idea that as the financial crisis deepens, civil liberties are curtailed by governments eager to put an end to falls in share prices and economies. This is an insightful discussion, a must-watch.

“The government has gone to war, it is an economic war. And in a war the government takes a larger and larger role in the society. That’s fine, you have to accept that,” Hendry said. “What is concerning is the erosion of civil liberties.”

The ban on short-selling financial securities in the UK is one example of erosion of civil liberties, another is a statement made in parliament last week which opens the way to silencing the press during financial crises.

The Treasury Select Committee said that it will look at the role of the media in financial stability and whether financial journalists “should operate under any form of reporting restrictions during banking crises”.

“We’re only a year into this and suddenly, already, our liberties are being brought back, brought in,” Hendry said.

Tags: Agriculture Commodities, Array, Asset Management, Caution, Choices, Civil Liberties, Cnbc, Commodity Stocks, Confession, Eclectica Asset Management, Economic War, eloquent and outspoken CIO, Erosion, Favour, Financial Crises, Financial Crisis, Financial Journalists, Financial Securities, Financial Stability, government securities, Hedge Fund, Hugh Hendry, Mandates, Minute Segment, Potash, Powerlunch, Role Of The Media, Share Prices, Syngenta, Treasury Select Committee, United Kingdom
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How Solid are the BRICs? (Part 1)

Tuesday, January 15th, 2008

According to IMF research, about 50% of global GDP growth now originates from BRIC countries. Incremental growth in demand for oil by India and China is driving the price of crude higher. Same for food prices. This is great for oil producers and agriculture commodities and stocks.

It may also prove to be beneficial as a needed and market driven cooling mechanism for higher-than-expected growth in the BRIC (Brazil, Russia, India, China) and other emerging markets, which are driving the average higher for world economic growth. Just how solid are the BRICs?

As BCA points out in The Oil Tax, higher oil prices have the same effect as rising “taxes” (globally), an organic form of economic tightening and will dampen the hopes of central banks as they move to stimulate the world economy with interest rate cuts. If oil prices continue higher, central banks will have to become more aggressive in order to stimulate economic growth. This is the problem in industrialized countries, but NOT in emerging markets.

As we pointed out in Rx for China, a US recession may be just what the doctor ordered, in the form of an “imported soft landing”. China, for example, has been trying to tame growth for years with their own monetary tightening. Rising oil prices, which are an economic dampener for industrialized net oil-consuming countries, may provide the cooling of growth that emerging countries have been wanting to achieve.

As the central banks of the industrialized world (Fed, ECB, BOJ) move to provide economic stimulus in the form of more interest rate cuts, the ensuing monetary liquidity spillover makes for an abundance of cheaper capital, flooding emerging markets with investment, as investors look for growth offshore.

According to BCA, the decoupling of emerging markets is expected to persist into 2008 as a result of these factors in tandem with robust domestic fundamentals. For the BRIC economies, and other emerging markets, this is potentially very promising. In part 2 (to follow) we will take a look at some of the economic and market fundamentals for the BRIC bloc, so stay tuned.

Read on: The following 4 articles highlights growth and inflationary concern in BRIC countries.

Brazil Economists See Faster Inflation, Higher Rates

http://www.bloomberg.com/apps/news?pid=20601086&sid=ag_GSEXHPVhQ&refer=news

Russian inflation 11.9 pct in 2007 – official data

http://www.forbes.com/markets/feeds/afx/2008/01/09/afx4510431.html

RBI’s rate hiking spree may halt http://economictimes.indiatimes.com/News/News_By_Industry/Banking_Finance_/RBIs_rate_hiking_spree_may_halt/articleshow/2703424.cms

China’s nerves on edge over inflation

http://uk.reuters.com/article/businessNews/idUKPEK22115220080113

Tags: Agriculture, Agriculture Commodities, Banks, Blog, Bloomberg, Brazil, BRIC, Bric Countries, BRICs, Central Banks, China, Commodities, Dampener, ECB, Economic Stimulus, Economists, Economy, Emerging Market, Emerging Markets, Fed, Food prices, GDP, GDP Growth, Global Gdp, GSE, higher oil prices, Imf, Incremental Growth, India, India China, Industrialized Countries, industrialized net oil-consuming countries, inflation, Interest Rate Cuts, International Monetary Fund, Investment, liquidity, Markets, Miscellaneous, oil, Oil Prices, Oil Producers, Oil Tax, Recession, Rising Oil Prices, risk, Russia, Spillover, UK, United States, Us Federal Reserve, World Economy
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