Transcript: The Weiss Global Forum, Part 1

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The Weiss Global Forum, Part 1
with Martin D. Weiss, Mike Larson, Claus Vogt,
Larry Edelson, Tony Sagami, and Monty Agarwal
(Edited Transcript)

Martin Weiss: Welcome to the Weiss Global Forum, bringing together our top experts from around the world for this international video conference.

Our mission today is to explore with you a wide range of new global profit opportunities — and pitfalls — for the balance of 2009 and beyond … and to do so in a way you will rarely see on TV, in a newsletter, or from Wall Street.

Unlike what you see on CNBC or Fox News, this is not a debate. Nor is it just academic discussion. Our experts are here to give you clarity of vision and actionable recommendations.

Unlike most, our experts aren’t armchair analysts glued to their computers. They travel to the far corners of the globe, get out into the sticks, and bring back intelligence that’s not available on the Internet, from Bloomberg, or any other public source.

And unlike what you typically get from Wall Street, our experts are not focused just on buy, buy, buy. They also tell you what to sell and when to sell.

Each of these strengths of our presentation today — clarity of vision, actionable buy recommendations, original information, plus the courage and objectivity to issue sell alerts — is especially critical right now as we witness the first phase of a major, millennial shift:

A shift of power, capital, wealth, and investment opportunities …

A shift from economies that are bogged down in debts, deficits — and denial of the dire disasters all around them — to economies that are rich in cash, rich in commodities, and full of confidence in their future …

A wealth shift from the United States and Western Europe to China and Asia — from West to East.

This is probably the most important and sustainable megatrend of our time. And this 1-hour special event is our response.

Right now, the prospects of everything you earn, own, and invest in depends on getting the answers to these critical questions:

Question #1. The U.S. housing market appears to be stabilizing. Does this mean the crisis is over?

Mike Larson, among the first to warn of the historic real estate bust, is here with me in our studios in Florida, and will give us his answers.

Question #2. The long-term outlook in the U.S. and Europe seems dismal at best. So why does the economy seem to be temporarily defying gravity? How long could this bear market rally continue? What will be the next shoe to fall?

Claus Vogt, of our Million-Dollar Contrarian Portfolio, joins us via remote video from Berlin, Germany, to tell us about where we’re headed.

Question #3. China’s economy and stock market are booming again. Why? How long could it last?

Larry Edelson, joining us from his office in Bangkok, provides the answers.

Question #4. Which specific investments are the most likely to give you a solid stake in this monumental West-to-East shift? Larry will name his favorites.

And Tony Sagami, editor of Asia Stock Alert, will tell us about the unique investment opportunities he has found after multiple trips to China.

Plus, I have a special guest today, one of the nation’s leading experts on hedge funds, who will help outline a broad investment approach to take advantage of the West-to-East shift.

His name: Monty Agarwal, author of a blockbuster new book due out this year, The Future of Hedge Fund Investing.

Mike, let’s start where this all began, in the U.S. housing market. You called the beginning of this entire crisis months in advance; and since then, you’ve been hailed as one of the nation’s leading experts on real estate.

When CNBC, Fox News, the New York Times, or the Wall Street Journal want candid, no-nonsense analysis of the real estate market, you’re among the very first they call upon, and I see your commentary in the press almost daily.

Mike Larson: But you will be the first to hear what I have to say today: If you’re wondering where will be the next shoe to fall, I can tell you flatly right now that it will probably not be in the U.S. housing market.

Martin: Are you saying the housing crisis is over?

Mike: No, far from it! From the outset, I have said that the fundamental driver of the housing crisis was the bubble in prices, and that the fundamental solution to the housing crisis was sharply lower prices. Now, with the price bust that has swept America, we have that solution. That’s why sales have bottomed. That’s why the supply of homes for sale has topped.

Martin: But have prices bottomed?

Mike: No, prices have not bottomed. They’ll probably decline further, perhaps by another 5 or 10 percent over the next year.

Martin: Why? I thought you said the supply of homes for sale has topped.

Mike: Yes, supplies have topped but they’re still way too large. We still have about one million too many homes on the market. Plus, you’ve still got massive amounts of option ARMs due to reset and you’ve still got more home foreclosures on the horizon.

But the key is that the foreclosures and the lower prices are now stimulating higher sales volumes and helping to chew away at the huge inventory of unsold homes. Plus, there are several states that act as leading indicators for the U.S. market.

Martin: Which states are those?

Mike: Look at California, where the sales of existing homes have shot up 20 percent year-over-year. In Florida, another sort of ground zero for this housing crisis, sales have risen 28 percent; in Nevada, they’re up 44 percent.

