 | | The Daily Reckoning | Thursday, November 11, 2010 | - How the Fed’s dollar printing machine is enriching emerging markets,
- Part II of our Daily Reckoning Video Series with Dr. Marc Faber,
- Plus Bill Bonner on why China is downgrading the US and more...
|  | | US Treasuries or Asian Stocks?
| An Interview with Marc Faber, Part II
| |  | | Joel Bowman |
From Buenos Aires, Argentina...
We interrupt our usual editorial diet of gloom and doom today to bring you an editorial diet of gloom, doom...and boom!
A couple of weeks ago, we brought you Part I of an interview Eric Fry conducted with Dr. Marc Faber from the sidelines of our annual investment symposium in Vancouver, Canada. They chatted about all the usual stuff: deflation vs. inflation, the emergence of developing economies and the ever-changing landscape of today’s investment environment.
In Part II of this interview, which we present below, Dr. Faber highlights some attractive, often overlooked markets in which readers may consider investing some of their money and/or time. Plus, there’s some bonus advice for any blind and/or asexual readers who might be tuning in. Click below for details:
Headed up by Kate Incontrera, associate producer of the critically acclaimed documentary I.O.U.S.A., the DR Video Series project is dedicated to bringing you insights from some of the leading contrarian minds in today’s investment world. We’ll alert you to these presentations as they come online, but you’ll always be able to access the archives on our homepage,here.
For today’s guest essay, we’ve selected an excerpt from the latest edition of Dr. Faber’s investment research newsletter, The Gloom, Boom & Doom Report. In it, Dr. Faber continues with the theme on undervalued “frontier” markets and includes a couple of easy, specific ways you can gain exposure to them. Please enjoy...
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On what? Not gold or blue chips. And obviously not real estate. Yet they could soon do it – and so could you.
Click here to watch the free new video that shows you how.
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| The Daily Reckoning Presents
| Frontier Investing
| |  | | Marc Faber |
[Ed. Note: The following is an excerpt from the November edition of Dr. Faber’s indispensable monthly newsletter, The Gloom, Doom & Boom Report.]
I think there may be a window of opportunity left in frontier markets. Let me explain. In last month’s report, I noted that we should think of the US as a “huge money-printing machine that produces an unlimited quantity of dollars”.
Most of these dollars flow to the corporate sector, wealthy individuals, and financial institutions. A large proportion of these dollars is then transferred to emerging economies through the US trade deficit and investment flows, where it boosts those economies’ economic activity and increases wealth relative to the US. I also warned that potentially spectacular bubbles could develop in emerging stock markets, as well as in selected hard assets (i.e. in precious metals, art prices, and prestigious properties). I am now beginning to think that even more spectacular bubbles could develop in frontier markets. How so?
I mentioned that the US transfers dollars to emerging economies through its trade deficit and investment flows. Emerging economies are then faced with the decision of what to do about the dollar inflows. If they let the currency appreciate, a temporary loss of competitiveness may result. (This is not my view, however.) If they do nothing, spectacular asset bubbles can occur that are accompanied by high consumer price increases. In either case, the price level (especially of assets) in traditional emerging economies initially increases compared to the level in frontier markets. What happens next?
International investors, sovereign funds, and wealthy individuals who live in more advanced neighboring emerging economies become aware of the huge differences in price (for everything, including all kinds of assets and services) between their own economy and that of the frontier region. As an example, wealthy Hong Kong, Singaporean, Korean, Taiwanese, and Japanese businessmen and investors (and their sovereign funds) won’t fail to recognize the enormous difference between real estate prices in their own relatively advanced economies and those in countries such as Cambodia, Vietnam, Myanmar, Mongolia, and Laos.
Now let us go back to the huge money-printing machine in the US, which transfers economic activity (including employment) and wealth to foreign countries.
First, US dollars flow to the countries with the highest current account surpluses and, as explained earlier, push these countries’ asset prices up either through appreciation of the currency or through high domestic price increases – or a combination of the two. In a second instance, this “additional liquidity”, which created enormous wealth in Asia, will flow to the least developed countries. I believe that in this context, Vietnam is currently an attractive investment destination.
I was recently in Vietnam and, as on previous visits since 1989, I was immensely impressed by the dynamism of its population and the ongoing economic growth. This is not to say that Vietnam is problem free (witness the struggle between the reformists and the hard liners in the government, the large trade deficit, high inflation of between 12% and 15%, a weakening currency, etc.), but for the first time in years the valuation of the equity market has become compelling.
For a modest exposure to Vietnam, investors may consider the purchase of the Market Vectors Vietnam ETF (VNM), which is listed on the NYSE.
Other stock markets that have failed to participate meaningfully in the global “asset reflation” since early 2009 include those in the Middle East, about which I have written before.
