Posted on 10/16/2003 11:49:12 AM PDT by arete
The legendary investor predicts the U.S. dollar will lose 40 percent of its value
SARASOTA -- Legendary investor Sir John Templeton is worried about the U.S. economy and stock market.
Gary Moore, a Sarasota investment adviser who met with Templeton last week in the Bahamas, says Sir John has never been more bearish.
Moore says Templeton is telling investors to avoid U.S. stocks and sell off excess residential real estate. He's also suggesting they buy bonds -- not U.S. bonds, but Australian, New Zealand, and Canadian bonds.
The reason for all this, Moore says, is that Sir John, who founded the highly successful Templeton Growth Fund and Templeton World Fund, believes the dollar will lose 40 percent of its value against foreign currencies in the coming months, especially the Japanese Yen and Chinese Yuan.
This depreciation will cause the Chinese and Japanese, who own 36 percent of all U.S. foreign debt, to sell their bonds and mortgage obligations and take their money out of the country.
When that happens, market forces will cause interest rates to rise, choking off investment in residential real estate and forcing the construction industry to contract.
Stagflation, a combination of economic stagnation and inflation, will then set in, Moore said.
U.S. manufacturers will face higher costs of production, but they won't be able to pass on price increases due to continued competition from lower- cost manufacturers in China and India. Profit margins for U.S. corporations will be squeezed and stock values will suffer.
"Stagflation is hell on equities," Moore said.
In turn, U.S. consumers will see their living standards decline, causing them to pull back on spending, sending another negative shock through the economy.
Templeton, who is 92, could not be reached for comment. But investment advisors contacted by the Herald-Tribune did not dispute his logic.
They all agreed that the greatest fear hanging over the world economy at the moment is the possibility that the value of the U.S. dollar will crash.
"I think Templeton is a good source and good long-term thinker," said Dave Anderson, president of Gold Financial Services in Kansas. "If I have one concern right now, it's the same one he voiced."
In Gold Financial's most recent newsletter, Anderson confirmed what Templeton is saying.
"We continue to see the greatest danger in our outlook coming from ongoing debasement of the U.S. dollar in the world market and the (Bush) Administration's wish to have flexible exchange rates," Anderson wrote.
Under pressure in this election year to do something to protect U.S. manufacturers, the Bush administration has been advocating a weaker dollar, Anderson said. A weaker dollar would make U.S. goods less expensive, allowing manufacturers to sell more both domestically and abroad.
Although Anderson and other investors believe the threat of a falling U.S. dollar is serious, they are not predicting as dark a future as Templeton.
Anderson thinks there will be a stock market correction, but he doesn't see the dollar and the U.S. stock market going into free fall.
Susan Moseley, president of Moseley Investment Management in Bradenton, agrees. But she added that comments coming from Templeton should be evaluated carefully.
She said Templeton's advanced age could count against him. But then again he called it right in 1999 when he predicted the stock market would fall, Moseley said.
"He does have an incredible ability to look at the world," she added. "When he says something, you definitely have to take a step back and think it over."
Gary Wood, owner of Wood Asset Management in Sarasota, also agreed with Templeton's logic. But Wood said he did not expect a precipitous drop in the dollar or the stock market.
"I don't expect a decline like that," Wood said. "I think the Bush administration will want a reasonably strong dollar and will take steps to ensure that happens."
For Moore, Templeton's arguments make perfect sense.
He said that if the dollar plunges, foreign investors will sell off their investments in U.S. Treasury bonds and real estate mortgages.
To attract more money to finance the growing Federal budget deficit and to continue to finance real estate mortgages, the Federal Reserve and U.S. banks will have to increase interest rates.
Rising interest rates make it more difficult for home buyers to borrow money. According to Business Week, someone wanting a $200,000 mortgage must have an annual income of $57,500 when interest rates are at 6 percent, but when interest rates rise to 8.6 percent, that same person needs an annual income of $74,700.
With fewer people able to purchase homes, the value of existing homes will stop rising. In turn, fewer homes will be built, stalling one of the great engines of economic growth in recent years -- the construction industry.
The impact of rising interest rates on the real estate market, is why Templeton is advising investors to sell residential real estate investments, Moore said. The reason Templeton is advising against U.S. stocks is that they never do well in a period of stagflation.
U.S. bonds are a safe bet, Moore said. But a better bet would be to buy foreign bonds. If you buy foreign bonds when the value of the dollar is declining against foreign currencies, you make money.
The reason Templeton recommends Canadian, New Zealand, and Australian bonds is that these countries are major exporters of agricultural commodities. During periods of inflation, prices of agricultural commodities often rise, Moore said.
Moore said it may take more than a few months for Templeton's scenario to work itself out.
"But I'm worried," he said.
And the inflation, deflation and stagflation debate continues.
Richard W.
Comments and opinons welcome.
Richard W.
4CJ, this was your advice, IIRC??? But not Canadian bonds?
Ff
Anyone with a pre-tax income of $57,500 who gets a $200,000 mortgage is foolish, IMO. The bank who gives it to him is just as bad.
The administration is now caught in a spider web of its own making. They can't keep borrowing and spending without higher interest rates. At the same time, they are being forced to weaken the dollar cause they can't pay the debt already on the books which will cause foreign investors to sell their dollar assets, and raise interest rates. No win situation. That is why everyone from the FED govornors to John Snow sound so confused.
Richard W.
If he's so brilliant an investment picker, why is he still working?
The bank doesn't care. The will just sell the mortgage off to someone else who will package it as a securitized vehicle and then sell it to a bond fund who will then sell it to Joe-6-pack for his retirement account. That is how the big boys pass off high risk to the average sheeple who are clueless about how the system really works.
Whenever you drive around and see new contruction in areas doomed to fail, don't laugh -- you are somehow probably going to pay for it.
Richard W.
He grants occasional interviews from his mansion in the Bahamas. Hardly what I'd call working.
Richard W.
So he doesn't do any research, he just makes predictions?
Do you know that he doesn't do research or are you just guessing and hoping to somehow discredit him as I suspect that you are?
Richard W.
I don't know...but if this comes to pass, expect hard times worldwide...
A weakened dollar makes it less attractive to dump here...and with the backlash building anainst "offshoring", places like India would have to absorb more local content.
Who knows???
Richard W.
Disclaimer: Opinions posted on Free Republic are those of the individual posters and do not necessarily represent the opinion of Free Republic or its management. All materials posted herein are protected by copyright law and the exemption for fair use of copyrighted works.