Nationally, new home sales surged 11 percent in May, the biggest monthly rise in eight years. Regionally, new home sales rose 22.6 percent in the West, 29.2 percent in the Northeast, and 43.1 percent in the Midwest.

Martin: What about commercial real estate?

Mike: Still sinking and, as far as I’m concerned, still in big trouble. But I repeat: If there’s new trouble ahead in the economy, the housing sector will not be the main cause. It will most likely come from another source.

Martin: Such as …

Mike: An obvious candidate: the monster federal deficit.

Claus Vogt: May I jump in and say a few words on that? I travel all over Germany. I talk with my colleagues at our bank here daily. I meet with international investors all the time. We are absolutely dumbfounded — not just by the extraordinary size of the federal deficits, but even more so by the dismissive attitude of government authorities toward the deficit.

The U.S. deficit is now closing in on two trillion dollars, and politicians in Washington are sleepwalking through their daily life as if nothing had changed. Tax revenues have just plunged by the biggest amount since 1932 … and Washington is behaving as if it were still business as usual.

Mike: This is not just a political debate or some future disaster. It’s having an immediate impact right now. The deficit is already creating huge supplies of bonds, which are already pushing up long-term interest rates.

This week is a case in point. On Tuesday, they issued $37 billion in 3-year notes. Yesterday, they issued $23 billion in 10-year notes. Today, they came out with another $15 billion in 30-year bonds. That’s $75 billion in new notes and bonds hitting the market in just three days. It’s an avalanche.

Martin: Mike and Claus, you make this sound like this is strictly a U.S. problem.

Claus: Quite the contrary. Among those of us here in Europe who are not sticking our heads in the sand, the budget deficits in the eurozone are even more shocking than yours in the U.S.

Martin: Because of their size …

Claus: Yes and, more importantly, because the politicians explicitly promised to keep them under clearly defined limits. When they introduced the euro, they created a rule that budget deficits must never exceed 3 percent of GDP in any single eurozone country. Now, they have broken that rule in every single eurozone country.

Martin: By how much?

Claus: By a mile! Among the best countries, deficits are 6 or 7 percent of GDP — in other words, double the limit. In other countries, the deficits are 9 or 10 percent of GDP — or more than triple the limits. And there is no plan to fix this disaster.

Martin: There’s no timeline or distant date in the future for bringing the deficits back under control.

Claus: None whatsoever! All the promises are in the trashcan. The rules are garbage! This is a devastating development for long-term growth.

Martin: I remember back in the 1950s and 1960s, when I lived in Brazil. And this reminds me of the fiscal mess Brazil and other less developed countries faced in those days. How ironic it is that the U.S. and Western Europe are now in the same fiscal rat hole and the same debt trap that those countries were in for many decades! And what’s even more ironic is how Brazil and other so-called “Third World” countries have paid off their foreign debts and gained firm control over their budget deficits. It’s one of the most fundamental reversals of our time.

Claus: Yes, but let’s look at this from 30,000 feet and let’s ask: What are the two long-term drivers of economic growth? They are population and free markets.

For long-term, vibrant growth, the population structure should ideally form a normal-shaped pyramid.

Look at India — a broad, solid base of young people … a decent middle area of active, productive adults … a smaller layer of retired people … and an even smaller segment of the aged.

This is also similar to the demographic structure of Brazil today: A somewhat smaller group of people under the age of 10, but still a nice, solid base of people under the age of 30, with no large baby-boom generation.

Unfortunately, that’s not what we see in the U.S. Instead of a broad base of young people, the population is top-heavy with a bulging group of baby boomers.

Nor is it what we see in countries like Germany, where young populations are even smaller and the baby-boomer bulge is even larger.

So the demographics of the U.S. and especially Western Europe do not favor economic growth. To the contrary, they point to economic stagnation.

Second, for vibrant long-term growth, we must have free markets. Free markets are the primary drivers of all the fundamental elements of capitalism, including labor markets and capital markets. But unfortunately, a major dramatic consequence of this credit crisis is that the United States and Europe have taken huge steps to move away from free market policies.

Martin: They say the government’s intrusion into the banking system is just a temporary emergency measure …

Claus: That’s what they say, yes. But rarely do we see governments take control … and then relinquish that control. Almost invariably, when governments move into the private sector, it’s a one-way street or, at best, big steps in and small steps out.

Look at the European Union, for example. The European Union has progressively abandoned free market principles. Instead of healthy growth in production and productivity, the EU has produced exponential growth in another, unwanted product …

Martin: Which is …

Claus: Legislation! Thousands of new directives, regulations, judgments, and other legal actions — all adding up to higher costs, more inefficiencies, less flexibility, and, ultimately, deeper recessions … or, at best, growth that’s stunted and handicapped.

