The Asset Shufflers

Anyone who read the roundtable discussion at Barron's ($) over the weekend and who is now reading this blog should not be surprised that Dr. Marc Faber is prominently featured in the recap that appears below.

It was a pretty funny bunch that also included Bill Gross of Pimco and ten others, many with names that are unfamiliar here. Some of them will not be easily forgotten such as Art Samberg, apparently the head asset shuffler in the bunch, for his memorable response when asked to comment on the year just concluded and the prospects for 2007.

Art Samberg: If it ain't broke, don't fix it. China is growing by 9%, 10%. India is growing slightly less. Brazil is growing at a nice rate. I don't see where there's anything all that unusual.We have no inflation in the world. These countries are sucking up commodities, providing low-cost labor. Productivity is slowing but it is still decent. There's no major change in anything. The world economy is growing faster than anything we've ever seen before. In the long term, will jobs get outsourced and the U.S. lose its dominant position? Perhaps. It's a risk. But it ain't going to happen this year. As for housing, price inflation in the United States is no different from what it was in England and Australia, and those markets didn't see a collapse.

Felix Zulauf: There's a difference, Art. The U.K. and Australian housing markets never had an inventory problem. Prices turned flat for 12 months, but inventories didn't go up.

Mario Gabelli: Housing has had a typical cycle, with some excesses.

Bill Gross: Excesses like we've never seen before. Home prices on a year-over-year basis are down 3.1%, according to the National Association of Realtors. We've never had a year-over-year decrease of this magnitude on a nominal basis

Samberg: A 3% decline is something to worry about, but it doesn't change how the consumer thinks his balance sheet looks.

That pretty much summarizes the whole discussion - a large group of asset shufflers who plan to make as much hay as they can while the sun still shines, and a smaller coterie of realists who fear that something will eventually go terribly wrong.

A consumption based economy driven by rising asset prices where most of the asset owners do not yet know how much "wealth" they've lost in the last year due to falling home prices. What could possibly go wrong?

Moderator: You've been quiet, Marc. What's wrong?

Marc Faber: I agree with Art that we are in the midst of the greatest synchronized economic expansion in the world. In the first 150 years of capitalism, the colonial system prevailed. It was never the objective of the industrialized countries to boost growth rates in the colonies. They were used for exploitation. Once the colonial system broke down, roughly three billion people fell under communism and socialism. After 1980 commodity prices collapsed and Latin America went into a depression. Then the Soviet Union collapsed. While Latin America began to recover in the 1990s, Japan, at that time the second-largest economy in the world, had stopped growing. The Asian crisis hit in '97, the Russian crisis in '98. So there was no synchronized growth.

The recovery began in November 2001 in the U.S. Strong consumption growth in the U.S. boosted industrial production, notably in China. Incremental industrial growth, combined with strong personal-income gains and capital spending, then led China to import resources, in particular oil. That led to rising commodities prices, which greased the economies of the Middle East and the former Soviet Union. Demand from China for copper and iron ore greased Latin America and Australia, and those countries grew rapidly. They demanded more imported goods, capital goods and luxury goods from Europe and Japan, and bingo! You suddenly had the whole world expanding rapidly. However...

Moderator: We knew that was coming.

Faber: Global imbalances have increased. The emerging world has grown much more rapidly than the United States. In the U.S., ultra-expansionary monetary policy got under way ahead of Y2K in 1999. It continued after 2001, when the Fed slashed interest rates to 1% from 6.5%. Though the Fed has raised rates since 2004, to 5.25%, we still have expansionary monetary policies worldwide. If you define economic growth by consumption, the U.S. has grown rapidly and will probably continue to grow. If you print money you give people the opportunity to spend. But along with the spending came a growing trade and current-account deficit, which was offset by surpluses in Asia. Every region of the world has a current-account surplus with the U.S. For the first time in capitalism, the poor countries, notably China, are financing consumption in the U.S. This will not last forever.

In 2006 -- hurrah, hurrah -- the Dow Jones Industrial Average was up 16% and the S&P 500 14%. But in euro terms the S&P was up less than 5%. In gold terms it was down. Against most commodities, the Dow was down. The U.S. also has a split economy. The typical household is not doing well. But one economy is doing exceedingly well: the asset shufflers in this room. [Nervous laughter] This economy is in the greatest bubble ever. There's a bubble in the art market; art prices were up 27% last year. There's a bubble in equities, especially in emerging markets, and in real estate in Anglo-Saxon countries. The big threat is not that liquidity will vanish because of Federal Reserve action. The Fed will print money, I guarantee you. But when asset markets go up, they create liquidity by allowing people to borrow more money against appreciating assets. When asset values go down, liquidity contracts immediately because people repay loans. The moment the asset bubble begins to deflate, liquidity will contract.

Some would call Dr. Faber a wet blanket, others would call him a realist.

Art Samberg would probably call him a blanket that is so wet, cold, and heavy that it should be immediately tossed in the trash bin in favor of an exotic cashmere bed cover imported from Asia.

Samberg: Where is the bubble? I'm confused. Marc appropriately gave us a history lesson about how the world has changed to one in which economic growth and personal freedom and better lifestyles are adopted across the globe. The most mature financial markets are here in the U.S., and we're the clearinghouse for the world, which can lead to long-term problems. But why turn a positive into a negative? The world is awash with growth. It is awash with liquidity, and our markets can clear liquidity better than any others.

Moderator: It is also awash in consumption, extravagance and debt.

Faber: America's current-account deficit has greased the whole world. Latin American markets are in the midst of a huge boom. The Argentine stock market is up 10 times from the lows. Latin American debt on a total-return basis has doubled in the past five years. In Asia we have bubbles in real estate. In the U.S. there's a debt bubble. Debt is now 330% of GDP. That will prevent the Fed from ever pursuing tight monetary policies, even if it becomes necessary.

Hickey: Asset bubbles are always fun while you are going through it. The tulip bubble was fun. The Mississippi bubble was fun. But they always end in tears and disaster.

Gabelli: I'll float a bubble. Abby, the Democrats won the midterm elections in a landslide. Marc, should we worry about a politically motivated constraint on global trade?

Faber: I'm less worried about that than this: The five brokerage firms in New York -- Merrill Lynch, Morgan Stanley, Lehman Brothers, Bear Stearns and Goldman Sachs -- paid out $36 billion in 2006 bonuses. Compensation and bonuses together roughly are equal to Vietnam's GDP. I see a bipolar world in which there's the typical household in the U.S. or Western Europe, and then this huge wealth concentration. It will lead to a political backlash one day.

Moderator: Starting in Connecticut.

Yeah, that's going to be the tricky part. One day they'll storm the castle and drive the asset shufflers out into the streets and then things might get ugly.

But it ain't going to happen this year.