Dr. Marc Faber: No Hurry To Buy Anything in Asia!

Dr. Marc Faber was featured again Barron's Midyear Roundtable.

Link: http://online.barrons.com/article/SB121339741569973523.html?mod=9_0031_b_this_weeks_magazine_main&page=sp

Barron's: What do you make of '08, so far?

Faber: Measured in euros, the U.S. is down around 13%. But it has outperformed many other markets. The U.S. has many problems. One is the slowdown in credit growth. Another is recession. The statistics don't indicate the economy is in a recession, but we question the statistics.

The Federal Reserve's aggressive interest-rate cuts -- to 2% from 5.25% last September -- make equities relatively attractive compared to cash yields. But in the second half and the first half of 2009 it will become evident that '09 earnings for the S&P 500 won't meet consensus estimates of $110 per S&P share. Earnings instead are coming down and will stay down, and this will weigh on stocks. The recession won't be deep but it could be long. And it could be deep for corporate profits.

How much further will the market fall?

The situation is similar to 1973-74. It's water torture. We may have a rally here or there, but once investors notice that Mr. Obama has a good chance of winning the presidential election, this will be another negative for stocks. He's not going to be good for the market.

Also, the bond market's not acting well. Bond yields are higher than when the Fed cut rates between December and January. The bond market looks as though it could weaken considerably. Once interest rates go up again, that will be another strong headwind for stocks.

The U.S. is down just 8% this year in dollars. India is down 30%; China, 40%; Vietnam, down 60%. Are those markets buys at current levels?

Among emerging markets, only Mexico and Brazil have been strong. I'd get out of them. There is no hurry to buy anything in Asia, though stocks aren't expensive. Thailand, down 7%, could fall another 5% or even 10%.

Japan is the exception. The Japanese market has performed badly in the past 18 months, and stocks are low compared to cash yields. Some corporations have increased their dividends. Steel Partners' ouster of the management of Aderans Holdings [8170.Japan], a Japanese wig maker, was an important event. Pension funds and foreign investors are starting to have more power over Japanese management.

Do you still like the iShares MSCI Japan Small Cap exchange-traded fund, which you recommended in January?

Buy that, and some Japanese banks: Sumitomo Trust, Mitsubishi UFJ and Mizuho Financial. I would still go long the dollar against the euro, which is overvalued. The tightening of global liquidity and the contracting U.S. trade and current-account deficits are likely to be dollar-supportive. Mr. Bernanke does not understand anything about international economics; it's not a weak currency that leads via import prices to inflation, as he suggested, but inflated money and credit growth that leads to a weak currency.

Where is oil headed, now that it trades in the $130s?

Prices should ease a bit. It wouldn't surprise me to see oil dropping to around $80 a barrel. If you're bearish about oil in the next three months -- though long-term, commodities will go higher -- it's best to own Japanese stocks or airlines. A drop in oil might not help the airlines much, but sentiment toward airlines will improve considerably. Buy AMR , Lufthansa, Singapore Airlines and Japan Airlines.

And sell oil stocks?

Interestingly, they haven't done well relative to crude. One problem is declining reserves. Also, I would rather own physical commodities than commodity-related equities because resource nationalism is on the upswing. That's also true of gold, which has fallen to $870 an ounce from $1,000. The price could go down to $780 to $800 an ounce. If you have no exposure to gold, start buying it here. People are blaming speculators for the recent run-up in commodities, but they are a symptom rather than a cause of the problem. The cause lies in excess liquidity, and the Fed is responsible for that.

My last suggestion concerns steel. If world economies decelerate, the pace of building in places like China will slow, hurting demand for steel. Steel stocks have been among this year's best performers. Short U.S. Steel .

Thank you, Marc.