Investment opportunities in Iraq vs Iran

Investing in Iraq

I think the future of southern Iraq is guaranteed in other words, from Bagdad south, that whole region where the oil is, Basra, that is Shia, their political future is essentially guaranteed because the Shias of Iran will not let ISIS capture that territory nor let Saudi Arabia invade. The Iraqi stock market is very inexpensive, it is very cheap. It is very difficult to invest now in Iran but in Iraq it is much easier and there are funds so that is an opportunity in my view. 

Emerging markets 

For the last few years emerging markets have under-performed say the US grossly, but if I look at the next ten years and in the immediate future, I don’t think that the emerging markets will perform well, they will come off further in my view but they are markets that offer relative good value in the sense that you have many shares say in Singapore, Malaysia, Thailand...that have a dividend yield of say 5-6% so at least you paid to wait. It is not yet at a very attractive valuation level but it´s reasonable. It is a world of inflated assets. 

Gold weakness explanations

Well as you know there are so many explanations [regarding Gold under performance] ranging from manipulation to essentially Chinese selling which could have been the case you know that margin calls went out for stock accounts, the margin buyers may not have been able to sell their shares because still about 20% are not trading.

Number two, they can’t sell their properties because you can’t sell overnight the properties so the margin call has to be met the next day and property transactions may take, I don’t know three months until you close and maybe there were some corporations or individuals that were holding gold and so that they could liquidate, that is an explanation that I could sympathize with.

Or you could say because of the strong dollar people became, or had hesitations of owning gold because they said if the dollar is strong why would I own gold? I mean there are lots of explanations. The simple explanation is of course that there were more sellers than buyers at that particular time. Now if you look at the pole market in gold, 1999 255 dollars went to 1921 dollars in September 2011 and then we had this correction which now we are in 2015, four years on and the price was always holding around 11 or 12 hundred and now it looks like it has broken down on the downside and then you have to ask yourself well is it a breakdown that will lead to further selling in other words, prices would move lower and find the low at, I don’t know, maybe 700, 800, 900 dollars, a thousand or is it a final liquidation from which prices will start to move up.

I really don’t know, all I know is that I own gold and it doesn’t worry me that it went down because as I mentioned to you I have this diversification, the bonds in US dollars and the cash in US dollars has been a good investment essentially over the last twelve months. Then I own equities and I own properties in Asia that have been reasonably good investments so the fact that gold is going down doesn’t worry me and I buy every month a little bit but I think on this weakness I will increase the position substantially because I had maybe say 25% in gold but because equities and properties went up, the dollar went up and gold went down, the allocation to gold is no longer 25% but maybe only 10 or 15%.

Full interview with Sprott and Tekoa

Marc Faber interview with Tekoa Da Silva of Sprott Global

TD: Marc I saw some recent commentary of yours indicating that there’s only so much debt-funded capital investment a person can make in their business before the debt becomes superfluous, unhelpful. Can you talk to that?

MF: Well, I distinguish between productive credit and unproductive credit. A productive credit is something like—let’s say we start a company. We buy the land. We build the factory. We acquire machinery and inventories and we hire people and then we produce either goods or services.

That credit is then serviced by the cash flow our businesses will generate and by the earnings over time, we will repay the loan.

An unproductive credit is a credit whereby you and I borrow money to go and gamble in Las Vegas, or buy a car. Then every month we have to pay off that loan. So that unproductive credit loan, in the initial stages of society, yes it stimulates economic growth above the trend line because future demand is advanced to today.

Otherwise, people would save for ten years and then buy a car. Now, they can buy the car today and pay it off over time. But unless the wages go up substantially, it’s a very unproductive credit.

TD: Marc, I’ve also seen you note that early American railroad companies, heavily indebted, mostly went bankrupt. But they left behind lots of physical assets created by the debt.

Currently, is Western society creating anything with all the debt? 

MF: Yeah, I love that question because when the people default on their household debt, mortgage debt, and student debt, I wonder what will be left behind. They will be people you can’t hire because they studied the wrong stuff.

The difference with the US is that if there is a massive default, nothing will be left behind. At least in China they will have railroads, tunnels, bridges, highways, airport infrastructure, port facilities and so on.

So I say that China, with all its shortcomings and faults, at least they have had productive credit until recently. Recently it has also changed somewhat. But at least it has been productive credit that builds something. Here in the US, credit is used largely for consumption.

TD: Do you have any idea how this is going to resolve itself?

