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Dr. Marc Faber Sunday, March 16 - 2008 at 00:05 (GMT+4)

A tribute to Marc Faber, part one: US dollar, Nasdaq, gold and oil
Dr Marc Faber once said that any journalist could write a positive or negative article about him by picking out his good or bad calls. But just as Nury Vittachi could sit down in the late 1990s and pen a whole book that sided with the postive view of Faber, AME Info has scanned over 100 articles and reached a similar opinion.
So what did Dr Doom get wrong in the 2000s? Not a great deal really, but actually his biggest error was a repeat of the error of pessimism he committed in the 1990s about the length and durability of the US stock market upturn. What he missed entirely was that the start of the Second Gulf War in spring 2003 would be a 'Bottom War', marking the bottom of the US stock downturn that began in early 2000. He thought US stocks were down and would fall still further. His record on the he was perfectly correct in saying: 'In the course of 2002, we have repeatedly warned that US dollar weakness was only a matter of time. 'Since the summer of 2002, the dollar has weakened considerably and we feel that the 1995-2002 bull market has definitely come to an end and that, after a brief technical rally, more dollar weakness should be expected in 2003, as the US economy continues to disappoint.' What actually happened was that the nominal US stock market rally was then supported by the declining value of the US dollar, and the value of US equity investments if denominated in nonUS dollar currencies drifted sideways. So in that sense Faber's pessimism about the performance of US equities throughout the 2000s was proven correct as US stocks went nowhere in foreign currency terms. Nasdaq spot-on He was also right as regards the Nasdaq. In noted: 'This Nasdaq 5000 level may very well turn out to be as much of a 'milestone' in financial history as the Nikkei 39,000 level reached in December 1989. 'When the Nasdaq reached in March the 5000 level, this Index consisted of about 4,800 stocks with a market capitalisation in excess of US $6 trillion. Based on combined Nasdaq earnings estimates for the year 2000 of US$25bn, these stocks had, in March 2000, collectively a P/E of about 240! 'Now, let us assumes that the Nasdaq with its $6 trillion valuation can grow its earnings at a compound rate of 20% per annum for the next 10 years 'without interruption.' At the end of the period, in 2010, let us also assumes that the P/E of the Nasdaq will be twice its earnings growth rate (of 20% per annum). In other words the Nasdaq will sell for 40 times earnings. 'Since the S&P 500 sells for about 28 times earnings, the assumption of a P/E of 40 for the Nasdaq is quite realistic. Under this scenario, the Nasdaq's current $25bn in earnings will grow

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to $155bn in 10 years time and with a P/E of 40, these $155bn would have a value of $6.2 trillion. In short, even under this extremely and, in my opinion, totally unrealistic scenario, the Nasdaq would at best be in 10 years time where it was in March of this year.' With the benefit of hindsight this is a superb application of sober investment analysis to the dotcom boom folly that still held some investors fixed like rabbits in a car headlights in late 2000. And as we now know even seven years later the Nasdaq was still only worth half of its 2000 peak. Gold tipped in 2001 But his most brilliant call was undoutedly to buy gold in early 2001, way ahead of most other market commentators and following a 20 year bear market that had left the gold market in a mood of deep depression and dispondency. It was an incredibly radical call, and first appeared in an article in February 2001 with a groundbreaking fundamental . 'Today, I should like to advocate the purchase of a group of stocks, which has over the last 20 years been the worst under-performer. This group consists of gold mining companies around the world, all of which have a combined stock market capitalisation of only $30bn. 'In other words, you could buy the world's entire gold mining industry for just $30bn. A bargain when you consider that Cisco and Microsoft alone had earlier last year a combined stock market capitalisation of more than $1 trillion, and that Amazon.com was valued at its peak at $35bn. 'Every year in the 1990s, physical gold demand has exceeded the annual supply of approximately 2,500 tons - valued at present at about $35bn - by about 300 to 500 tons. Compare this to the annual supply of bonds in the world, which amounts to about $3.5 trillion and it becomes evident, how small the supply of gold is. 'Then consider this. In the year 2000, Indians bought about 850 tons of gold. In other words, in India, where the GDP per capita is only $300 per annum, every man, woman and child bought almost one gram of gold each. If gold became one day as popular as platinum or the Nasdaq is at present, and every person in the world bought just one gram of gold, it would generate an annual demand of 6,000 tons, which is about 2.5 times its annual supply from mines.' Probably nobody has written a better assessment of the fundamental case for investment in gold, and at the same time Faber also correctly called for an emerging market stock rally based on a resurgent China that also had an important message for the commodity markets in general: 'As more and more foreign companies start to produce in China, its domestic economy will remain robust and lead to rising property prices in the long run. In this respect, I believe that Shanghai properties are one of the most interesting investments at the present time. 'In India, I can see that the software industry will continue to grow. The Indian software industry will not only penetrate the domestic market but it will also gain market share from software providers in Europe and the US thanks to its cost advantages.' Investment classic Indeed, by the middle of 2001 Faber had made the critical market judgments that would be the subject of his own classic investment book, 'Tomorrow's Gold' published at the end of 2002. This book correctly forecasted the bull market in commodities, particularly for oil and gold and the growth of emerging markets. No review of Faber's popular column on AME Info could be complete without also looking at his assessment of the oil market which in 2004 forecast continued strength in the oil market, and as with the earlier gold item gives a superb summary of the bullish long term case for oil. In fact, as far back as 2000 he suggested that . In 2004 he said: 'Since its last major low in 1998 at $12 (when 'The Economist' published a very bearish piece about oil), to around $50 at present. The question, therefore, arises whether oil
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prices are headed for a sharp fall, as most analysts seem to think, or whether far higher prices could become reality in the years to come. 'Over the last two years we have repeatedly explained how rising demand for oil in Asia would likely lead to higher prices - this especially because we took the view that the oil producing countries in the world were unlikely to be in a position to increase their production meaningfully. 'At $50, one might, however, be tempted to think that oil prices are substantially over-bought certainly from a near term perspective - and ready to decline again. Therefore, I have noted that numerous market participants have been shorting oil futures in the hope of a sharp fall... Still, I maintain the view that we may see sometime in future far higher prices than anybody envisions. Oil outlook 'First of all, if we look at oil prices in real terms - that is oil prices adjusted for inflation - the real prices is right now still about 50% lower than it was at its January 1980 peak. In fact, oil is now not much higher than it was in the early 1970s, when the last big oil bull market got underway. 'But, what is important to understand is that whereas the 1970 oil price increases were coming from a supply shock, which was driven by OPEC cutting its production all the while large production excess capacities existed, the current oil bull market is purely a function of increased demand coming principally from Asia at a time global oil production has practically no spare capacity which could lead to much higher production than the current 80 million barrels per day. So, whereas we can say that the 1970s oil shock was 'event driven', today's oil price increase is structural in nature.' It is hardly any wonder that Marc Faber remains a popular commentator with his successful investment calls far outweighing his occasional mistakes. See also:

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