China Hard Landing Possible; Impact ‘Devastating’: Faber
A hard landing for China will have a major negative impact on global commodities and risk currencies, says Marc Faber, the editor of The Gloom, Boom & Doom report, who adds that he is more worried about a Chinese economic downturn than a recession in Europe.
Faber, whose investment portfolio is concentrated in Asia, believes a Chinese slowdown is already under way.
"The (Chinese) economy consists of many sectors and I think some sectors are already probably in a recession," Faber said to CNBC on Friday in a phone interview. "I think growth will be much lower and it is possible that we could have a hard landing with no growth at all."
Faber, who correctly predicted the 1987 stock market crash and more recently forecast the stock market correction in August, says China's economy depends largely on capital spending, which tends to be volatile and has a strong multiplier effect on the economy.
While a recession in Europe could mean a gross domestic production contraction of 1-2 percent, he expects a shrinking Chinese economy to have a more widespread impact globally.
The commodities market, in particular, will bear the brunt of a China economic deceleration, said Faber. "If the Chinese economy grows at 10 percent, or 5 percent or no growth, it has a huge impact on iron ore, copper, nickel, anything. “
"It will have on the global economy a devastating impact via the resource producers of the world, whether it's Brazil or Australia or the Middle East or Africa," Faber added.
When asked about investor Jim Rogers' view that commodities will continue to do well in the long-run, in spite of a China slowdown, Faber said: "If I was always bullish about commodities and completely missed out on the crash in 2008, then obviously, having tied essentially my reputation to commodities, I'd continue to be bullish." Read Rogers' rebuttal here.
Still, Faber says gold [XAU= 1748.04 4.30 (+0.25%) ] should get some support over the near-to-medium term as he expects central banks in Europe and the U.S. to print more money to prop up their economies. As such, he advises investors to steer clear of the Australian dollar [AUD= 1.0226 -0.0016 (-0.16%) ], the Canadian dollar [CAD= 1.0164 0.0026 (+0.26%) ] and resources stocks.
Faber says he is staying well diversified with his portfolio divided equally in four parts between gold, real estate, stocks, and cash and bonds. He adds that he is keeping cash on hand to scoop up assets should markets correct further.
Jim Rogers: Faber's Wrong About China
Jim Rogers thinks Marc Faber has got it wrong about China, when he says the country is possibly headed for a hard landing, which would lead to a devastating impact on commodities around the world.
"Marc still does not understand China. There are going to be several hard landings in the next few years, but China’s will be less hard overall than others such as Greece, U.S., et al," Rogers told CNBC in an email.
Rogers says some parts of China's economy will have a "hard landing" but other parts will continue to boom. He says the commodity market will have a correction, but rebutted Faber's view that it would be devastating.
"Yes, there will be consolidations in the commodity bull market just as all markets have consolidations," he said. "In 1987, stocks declined 40-80 percent worldwide, but it was not the end of the secular bull market in stocks."
Rogers said he was still long commodities, adding that gold went up 600 percent in the 1970s and then corrected by 50 percent scaring a lot of people. "It then continued its secular bull market and rose 850 percent. Corrections are the normal way of all markets."
According to Faber, Rogers' bullish call on commodities is misplaced. "If I was always bullish about commodities and completely missed out on the crash in 2008, then obviously, having tied essentially my reputation to commodities, I'd continue to be bullish," Faber said.
But Rogers said Faber had got it wrong when it came to his call in 2008. "I proclaimed repeatedly far and wide that one should not buy commodities in the run up phase. I also explained that I was not selling mine since we were [and are] in a secular bull market," Rogers said.
"I explained that my shorts of Citibank, Fannie Mae, all the investment banks and homebuilders, plus my long position in the Japanese yen would protect me in any sell-offs. When one’s shorts decline 90-100 percent, it is a good year even when one’s longs decline," Rogers added.
According to Rogers, Faber is the one who has made many wrong calls, arguing that he "totally missed" the secular bull market in commodities that began in early 1999.
"Also back in those days, he and his friends proclaimed often that China was a mess and would continue to be so," Rogers said. "They all were wildly excited about Russia. Some of his friends even left China to start operations in Russia. We all know how that resulted."
Ironically, the cat fight seems less about what will happen, then a pissing match about prior investment track records, which is comical. I've made some calls as good if not better than both of those guys. I got my family out of the stock market in 1999, back into the stock market in 2003 and back out in 2007. I got them out of real estate in 2003 and into gold in 2004. My only big miss was not getting back into stocks in 2009. So, when I see two gurus squabbling over track records I find it comical.
I believe both have some solid thoughts on China, and it seems more a question of when and to what degree. I struggle with the idea of China because from what I've read their real estate market is being propelled by building vast amounts of real estate that sits empty, virtual ghost cities. There comes a day when the building boom and the infrastructure boom comes to an end or major slow down, and it will produce a hard landing.
Ironically, I have a client that is an inspection firm of metal and concrete as it relates to the building of bridges. They currently have a hand full of big jobs in the united states. They are bidding on 3-4 bridge jobs in.................that's right China. The jobs are quite large!
As someone who has called major market turns with some success, I can say calling what will happen and when it will are very difficult to get both right. Will China have major issues and be part of global recession? Yes. Timing however is far more difficult to gauge because bubbles expand the normal cycle time frames from which we are all used to in gauging market turns.
I would rather argue that any hard landing in China, the Eurozone, or the US, will happen at a time when all three have an issues, serious economic pain of various degrees, which could easily create a global deflationary environment.
We bought into gold quite heavily in 2004. We actually sold some in the past 18 months. We've moved from a 20% weighting of the families net worth to 8%. Our cost basis was mostly around $440 and we had huge gains in 6 years and it was time to book some profits. We've held onto some because everyone should at a minimum have 5-10% invested in the physical holding of precious metals.
Below is the monthly chart of gold. What you'll see is a virtual straight line up. I personally have a hard time with the idea of buying gold now, even though it could wiggle higher, maybe up to $1,900 - $2,000. The technical reason is that the monthly MACD has yet to roll over and indicate a correctional phase, so the door is open for another push up.
That being said, I am interested in buying back into gold and silver, but I want to see a correction. Both Faber and Rogers believe a correction could happen, as do I. I believe it's a correction within a secular bull market, but that doesn't mean we can't see gold correct back to $1,200, maybe even $1,000, it just depends on the strength of the so called hard landing, and the global deflationary environment. I would expect gold to reflect relevant strength even as it declines in such a deflationary world.
I agree with Rogers on the idea of keeping cash. It's our single largest weighting. I think about it differently then rogers though. Why would I want to own bonds, especially US bonds, they're at record highs paying scant interest? Why would I want to buy into gold now, when it's wildly over bought and due for a correction in time or price? Why would I want to buy a propped up US stock market that has doubled in two years? Why would we want to buy US real estate when the values of real estate have yet to reflect the impact of more wager deflation, higher taxes coming, and a bond market correction sending rates much higher?
Cash is king. Yes, we will use our cash for buying opportunities like Rogers when we go through the next correction, but why would anyone want to be putting money to work and holding asset categories that seem flawed? I ask these question because I personally can't get excited about a long term buy and hold approach on much these days, hence the reason cash is king for us.
Hope all is well.
J.D. Rosendahl, Rosey