MF: Well, my sense is that the current neo-Keynesian interventionists, using fiscal measures and monetary policies, will in time fail massively. It’s not going to work. If in the US, you print money, then yes, real estate recovers somewhat, stocks go to new highs and so forth.

But the median household income is down because the cost of living for most people is going up much more than wages. So these monetary policies have, in my view, in the long run a very negative impact on economic activity and not a positive impact.

Anyone with halfway common sense can understand that printing money does not create a rich and prosperous society. Otherwise, nobody would work and everybody would have a money-printing machine at home.

TD: Another piece of data I saw you publish recently was a chart showing the increase of service sector employment contrasted against a decline in manufacturing employment in the United States.

How does that resolve itself? Does something change with the currency and cause export opportunities to become more attractive over time?

MF: Well, the manufacturing sector in general has high-paying jobs. They’re not the highest-paying jobs but they’re relatively high-paying jobs because nowadays, in manufacturing, you have machines that cost $5 million. Some cost $25 million.

You can’t have someone operating that machine that spends the whole day on his Facebook account. You need someone with some skills and most people that come out of universities nowadays have zero skills but lots of student debts. That’s the difference with previous generations compared to this generation.

On job creation, we’ll soon have more bartenders in the US than people employed in manufacturing. Of course it’s more fun to work in a bar than in a factory but it doesn’t help society overall.

It’s actually very interesting that although the cost of labor in China and other countries has gone up a lot in the last 10 years (in other words the wages went up a lot), the US in terms of goods, the deficit is still rising. It’s not contracting.

Where it’s contracting in terms of trade deficit is the oil sector. In other words, the US needs to import less oil. So that has helped but on manufactured goods, the deficit of the US is going up, up, up, and up.

So the manufacturing sector which is at the backbone of an economy is basically shrinking relative to the whole economy in the US.  People working in healthcare, nursing homes, bars, restaurants (in other words low-paying jobs)—that is booming. Amusement parks also.

Prosperity is not created as a result, and this is reflected in statistics such as home ownership rates. Young people, they generally have no money to buy a home. They hardly have the money to rent their homes. So they stay with their parents or they share an apartment with one, two, three, four, five, six, seven different people.

This is the new reality. Then you hear statements by the Fed and the financial sector on how great everything is because the stock market has gone up.

I was recently in Turkey. Some media hack said to me, “Well, the stock market is going up.” So I said, “How many people in Turkey own shares?” He said, “1.3 million.”

Of a population of 80 million, I told him, “You mean to say that you favor say monetary interventions that benefit 1.3 million at the expense of the other 79 million?”

Understand what I mean? Because if you print money in Turkey, the currency goes down and it hurts most people, but it benefits shareholders because stocks go up. 

TD: Marc, what do you see over the next decade or two in terms of Asian growth? In decades past if you look at 100 people, a certain number may have a car, a certain number may have a refrigerator, etc. What do you see when you explore these days?

MF: Well, everything is relative. I think that realistically seen, Asia can grow without the rest of the world. What we need is peace. If there is peace I think there could be growth across Asia. I would say 4%-5% per annum. Maybe some countries like Vietnam can grow at 6% per annum trend line. Maybe India can grow at 5%-6% trend line.

Compared to Europe, I think there will be no growth for the next 10 years. In the US in my view, there will hardly be any growth, and the standards of living and real incomes will go down.

So a growth rate of 3%, 4%, or 5% in Asian regions would be fantastic.

Near term, my sense is that the Chinese economy is growing at a maximum of 4% per annum. In most countries I visit, whether it’s Singapore, Hong Kong, Thailand, Malaysia, Indonesia—we have at the present time practically no growth. Maybe some contraction. In Singapore, the manufacturing sector has been contracting.

TD: With that in mind, how far into this commodities down cycle do you think we are?

MF: Well, compared to the stock market commodities are probably relatively inexpensive. But a strong price recovery I don’t see. First of all, a lot of commodity supplies are coming on stream.

Second, a lot of producers will continue to produce as long as they cover variable costs. Three, as I mentioned before, demand from China is not likely to pick up anytime soon.

So the outlook for commodities is maybe not much lower on the downside and maybe you can have a rebound. Oil fell from over $100 down to around $40. Maybe we can have a rebound to $60. I would guess the long term equilibrium price of oil is somewhere between $40 and $60. But you can undershoot, like in 2008, when it went down to $32.