To understand how serious this is, look back to Germany of the 1950s and 1960s to compare today’s situation to the so-called “economic miracle” of that era. It was not really a miracle. It was merely the logical outcome of a rational policy.

With the irrational, reckless policies we have today, there’s no way we can have that kind of growth in the U.S. or Europe.

Martin: Please break this down to the simplest terms.

Claus: In the simplest terms, back in the 1950 and 1960s, we had people who worked. And they had every incentive to work hard. Today, we have neither the people nor the incentive. In sum, the two most important long-term drivers of growth are absent in the U.S. and Western Europe today! It’s truly frightening.

Martin: What about Eastern Europe?

Claus: As countries like Poland, Hungary, the Czech Republic, and others are integrated into the European Union, they’re getting sucked into the same giant bureaucracy and they’re suffering from the same kind of disincentives for long-term growth.

Martin: So what would you say to U.S. investors?

Claus: If you’re looking to escape the troubles on your side of the Atlantic, don’t come to Europe! You’d just be jumping from the frying pan into the fire; the housing bubbles in Spain, Portugal, Ireland, and the U.K. were even more extreme than the bubble in the U.S.

Meanwhile, in Germany, we had the post-unification bubble and a long, drawn-out bust that’s still not over.

The bubbles in Eastern Europe were even worse due to huge amounts they borrowed in foreign currencies, like the Swiss Franc and the Japanese yen. Meanwhile, the European banks are three times more leveraged than the big five U.S. banks. In a financial crisis, they’re more likely to collapse. And in a government rescue, they’re a much bigger burden to the government and much bigger drag on growth.

Martin: So basically, cross Europe off the list.

Claus: Yes, with one big exception: Russia. Ironically, despite all its corruption and deficiencies, Russia’s bureaucracy is not destroying wealth. It’s generating wealth.

Moreover, Russia has what China desperately wants: oil and other commodities. If the Chinese growth story continues, Russia’s growth story will continue. I really see it as that easy.

Plus, there’s a strong positive correlation between the oil price and Russia’s stock market and economy. So if you are bullish on oil, you should also be bullish on Russia as a way to leverage the price of oil.

Martin: Larry, you’re out in Bangkok, you see what’s going on. What do you think about what Claus just said?

Larry Edelson: I agree. I can tell you without hesitation that China’s massive growth machine has been stress-tested by the crisis, and it has passed that great stress test with flying colors. It has proven that its growth is sustainable, and it has launched forward on a new, equally dynamic growth spurt.

Claus: Beware: What looks like healthy growth today could turn into a speculative bubble later.

Larry: At some point, perhaps, but not now! And even if it does, a short-term boom and bust cycle is not going to change the long-term transformation underway.

Martin: Hold that thought, Larry. Monty, among all of us here, you have spent the most time in Asia — not only in India where you were born and brought up, but also in Singapore, Hong Kong, and Japan, where you worked as a portfolio manager for several years.

Monty Agarwal: I see how this discussion is flowing. It’s flowing in the same direction as the millennial shift you cited at the outset — from West to East — first the U.S., then Western Europe, next Eastern Europe and Russia … and now China and East Asia. And it’s going to the BRIC countries: Brazil, Russia, India, and China.

The only comment I want to throw in now is that’s also the direction that sophisticated capital is flowing.

But in this group, I’m the new kid on the block. So I first would like to hear what everyone has to say. Then, I’ll give you my big-picture vision and strategy.

Martin: Sorry to have cut you off, Larry. Go ahead with what you were saying …

Larry: The key point I wanted to make is that while most societies in the West are moving toward more regulation and more government intervention, the trend in China is precisely in the opposite direction — sweeping deregulation.

And while the population dynamics in the West are negative, as Claus pointed out, the dynamics in China are still extremely positive — not only in the structure of the population pyramids, but also in the how they communicate, especially through the Internet.

Martin: So you don’t see the Internet as strictly a technological revolution?

Larry: I never did. It has a much bigger impact than just the latest and greatest tech stocks, whether back in 2000 or today. It has transformed society. I’ve been in China in the rural areas and here in Thailand. It’s just amazing when you see a farmer — who didn’t even have electricity a few years ago — now checking rice prices on the Internet or reviewing his 10 acres of rice paddies with his Garmin GPS.

You have to realize they are jumping from the 19th century straight into the 21st century, virtually leapfrogging the 20th century.

Martin: With the Internet and computers.

Tony Sagami: No, with cell phones! Most people in China and many countries in Asia connect to the Internet through their cell phones. It costs a heck of a lot less to put up a cell tower than to lay down thousands of miles of land lines and, more importantly, a cell phone is much more affordable than a computer.

