I would like to wish all of my American readers a happy and safe Fourth of July!

As for everyone else, have a wonderful weekend.

Christopher E. Hill
Editor

Well-known investment adviser Marc Faber was in South Korea recently, where he took time out to speak to Lee Hyo-sik of the The Korea Times (South Korea) about his short- and long-term outlook for the global economy and markets, commodities, and currencies. From the Times website on July 1:

In an interview with The Korea Times, Marc Faber, better known as Dr. Doom for his negative views on the global economy, said that to hedge against rising inflationary risks, long-term investors should buy stocks and gold bars, rather than hold onto cash.

But he said for short-term equity investors, they should take a wait-and-see attitude for the time being as stock markets across the globe will likely undergo corrections in the near future after first-half rallies. Faber was here to attend the 3rd Annual Korea Institutional Investment Forum, organized by Hong Kong-based business magazine Asian Investor.

Faber projected the United States will go into hyperinflation similar to that of Zimbabwe, harshly criticizing the U.S. Federal Reserves for causing unnecessary inflationary pressure through its zero interest-rate and credit-easing policies.

“The U.S. central bank has structured and introduced policies without considering exponential credit growth and its consequences. I think the Federal Reserve is not independent and has become a mere political apparatus of the U.S. government. Keeping interest rates artificially low and printing money has and will cause an asset bubble,” Dr. Doom said.

People have been encouraged to borrow and speculate on stocks and other assets over the past year because they do not earn anything from putting money into bank deposits due to the record-low interest rate, he said. “It will again create an asset bubble and next time when it bursts, we will not be able to respond to it in the same manner as we can now.”

Since 2002, the U.S. has maintained the interest rate low to prop up the economy by prompting corporate investments and private consumption. But it created a real estate bubble, which led to the collapse of the U.S. subprime mortgage sector, bringing about the greatest financial market distress since the Great Depression in the 1930s.

“The United States will not raise interest rates for many years to come because it needs to pay off its huge debts. With higher interest, its borrowing costs will go up, putting a heavier financial burden on the U.S. government. It means the interest rate will remain low and the U.S. will not be able to narrow fiscal deficits for many years. In turn, too much money in the economy will raise costs of everything, including healthcare and education, giving rise to hyperinflation,” Faber said.

He added that U.S.-led hyperinflation will spread to the rest of the world, advising investors to put money into inflation-hedging assets, such as stocks and gold bars.

The editor of The Gloom Boom & Doom Report also had advice for traders. Lee Hyo-sik wrote:

But Faber prescribed different medicine for short-term investors, saying now is not a good time to buy stocks and commodities because the markets will undergo corrections in the second half of the year.

“Now, risks are too high, compared to expected returns. Investors should increase their cash positions. I would rather take a long vacation and wait until the market moves either upward or downward. Given a list of unfavorable factors, I bet on a market downturn. It won’t be too late for investors to act after the market sends visible signs of its direction,” he said.

Dr. Faber talked about hard assets as well. From the piece:

As for investors interested in commodities, the Swiss-born investment advisor said natural gas would be his best pick, adding crude oil prices will undergo corrections in the coming months. “Natural gas is cheap, compared to crude oil. I would buy natural gas. Oil was traded as low as $32 per barrel late last year but has jumped to $72.

From a pure demand and supply perspective, the demand from both advanced and emerging economies is not strong. But in the long-term, prices will be much higher than now,” he said.

The man who correctly called the 1987 U.S. stock market crash also discussed the dollar. While the greenback may remain strong in the short-term during a global economic recovery, Faber says:

I am bearish about the dollar in the long term. I think its value peaked in November 2008 at the height of the global credit crunch, but since then it has declined. I think the dollar will continue to head south, and along the way it will cause severe inflationary pressure.

Finally, Dr. Faber issued a warning to Western economies. He said:

From 2002 to 2007, Asia’s rapidly growing economies outperformed the U.S. but they have been hit hard by the ongoing economic slump because of their outward-oriented and export-dependent structure. But Asia will continue to outshine the West and I am bearish about the future of the Western world in the long term.

Source:

“Hyperinflation Looming Large”
Lee Hyo-sik
The Korea Times (South Korea), July 1, 2009

Legendary real estate investor Thomas Barrack, Jr., has his hands full these days. From the Los Angeles Business Journal’s Deborah Crowe on Tuesday:

Colony Financial Inc., a newly formed subsidiary of Century City investment firm Colony Capital LLC said Tuesday that it had filed for an initial public offering of its common stock.

Colony Financial plans to acquire, originate, and manage a portfolio of real estate-related debt, including performing, sub-performing and non-performing loans, the company said in its U.S. Securities and Exchange Commission filing. The company’s initial focus will be on commercial real estate.

The company, which intends to qualify as a real estate investment trust for tax purposes, said it will not make any investments until completion of the proposed offering.

Merrill Lynch & Co. is acting as the underwriter.

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Source:

“Colony Financial Files for IPO”
Deborah Crowe
Los Angeles Business Journal, June 30, 2009

Sounds like George Soros might be throwing in the towel when it comes to trying to forecast what’s in store for the global financial markets down the road. On Tuesday, BusinessWeek’s Bruce Nussbaum talked about how the famous investor warned against “unlimited” financial innovation during an appearance in New York City earlier this week, in addition to the following:

Soros also believes that we now live in beta—constant change that is unforseen. “My theory is the future is unpredictable so I’m not going to predict it…it’s not the time to have firm conviction.” Hedge funds and Wall Street firms are not investing on fundamentals, he said, making markets more volatile.