TD: How do you see the precious metals--gold, silver, platinum, palladium fitting into that picture?

MF: Well, precious metals are relatively inexpensive compared to equities. So if you want to invest new money at the present time, I would recommend looking at mining companies and the precious metals. Personally, I don’t think precious metals, gold, silver, platinum, have a lot of downside risk.

But other people will disagree with me and say well, “the metals are useless, they will go lower.” That I doubt because of what I just said. With central banks coordinating policies and printing more and more money, I think some people will gradually say, “Well, if we get negative interest rates on deposits, then why not hold some gold?”

If on a ten-year Japanese bond I get only 0.29%, I would rather own gold. You understand?

So I think in the absence of anything more compelling, with grossly-inflated assets markets, gold, silver, and platinum are relatively attractive. And statistically—gold mining shares compared to the rest of the stock market are incredibly inexpensive.

TD: Marc, what would you advise to the individual—what can they do to shield themselves?

MF: Well, my view is that we had a fabulous time for asset holders, from 1981 to recently. Stocks went up. Interest rates went down. In other words, that lifted bond prices.

If you invested continuously with the cash flow every year since 1981 in 30-year bonds, you’ve actually outperformed equities. But you have to roll it over and you have to reinvest the interest.

If you invested in homes in 1980, even after the recent decline, you’ve still made a lot of money. In particular, if you invested in high quality homes, in say Newport Beach, Vancouver, Whistler Mountain, Sun Valley, Aspen, the Hamptons, New York City, Madison, Fifth Avenue and so forth, those have gone ballistic.

If you bought a Roscoe or Picasso painting in 1980, by now it’s up maybe 20x. So lots of things have gone up a lot in price, and that was the ideal time for asset holders. But from here on I expect asset returns to be very muted.

Now you can come to me and say, “Yes, but if you invested in Facebook, you would have made a lot of money.” Yes. But I can then turn around and say that Facebook investors, they probably also owned GoPro. They owned Yelp and Twitter, all stocks that have tumbled. You understand?

So that one stock has done fantastically well and this is one of the problems for the stock market. At the present time, there are only about 10 or 15 stocks making new highs. The broad market-- in other words the ‘generals’ are moving ahead, and the soldiers behind are no longer following. They’re all down. They’re all dead.

So the market in my opinion has very little upside potential. Bonds have very little upside potential. Gold, silver, and platinum probably have the best upside potential in this environment. But it may take a while until it really gets going.

TD: Marc, is there anything you think we may have missed?

MF: I think this covers it. But I did mention to an audience today that I like Indochina, Cambodia, Vietnam, Myanmar, Thailand and so forth. It is a region that will grow a lot and there is great economic potential.

Marc Faber talks jobs, current generation college graduates, money printing and MORE

Cost of living for most people is going up higher much more than their wages. So these Monetary policies, in my view in the long run has a very negative impact on economic activities and not a positive impact. 

And by the way, anyone with half way common sense can understand that printing money does not create a rich and prosperous society otherwise nobody would work and everybody would have a money printing machine at home.

Optimal size for Government to GDP

The problem with communism was that the whole economy was run by the government. In other words, essentially the whole economy was 100% government. That was a problem. 

In Singapore we had the leader, for the last, essentially, 50 years, and he’s done a great job. 

And in other countries also we had great leaders, but the issue really is, “How much government do you want? How much transfer payments do you want?” 

In my view, a small government is the best, the maximum, say 15 to 20% of GDP. But now, in the Western world, we have, through all the transfer payments, governments that are close to 50% of GDP, and in some countries, more than 50% of GDP.

Uneven benefits for economy from money printing

If you print money, the money will not flow evenly into the economic system and this has already been observed by Copernicus who wrote about money and it was later also observed by David Hume and by Irving Fisher that when you print money, the money flows do not benefit all classes of society and all industries equally at the same time.

What then happens is that you look for instance at commodity prices, ok, we had money printing and then prices rose but not only because of money printing, they rose mostly because of the incremental demand from China, but the Chinese boom came to some extent from money printing in the US which led to rising trade and current account deficits until 2008, until the crisis. Since then actually in terms of goods, the trade balance in the US has worsened again, further, but because of the oil industry the overall trade and current account deficit has been diminishing.

The point is simply this, the over capacities that we have in some industries like steel in China, cement and in resources, iron ore, this was made possible by money printing. I am not saying only, by to some extent money printing was responsible. The housing bubble, the housing inflation in the US was made possible by money printing and keeping interest rates artificially low. Now we have a bubble in sovereign debt and we have a bubble in equities, certainly in US equities.

