Whiskey & Gunpowder
December 21, 2006
by Dr. Marc Faber
Chiangmai, Thailand
Will the U.S. Become a Banana Republic?
Now, I am not insinuating that the US is already a banana republic, but the trend is undoubtedly there. 
The physical infrastructure is more often than not totally insufficient. Not a single flight I took in the US was on time, with one arriving 10 hours late, another 12 hours late, while two were cancelled altogether, resulting in delays of more than 4 hours. In Philadelphia, my US Air flight was delayed by three hours. The plane was on the ground in front of us, the pilots were all present, as well as one flight attendant (air hostess). But because a second flight attendant was unavailable in Philadelphia, one had to be flown in from Washington, so delaying my flight. Since there was no service provided on the flight, I wondered what purpose the additional attendant might have served.
Thomas Friedman expressed the view that if the Republicans had remained in control of the House and the Senate, the US would have become a banana republic. But a banana republic isn't characterised only by a rotten political system, ruled by a small, wealthy, and corrupt clique usually put in power or supported by foreign interests (in the 20th century, in the case of several Central and Latin American countries, by the US), but also by huge wealth and income inequities, poor infrastructure, backwardness in many sectors of the economy, low capital spending, a reliance on foreign capital, money printing and budget deficits, and of course a weakening currency.
A banana republic is also characterised by a ruling class that curtails people's personal freedoms and is moving towards a heavyhanded military dictatorship under the excuse of fighting guerrilla (or terrorist) opposition groups or enemies. Moreover, the fact that the ruling class or the elite comes from different political parties isn't a relevant factor in classifying a country as a banana republic; what is relevant is the determination of the elite, irrespective of which party its members belong to, to shift wealth from the majority of the people (the masses) to themselves, usually through simply printing money and incurring chronic budget deficits, and frequently also through senseless warfare.....
INVESTMENT IMPLICATIONS
From our remarks about the polarisation of wealth in the US, one could construe that the typical household in the US is vulnerable, whereas the type of people who make the Forbes list of the 400 wealthiest Americans will continue to thrive. (I could also be labelled as a socialist.) This would imply avoiding stocks such as Wal-Mart and Home Depot, and buying any company that has to do with the economy of the superrich, such as auction houses, brokerage stocks, publicly traded hedge and LBO funds, luxury goods retailers, and high-end hotel chains, or investing in top-end properties around the world. Indeed, if we compare the performance of luxury department stores to the performance of low-end stores, it is evident that the economy of the super-rich has done far better than that of the median household.
However, when payback time comes, it is likely that the economy of the super-rich could be hurt rather badly. This would certainly be the case if Albert Edwards is correct and the "credit cycle is turning down". In the mid-1990s, Stephen Roach frequently wrote about a "workers' backlash". His view was that, in time, wages would rise, lifting the rate of inflation and depressing corporate profits. While this view was premature then, I wouldn't be surprised to see wage inflation accelerating and shifting some income back from Wall Street and corporations to the labour force. Such a shift would lead to higher inflation and have a negative impact on corporate profit margins, and on the valuation of bonds and equities.
There is another point I should like to make about the economy of the super-rich. In the late 1980s, the super-rich did very well in Japan. In the mid-1990s, the super-rich creamed off all the money in Southeast Asia. Both periods were characterised by asset accumulators becoming rich and being highly leveraged. In both cases, subsequent events - the bear market in asset prices in Japan, and the Asian crisis - hurt the asset shufflers the most; ordinary people, especially those living in the countryside, were hardly affected. I suppose that if you have nothing, you have little to lose! Therefore, as a contrarian bet, I would look at shorting at some point companies that have benefited the most from the shift in wealth from the masses to the asset shufflers. Such a list would obviously include luxury retailers, the brokerage industry, asset management companies, and custody banks, all of which either arranged or benefited from this transfer of wealth and the asset inflation.
The last few weeks have been characterised by a weak dollar and rising equity, bond, and commodity prices. As we move into 2007, the pattern will be the same. Either the Fed will finally decide to implement tight monetary policies, which would strengthen the US dollar and weaken all asset prices except bonds, or it will continue with its expansionary bias. In that case, asset prices will continue to rise and the dollar will continue to weaken. However, it should be understood that under easy monetary policies, dollar assets (US equities, bonds, and real estate) will, as has been the case for the last few years, underperform foreign assets and commodities. Since Mr. Bernanke was appointed Fed chairman, the S&P 500 is up by 14.6% in dollars, but only by 7.5% in Euro terms. Over the same time frame (November 1, 2005 to November 27, 2006), gold is up 40%, silver 80%, and copper 68%. Year-to-date, the S&P is up 11% in dollars but only up 0.2% in Euros and, of course, it is down against gold and silver. The worst investments were US dollar cash and bonds, both of which declined in value in both Euro and gold terms. Therefore, I advise investors who wish to have an equity exposure to overweight foreign markets, especially the Asian stock markets, and to significantly underweight US assets.
Near term, asset markets are mostly over-extended and the contrarian play is to reduce exposure to all asset markets. Moreover, after its recent weakness, the dollar could stabilise, but a strong rally shouldn't be expected. Euro-area monetary and debt growth has been strong over the last 12 months and may force the European Central Bank to increase interest rates, which should support or even strengthen the Euro. Also, given the record short positions that exist in the Japanese Yen, I would consider buying Yen against the US dollar.
As of late November, asset markets became extremely overbought. I recommend deferring any buying and to await the shape and the severity of the expected correction.
I wish my readers a Merry Christmas and a Happy New Year. I would like all my readers to travel often to new places to see the world, to learn about other cultures, and to take an interest in other people's lives. I also hope that my more affluent readers know that giving money away isn't the only way to help those who are less fortunate. As the author Han Suyin (A Many Splendored Thing) observed, "There is nothing stronger in the world than gentleness." And as Abigail Van Buren remarked, "The best index to a person's character is how he treats people who can't do him any good, and how he treats people who can't fight back." At the same time, I hope that my readers enjoy their lives and have some fun and laughs. The famous and extremely popular golfer Chi Chi Rodriguez once said: "I was born broke, so I want to live like a millionaire and die poor; I don't want to live poor and die a millionaire." Mark Twain believed that, "Twenty years from now you will be more disappointed by the things that you didn't do than by the ones you did do. So throw off the bowlines. Sail away from the safe harbor. Catch the trade winds in your sails. Explore. Dream. Discover."
At the same time, on a more sobering note, don't forget the words of Mahatma Mohandas K. Gandhi:
"The things that will destroy us are: politics without principle; pleasure without conscience; wealth without work; knowledge without character; business without morality; science without humanity; and worship without sacrifice."
Regards,
Marc Faber
http://www.whiskeyandgunpowder…chives/2006/20061221.html
..sagt ueber 2007:
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