Obviously, as in the case of investments in Russia and Central Asia, the performance of the Middle Eastern markets will depend largely on stable or rising oil prices. However, oil and oil-related equities have begun to show favorable relative strength based on several technical indicators, which gives me some comfort when making these recommendations. Stable or rising oil prices should also have a positive impact on US oil stocks, and on Canadian oil stocks that have exposure to oil sands.
The Market Vectors Gulf States ETF (MES) offers an exposure to the Middle East.
Regards,
Dr. Marc Faber,
for The Daily Reckoning
Joel’s Note: Dr. Marc Faber, an Asian-equities sleuth and the original bear on Japan, is the editor of The Gloom, Boom & Doom Report. Dr. Faber has been headquartered in Hong Kong for nearly 20 years, during which time he has specialized in Asian markets and advised major clients seeking down-and-out bargains with deep hidden value – unknown to the average investing public – and immense upside potential. Dr. Faber is the author of the bestsellerTomorrow’s Gold.
Readers are reminded that they can find our entire Daily Reckoning Video Series, which we provide as a free service, online here.
| | | Bill Bonner
| When the Markets Wise Up
|  | | Bill Bonner |
With an Armistice Day reckoning from Paris, France...
The Dow went up 10 points yesterday. Gold went down $10.
Noise. Forget about it.
But wait...maybe this noise is whispering to us. “Watch out!” it seems to say.
Surveys show investor sentiment more bullish than it has been at any time since ’06/’07 – that is, since the peak of the bubble years.
And now the Fed has just entered the market with the biggest wad of cash investors have every seen. The Fed’s pockets bulge with $600 billion. It says it will spend $105 billion next month alone. The Fed is all bid. No ask. And everyone knows it.
How come the stock market isn’t soaring? How come it didn’t soar yesterday? And how come gold fell yesterday?
Is all this buying power already priced in?
True, the Fed is buying bonds, not stocks. But where does the money go? Into the hands of the bondholders. What do they do with it? Why don’t they buy stocks...as the underbid, underpriced, underappreciated risk asset?
What’s going on?
We don’t know. But we raised our “Crash Alert” flag yesterday. Anything could happen. And “anything” is usually not good.
But hold on...how could the market crash when the Fed is pumping in so much money?
Again, anything could happen...markets are sometimes smart and sometimes dumb. In times of trouble, the market’s IQ tends to go up. It gets smarter...it begins doubting what it hears...and what it sees. It looks further ahead.
If it looked ahead now, what would it see? It would probably see a speculative surge...followed by a sell-off. Looking at the big, long-term picture, it might see that there is little reason for much price appreciation in US stocks over the next 5, 10, 15 years. How are companies going to make more money? The economy is de-leveraging.
If prices don’t go up, investors have to look to yield for their money. The current yield is only about 2.5%. Not enough. In order to get the yield up to a more respectable 3.5%, stock prices would have to fall – by about 40%.
The stock market will probably come to terms with that logic sooner or later. Maybe it will skip the speculative run-up in prices all together. Maybe it will just sell off, to bring stocks down to a point where yields make them attractive again.
Stay tuned...
And more thoughts...
As an institution matures, more people get a good grip on it. And take advantage of it. Typically, it is corrupted by its own custodians. Instead of serving its original purpose, it serves to enrich its managers and employees.
The wage slaves become the masters. The zombies take over. USA Today has the report:The number of federal workers earning $150,000 or more a year has soared tenfold in the past five years and doubled since President Obama took office, a USA TODAY analysis finds.
FEDERAL WORKERS: Earning double their private counterparts
Federal salaries have grown robustly in recent years, according to a USA TODAY analysis of Office of Personnel Management data. Key findings:
Government-wide raises. Top-paid staff have increased in every department and agency. The Defense Department had nine civilians earning $170,000 or more in 2005, 214 when Obama took office and 994 in June.
Physicians rewarded. Medical doctors at veterans hospitals, prisons and elsewhere earn an average of $179,500, up from $111,000 in 2005.
Federal workers earning $150,000 or more make up 3.9% of the workforce, up from 0.4% in 2005.
Since 2000, federal pay and benefits have increased 3% annually above inflation compared with 0.8% for private workers, according to the Bureau of Economic Analysis.
Some government employees provide good and useful service. Most probably work hard at jobs that aren’t worth doing.
In either case, if bailed-out bank chiefs get to pay themselves million-dollar bonuses, the feds should keep their money too. They all stole it fair and square.
Of course, paying people a lot of money to do things that aren’t worth doing is not exactly good business. That’s how you go broke. So it shouldn’t be a surprise that the US is headed for bankruptcy. Last month the US government posted a $140 billion deficit. The newspapers reported it as good news, because it was down from $176 billion the year before. But this is like saying that the airplane managed to slow to only 300 miles an hour before it crashed.
Bloomberg has more details: While the economic recovery that started in June last year has helped generate more revenue for the Treasury, the Congressional Budget Office estimates the deficit this fiscal year will exceed $1 trillion for a third time. Cutting the budget shortfall may prove challenging with a newly elected Republican majority in the House of Representatives and President Barack Obama, a Democrat, in the White House.