Now we have a bubble in sovereign debt and we have a bubble in equities, certainly in US equities.

When that bubble deflates eventually in sovereign debt and in equities, what the impact will be on the economy will be interesting to watch because the markets are not prepared for rising interest rates.

Market crash is yet to come

I don't think the crash has happened yet. Say you're a young person and you're just starting to work. So take me in the 1970's. In the US, with 20 hours of work, I could buy the S&P 500. Now you need more than 90 hours of work to buy the S&P 500 if you're young, say with a medium income. When I was young you could buy a home at a reasonable price, even in Hong Kong. 


What I want to say is that the Fed has basically created with their colleagues in Japan and at the European Central Bank (ECB) and the Bank of England (BOE), they've created a colossal asset bubble. And the returns going forward are going to be disappointing.

Advance/Decline numbers

The composition of an index is that it's usually capitalization weighted. So one stock that goes up vertically could theoretically drive up an index and 99 percent of the shares don't make new highs. We had a strong day on Wall Street, but on the New York Stock Exchange, out of more than 3,000 shares that are being traded, only less than a hundred made a 12-month new high. The advance is very narrow.

Some markets are still strong, but the bulk is no longer moving up so in other words the advance of asset price inflation has been narrowing significantly.

Soft landing for China economy will not be easy

I think it's very difficult if you had the kind of bubble like you had in China, and the credit bubble, to then engineer a soft landing. You could maybe cushion the downturn somewhat, but the fact is I don't believe that the economy isn't growing at all, but I think that I have argued and this for the last 18 months that the economy was slowing down meaningfully, and that growth would be roughly at three to four percent, which it is at the present time, I would imagine.

China is a massive country

I think many people don't understand that China has a population twice as large as the U.S. and Europe combined. It's not just a country. It's an entire empire. And you can have growth in some sectors of the economy. I have no doubt that some service sectors are growing, but other very important sectors like industrial production isn't growing at the present time.

     
If you really want to have a good view of the service sector and how well it's doing in China, ask Yum!, the fast-food chain in the U.S. They will tell you about their Chinese sales.

And the way the U.S. had sometimes a recession in California like in the early 1990's, and other states were growing, you can have in China some provinces growing and others contracting. And so and to measure economic growth in a country this large with that many people is very difficult. But say the evidence shows that it's nowhere growing at the same pace it was growing say between 2000 and 2007.

Credit bubble disaster ?     

And what we have had in China, and this investors should realize, is a credit bubble of epic proportions. I have read economic history. I've never seen credit as a percent of the economy growing as fast as in China in the last seven years.

Financial mess for average american household

Michael Smithson, a social scientist at Australian National University uses this analogy about knowledge and ignorance: “The larger the island of knowledge grows, the longer the shoreline - where knowledge meets ignorance - extends. The more we know, the more we can ask. ....Answers breed questions. Curiosity isn’t merely a static disposition but rather a passion of the mind. ....Mapping the coast of the island of knowledge, to continue the metaphor, requires a grasp of the psychology of ambiguity. The ever-expanding shoreline, where questions are born of answers, is terrain characterized by vague and conflicting information. The resulting state of uncertainty, psychologists have shown, intensifies our emotions: not only exhilaration and surprise, but also confusion and frustration.”

Matthew Winkler, Editor-in-Chief Emeritus at Bloomberg, opines that, “Markets, represent the judgment of buyers and sellers of what’s valuable. By that yardstick, shareholders already have decided that Obamacare is a boon for the American economy.”

The facts, however, seem to repudiate Winkler’s views. According to Bankrate.com, which conducted a survey of 1,000 adults, nearly one in three (29%) American adults (that’s roughly 70 million) have no emergency savings at all - the highest percentage since Bankrate began doing this survey five years ago. What’s more, only 22% of Americans have at least six months of emergency savings (that’s what advisers recommend) - the lowest level since Bankrate began doing the survey.

These findings mirror others - all of which paint a rather unambiguously abysmal picture of Americans’ ability to withstand an emergency. Greg McBride, the chief financial analyst for Bankrate.com, says these low savings reflect that households haven’t seen their incomes ramp up and thus ‘household budgets are tight.’ Plus, he adds ‘people don’t pay themselves first - they wait until the end of the month to save what’s left over and then nothing is left over.’ 


via Gloom Boom Doom