Sun Sets on the West

The Sun Sets on the West
By Chris Mayer

What will the global economy look like in 2050?...and should we care about that now, forty years before the fact? Dr. Marc Faber, the 63- year-old Swiss editor of the well-regarded Gloom Boom & Doom Report, recently addressed both questions.

China ought to be the world’s largest economy by then, Faber predicts. The economies of the U.S. and India, should be neck and neck for the No. 2 spot - about 60% of the size of China’s. A distant fourth, at maybe a quarter of the size of the U.S. economy, will be Brazil, followed closely by Mexico, Russia, Indonesia and Japan.



That’s a very different world than the one we live in now, where the U.S. is No. 1 by a large margin and the European countries, such as Germany and the U.K., still figure prominently. What interests us most, though, is not so much the destination of 2050, but the path of growth to get there.

There are as many ways to show this growth trend as there are golf balls in the water at No. 15 at my local golf course. But Faber cites the trend in motor vehicle sales to illustrate the trend.



You can see that the “emerging 16? – the largest of the emerging markets, which includes China and India – caught up and passed the U.S., the European Union and Japan in 2008 as the world’s largest auto markets. What’s interesting here is that even in this recession that gap has widened.

There are all kinds of ideas that spin out of just that one observation. Cars don’t operate in a vacuum. They require an entire operating system to run, as software does. You need roads, for instance, and you need gasoline stations and gasoline. You need a lot of oil.

Just think about oil for a minute. The U.S. eats up about 25 barrels of oil per capita per year. Even countries such as South Korea and Japan consume around 15-20 barrels of oil per capita per year. China and India are tiny compared with that. China is at 1.5 barrels of oil per capita annually. And India barely registers.

So one can only imagine that as these economies grow and take up more of a share of the global economy, their oil consumption will rise exponentially. As far as investing goes, it boils down to investing in what these economies need, but don’t have.

In other words, we ought to ask the question, “For which commodities will demand not collapse?” Faber presents a chart that provides a partial answer. The chart presents China’s proven reserves of each commodity as a percentage of the world’s total reserves.



This chart does not include the agricultural commodities like soybeans and potash that China has in very short supply, but the chart does include many other important (and investible) commodities like copper, natural gas, uranium, bauxite (important in making aluminum), chromium (a steel additive) and manganese (important for making stainless steels). As investors, the left-hand side of the vertical line on the chart is where you want to be.

The commodities bull market, Faber ventured, is still on, though he cautioned that the road will be bumpy.

Even in commodity bull markets, 50% corrections are common.

“Hard asset booms are fueled as much by pessimism about economic prospects as by optimism about a continuously high appreciation of the commodity in question,” Faber explains. “In this sense, commodity booms are characterized by greed based on fear.”

On the question of the dollar, Faber was emphatic that we would see it lose value against the real world of things. Faber predicted that sooner or later we would have major inflation thanks to government stimulus and money printing. Therefore, Faber is long gold and silver.

He also thinks Japanese equities are depressed and points out that many Asian equities are near 20-year lows, except China’s. He also likes financial services in emerging economies and infrastructure stocks. On this latter idea, Faber said, “There are bottlenecks everywhere,” and noted a potential problem of delays or cancellations. He likes farmland, too.

As for what to avoid, Faber says turn your nose up at real estate and government bonds. There are also potential oversupply problems in tourism, with too many hotels, resorts and the like. Faber cautioned against these industries…and there are certainly too many government bonds as well.

We’ll see how it plays out, but I’m with Faber. The world is changing dramatically. And it’s the emerging markets that will provide the light at the end of the tunnel.