The CBO said Aug. 19 that the budget shortfall this fiscal year will be almost $1.1 trillion. The deficit will amount to 7 percent of the nation’s gross domestic product, the nonpartisan agency’s semi-annual budget report projected.
Let’s see. A trillion here. A trillion there. It starts to add up. And pretty soon, your political system is corrupted by it. You can’t correct the situation. Too many zombies on the payroll. And the zombies vote.
So, what happens when you spend more than you can afford? First, your credit rating goes down. Then you go broke.
And here, we turn to The Telegraph, in London:
“Leading Chinese credit rating agency downgrades USA government bonds.”
Many of the world’s leading economies have condemned America’s money printing. Brazil, Germany, China – all think the US is headed in the wrong direction. Here’s more of the report in the Telegraph: If China, now the second biggest economy in the world, stops buying US government bonds this could have a very negative effect on the global recovery. The Dagong Global Credit Rating Company analysis is highly critical of American attempts to borrow their way out of debt. It criticises competitive currency devaluation and predicts a “long-term recession”.
Dagong Global Credit says: “In order to rescue the national crisis, the US government resorted to the extreme economic policy of depreciating the US dollar at all costs and this fully exposes the deep-rooted problem in the development and the management model of national economy.
“It would be difficult for the US to find the correct path to revive the US economy should the US government fail to understand the source of the credit crunch and the development law of a modern credit economy, and stick to the mindset of traditional economic management model, which indicates that the US economic and social development will enter a long-term recession phase.”
The analysis concludes: “The potential overall crisis in the world resulting from the US dollar depreciation will increase the uncertainty of the US economic recovery. Under the circumstances that none of the economic factors influencing the US economy has turned better explicitly it is possible that the US will continue to expand the use of its loose monetary policy, damaging the interests the creditors.”
We can’t quite understand the language of some of Dagong’s report. But what the Chinese don’t know about mismanaging an economy is probably not worth knowing. They did some amazingly stupid things during their pre-capitalist days. Backyard steel making, Great Leaps forward, price controls – they know what kind of mischief you can get up to with central planning. And they see the US headed for trouble. So do we...
*** We’re on our way to London, where news reports tell us that the zombies are waking up. Students smashed windows yesterday...protesting government cutbacks.
If you happen to be in London tomorrow, dear reader, we’re giving a speech at the Queen Elizabeth II conference center at 10:30AM. Then, at 9PM on Channel 4, we have a small part in a documentary about how countries go broke.
Here’s a link to an offline version of the film.
Regards,
Bill Bonner,
for The Daily Reckoning
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Here at The Daily Reckoning, we value your questions and comments. If you would like to send us a few thoughts of your own, please address them to your managing editor atjoel@dailyreckoning.com |
| |  |  |  | Economic Irony: Creating Bubbles to Maintain Stability
So, sit back and enjoy the show, dear reader. It’s the greatest show on earth. Yes, it will most likely lead to embarrassment and poverty in the US. Yes, the US dollar will cease being the world’s reserve currency. And yes, America’s leading economists – many of whom have won Nobel prizes – will be shown to be hapless goofballs.
How the Fed Keeps Feeding the Financial Crisis
A Look Forward at the Final Stage of the Gold Bull Market | Prepare for Mass Inflation
The thing that has sent me into Mogambo Panic Mode (MPM) over the terrifying inflationary implications is the latest outrage from the Federal Reserve, reported at Bloomberg.com as, “The Federal Reserve will buy an additional $600 billion of Treasuries through June, expanding record stimulus and risking its credibility in a bid to reduce unemployment and avert deflation.”
Money Creation and Price Inflation Cause Justified Paranoia
Thanks for the Silver: An Open Letter to JPMorgan and HSBC | Ben Bernanke: The Chauncey Gardiner of Central Banking
In Ben Bernanke’s Washington Post elucidation of Fed policy, “What the Fed Did and Why: Supporting the Recovery and Sustaining Price Stability,” the Fed chairman cut-and-pasted misleading paragraphs from earlier misleading speeches. He did not discuss the two most important aspects of his money experiment. Bernanke did not address, first, the real economy or, second, the rest of the world. It will be the first of these lapses that will be discussed below.
The Dollar or Toilet Paper… Which is Shrinking Faster?
Plus Ça Change (Plus C’est La Même Chose) | |
| | The Daily Reckoning: Now in its 11th year, The Daily Reckoning is the flagship e-letter of Baltimore-based financial research firm and publishing group Agora Financial, a subsidiary of Agora Inc. The Daily Reckoning provides over half a million subscribers with literary economic perspective, global market analysis, and contrarian investment ideas. Published daily in six countries and three languages, each issue delivers a feature-length article by a senior member of our team and a guest essay from one of many leading thinkers and nationally acclaimed columnists. |  |
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