So we shouldn’t feel so relieved that the bottom has not dropped out of the global economy.

Source:

“George Soros - Too Much Innovation in Finance Can Hurt”
Bruce Nussbaum
BusinessWeek, June 30, 2009

Thailand-based investor Marc Faber was in South Korea yesterday where he talked about the bright future ahead for emerging markets, as well as a number of investment opportunities. Bloomberg’s Kyung Bok Cho wrote yesterday:

The outlook for emerging markets is “far more optimistic” than for developed economies as growth picks up, said investor Marc Faber, who advised investors to buy gold before its eight-year rally.

“We are living through major changes in the world,” said Faber, the publisher of the Gloom, Boom and Doom report. Emerging markets such as China are becoming more significant to the global economy, and “I don’t think this will be reversed,” he said today at an Asian Investor magazine forum in Seoul…

Among regions, investors should buy shares of Asian nations including Japan on any declines, while U.S. stocks are “not particularly cheap” in real terms, Faber said.

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The Swiss-born investment adviser does not see economic conditions returning to how they were before the global financial crisis. Cho wrote:

Global economic growth is unlikely to recover to the levels before the U.S. mortgage-market slump, Faber said…

“This unusual condition of all asset prices going up at the same time, or all economies booming, will not be coming back anytime soon,” Faber said.

In addition to Asian stocks, Faber had other suggestions for investors. From the piece:

He also recommended investments related to commodities, such as farmland, or the tourism industry.

Source:

“Emerging Markets Outlook Is ‘Optimistic,’ Faber Says (Update2)”
Kyung Bok Cho
Bloomberg, June 30, 2009

PIMCO founder and co-chief investment officer Bill Gross has released his latest investment newsletter. And, once again, Gross warns investors that the party is not coming back anytime soon, so they better adjust to the “new normal.” He wrote:

Our economy’s lights, if not switched off in a rehash of the 1930s Depression, have certainly been dimmed in a 21st century version likely to be labeled the Great Recession. Much like John McSherry, U.S. and many global consumers gorged themselves on Big Macs of all varieties: burgers to be sure, but also McHouses, McHummers, and McFlatscreens, all financed with excessive amounts of McCredit created under the mistaken assumption that the asset prices securitizing them could never go down. What a colossal McStake that turned out to be. Now, however, with financial markets seemingly calmed and an inventory-based recovery in store for the balance of 2009, there is a developing optimism that we can go back to the lifestyle of yesteryear. PIMCO’s driving thesis however, if not a juxtaposition, is succinctly described as a “new normal” where growth is slower, profit margins are narrower, and asset returns are smaller than in decades past based upon the delevering and reregulating of the global economy, which in turn should substantially inhibit the “gorging” of goods and services that we grew used to in decades past…

PIMCO and yours truly are not masters of the antithesis, a subjective approach which might derisively be called “crystal ball gazing,” but we try to focus on what might be legitimate changes in the way economies and financial markets are affected by seemingly irrational or “non-normal” behavior and events. The supersizing of financial leverage and consumer spending in concert with the politicizing of deregulation describes in fifteen words our most recent brush with irrational behavior and inefficient markets. Greed will come again. But for now, the trend is the other way and it promises to persist for a generation at a minimum. The fact is that American consumers have suffered a collapse in wealth of at least $15 trillion since early 2007. Global estimates are less reliable, but certainly in multiples of that figure. And when potential spenders feel less rich by that much, the only model one can use to forecast the future is a commonsensical one that predicts higher savings, lower consumption, and an economic growth rate that staggers forward at a new normal closer to 2 as opposed to 3½%. There’s no magic in that number, and no model to back it up, just a lot of commonsense that says this is how people and economic societies behave when stressed and stretched to a near breaking point.

So, where does that leave the investor then? Gross concludes:

What this all means to you as an investor is near obvious as well. Unsurprisingly, what still can be modeled is the direct correlation of real profit growth to real economic growth, assuming a constant division of the “pie” between profits, labor and government. If long-term economic growth declines by 1½% then profit growth will as well. This, after settling at perhaps half of absolute peak profit levels of 2007, because of the rise of savings rates from 0 to 8% or higher. But to add to the woes of the investor class, one has only to observe that their share of the pie is shrinking. What does the General Motors example tell us all about the rebalancing of power between the investor class and the proletariat? What do trillion-dollar deficits and the recent reinitiation of PAYGO government programs tell you about the future of corporate tax rates? They’re headed higher. Do you really think that a national health care program can be paid for with cost-cutting as opposed to tax hikes at insurance companies and benefit-paying corporations throughout all sectors of the American economy? The new normal will not be investor-friendly unless your forecasting dial is turned to “Pollyanna” or your intelligence quotient is significantly less than 100.

Investors who stuffed themselves on a constant diet of asset appreciation for the past quarter-century will now be enclosed in a cage featuring government-mandated, consumer-oriented fasting. “Non Appétit,” not Bon Appétit, will become the apt description for the American consumer, and significant parts of the global economy, including the U.S. Because this is so, short-term policy rates will be kept low for longer than cyclical norms, and the outlook for risk assets – stocks, high yield bonds, and commercial and residential real estate will involve just that – risk. Investors should stress secure income offered by bonds and stable dividend-paying equities.

You can read the entire “Investment Outlook” here.

Source:

“’Bon’ or ‘Non’ Apétit?”
Bill Gross
PIMCO, July 2009