Larry: Let’s not get too hung up on technology, and let’s go back to some simple demographics: One out every five people in the world is in China. And worldwide, three out of every five people are in Asia!

And never forget that, just a few years ago, most of this continent was way behind the West. Now, in parallel with the growth of the Internet, China and India have emerged from their socialist regimes and are bursting onto the world stage. It’s a megatrend that will shape the entire century, but it’s barely 15 years old.

Martin: Can we bring this back to the medium-term outlook? First, Claus, give us your medium-term outlook on Europe.

Claus: Medium term, it makes no sense to analyze the European markets separate from the U.S. markets. They are too interdependent. The U.S. leads; Europe follows. We saw this throughout the bear market, and we’ve seen it again in the rally since March.

Right now, the U.S. economy is stabilizing and looks like it has embarked on some sort of a feeble, medium-term recovery. The EU economy will follow suit.

Martin: Larry, Tony, what about China?

Larry: China’s stock market is, again, the single best performing major stock market in the world. It’s up some 87 percent for the year, 133 percent since last November.

Martin: Yes, but if you’re a U.S. investor and you invest in country ETFs, you’ll find that the best performing country ETF this year is the one tied to Brazil, symbol EWZ. Here’s the chart I sent to viewers a couple of weeks ago as part of our quick quiz:

The Brazil ETF is up 65 percent. The leading China ETF, symbol FXI, is up 40 percent. The ETF linked to the Dow, meanwhile, is up only 3 percent! So, for every $10,000 investors have made in the Dow this year, they could have made $133,000 in the China ETF and $217,000 in the Brazil ETF.

Larry: I’m talking about the Shanghai index. You’re talking about the China ETF available to U.S. investors only. Similar trends, but different numbers. Based on the Shanghai index, the Chinese market is the best performing major market, not the Brazil market.

Martin: OK. But is this trend sustainable?

Larry: Without normal, healthy short-term pullbacks, of course not. With short-term pullbacks, absolutely! Keep in mind that stock markets lead economies, not the other way around. So the strength you’re seeing in China’s stock markets is a sign that the underlying fundamentals of the economy are also growing. Just compare the U.S. GDP to the GDP in China.

In the first quarter of 2009, while the U.S. was shrinking at an annual pace of 6.4 percent, China’s GDP was the mirror image, growing at an annual pace of 6.1 percent.

In the second quarter, while the U.S. was shrinking at the annual pace of 1.0 percent, China was expanding at an annual rate of 7.9 percent.

And for the year, even if you accept the consensus of U.S. economists, which has proven to be overly optimistic, the U.S. economy will still be down this year. Meanwhile, China will probably grow by 8 or 9 percent.

Martin: What about the slump in Chinese exports?

Larry: We definitely had a slump in Chinese exports, but I don’t think it was nearly as bad as it was made out to be. Throughout the export slump, China was still racking up a huge trade surplus, and the money had to be coming from somewhere.

Plus, China’s export machine is now revving up again. China’s purchasing managers index has risen for the fifth straight month and is now back above the 50 mark, indicating an expansion is underway. In a recent survey, 70 percent of the industries surveyed in July reported a jump in new orders.

Martin: Larry, let’s get down to the bottom line here: How do investors profit from this?

Editor’s note: Be sure to check your inbox next Monday, August 31, for the second and concluding portion of the Weiss Global Forum transcript. In it, Larry Edelson and Tony Sagami name the specific investments they feel are the best to profit from this great megatrend; Claus Vogt points to where he sees the greatest values; and Monty Agarwal outlines a broad, long-term strategy.

Important: Larry Edelson, Tony Sagami, and their colleagues update this type of information in their daily e-letter, Uncommon Wisdom. To sign up, go to http://www.uncommonwisdomdaily.com/. It’s free. And, as always, you can opt out easily at any time you wish.

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Money and Markets (MaM) is published by Weiss Research, Inc. and written by Martin D. Weiss along with Nilus Mattive, Claus Vogt, Ron Rowland, Michael Larson and Bryan Rich. To avoid conflicts of interest, Weiss Research and its staff do not hold positions in companies recommended in MaM, nor do we accept any compensation for such recommendations. The comments, graphs, forecasts, and indices published in MaM are based upon data whose accuracy is deemed reliable but not guaranteed. Performance returns cited are derived from our best estimates but must be considered hypothetical in as much as we do not track the actual prices investors pay or receive. Regular contributors and staff include Kristen Adams, Andrea Baumwald, John Burke, Amy Carlino, Selene Ceballo, Amber Dakar, Dinesh Kalera, Red Morgan, Maryellen Murphy, Jennifer Newman-Amos, Adam Shafer, Julie Trudeau, Jill Umiker, Leslie Underwood and Michelle Zausnig.

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