Warning: if you are placing bets on a United States stock market recovery this year, former Hong Kong-based investment banker Marc Faber has discouraging words. The Swiss economist has penned his thoughts on the world economy in a 350-page book entitled Tomorrow's Gold: Asia's age of discovery.
Commissioned by brokerage CLSA, the book provides an overview of economic history, recounts Faber's favourite classical economic theories and culminates with a handful of investment themes for decades ahead.
True to his unorthodox style, Faber argues several widely held investment assumptions simply do not wash when evaluated on a historical basis. Chief among them is the belief that a buy and hold equities strategy works best over the long run. As evidence Faber points to two important bear markets in US equities that he says dispel the theory.
An investor who bought US railroad securities during the height of the railway boom in 1850 would have watched the asset languish until a major bottom was reached in 1932. The securities had underperformed other industrials despite being part of the largest industry in the US.
In the 1920s, electric utilities, cars and radio companies were growing rapidly, but after 1929 they failed to deliver satisfactory returns. The Dow Jones Utilities Average took until 1965 to exceed its 1929 high. While it could be argued the Dow eventually continued its upward march, Faber says investors may have done much better elsewhere.
He gives failing marks to Federal Reserve chairman Alan Greenspan for exacerbating the downturn with easy money policies that fuelled the consumer spending binge.
'I think he is insane. Everything he said in the 1950s and 1960s he hasn't pursued in the last five years. He was an advocate of the gold standard and also very much of the view excessive monetary and credit growth had led to the boom of the late 1920s and the subsequent collapse,' Mr Faber said in a recent interview.
'But basically what he has done is created this huge liquidity bubble, first by bailing out Mexico and then bailing out [US hedge fund] LTCM in 1998, and later he flushed the system with liquidity ahead of Y2K which led to the last Nasdaq bubble. And once again we have a monetary explosion in the last couple of weeks, which I think is highly dangerous.'
The best way to play the coming decline in the US dollar is by switching into real assets such as gold, agricultural commodities and oil, he says.
As the title of the book suggests, Faber favours Asia's emerging markets, particularly resource-rich countries that have ridden themselves of the excesses of the investment boom of the mid-1990s - namely Thailand, Malaysia, Vietnam, Myanmar, New Zealand and the Philippines.
By Marc Faber
Published by CLSA Books