St. LOUIS (ResourceInvestor.com) -- No one predicts the bust of the global economic bubble better than economist Marc Faber. Faber spoke with Resource Investor about his outlooks for the economy, commodities and the U.S. dollar heading into 2008.
RESOURCE INVESTOR: Hi, this is Jane Louis with Resource Investor Podcasts.
We’re here today with everyone’s favourite contrarian economist, Dr. Marc Faber. Marc is the editor and publisher of “The Gloom, Boom and Doom Report”, an economic and financial publication that promotes against the grain investments and cautions against widely accepted investment themes. You can read more at www.gloomboomdoom.com.
Marc is known for his realistic, though admittedly pessimistic, views on the state of the global economy. Hi, Marc. Welcome to Resource Investor.
MARC FABER: Hi.
RESOURCE INVESTOR: So let’s go back to September when you predicted in a U.S. Global Investors webcast that the synchronized global economic boom was going to burst.
It’s three months later now, and 2007 is coming to an end. How do you feel about the global boom now?
MARC FABER: Well, basically we still have very strong growth in emerging economies. If you travel around the world practically every economy is a boom condition. There’s only one economy really in recession. That’s Zimbabwe, where obviously money printing didn’t work and where we find an example that in the U.S. money printing also will not work in real terms.
It may boost asset prices at some point, but I would imagine that in the U.S. we are already in recession, if inflation - in other words, price increases were measured properly, then there would be no real economic growth at this stage.
RESOURCE INVESTOR: Well, as Alan Greenspan pointed out recently, the U.S. economy might actually be headed for a stagflation. Do you think that’s a possibility?
MARC FABER: Well, basically I don’t listen anymore or never have to Mr. Greenspan since he’s a hopeless forecaster, a hopeless economist and since he denies that he created this huge mess by having kept interest rates artificially low for too long.
So he’s not a person that I would consider to be trustworthy in terms of either economic statements or forecast. But it’s clear that in the U.S. we are already at some kind of a stage of stagflation where say retail sales are strong because grocery prices are rising very strongly. So that boosts essentially grocery sales whereas sales of discretionary items are sluggish, and this is also reflected in the performance of retailers. Retailers that sell essentially necessities of life are performing reasonably well, and the retailers that are selling discretionary items, their stock prices have performed miserably.
RESOURCE INVESTOR: The subprime credit crunch remains a big driver in the U.S. economy. How deep do you think the credit crunch runs?
MARC FABER: I published already in 2006 numerous papers on the subprime lending industry. And it’s not just subprime lending industries because all the banks were involved in it. The subsidiaries of GE Capital and General Motors Acceptance Corp. were involved in it, and in January of last year I wrote a piece called “Irreparable Cracks in the Financial Market”. And that had to do with the whole credit crisis, and in my opinion it took longer for the credit crisis really to sink in.
But when it sank in and it sullied, we’re in 2007 and everybody was looking for stock market crash because it’s 20 years after 1987. We didn’t have a stock market crash, but we certainly had a crash in the bond market, in the CDO market, in lower quality paper. And that, in my opinion, leads to slower credit growth on the side of the marketplace.
In other words, the individuals that borrowed money they find it now harder to get access to credit and the financial institutions. Let’s say you’re a board member of Citigroup or UBS or any of the large banks. As a board member you suddenly tell management, “Now no more lending to lower quality credit. No longer acquiring CDOs, and of course, so the whole credit bubble that we’ve built over the last 25 years, I have to point it out, has now basically come to an end. We will have lower credit growth.
Now opposing this lower credit growth is of course the Fed and also the ECB that are printing money like crazy and trying to create liquidity in the marketplace.
But for a while the private sector may win, and that leads to poor economic conditions. When the Fed will eventually win because they can print an unlimited amount of money, and they can essentially expand their balance sheet by not only acquiring treasury securities, but also lower quality paper, eventually I suppose they’ll win the support at that market, but then at that point I suppose that inflation will become a problem. And so in real terms you will have no economic growth, and you have a real kind of stagflationary environment.
RESOURCE INVESTOR: Now as a contrarian do you think the U.S. dollar is going to be a good investment in the coming year?
MARC FABER: What had happened between 2001 and 2006, international liquidity as defined for foreign official dollar reserves or international reserves, was drawing at an accelerating rate. And now it’s still growing, but no longer at an accelerating rate, so we have international liquidity kind of in a relative tightening mode.
Whenever international liquidity expands, the dollar tends to be weak. And whenever international liquidity tends to kind of contract or when you have relative tightening of international liquidity - in other words, the gross rate slows down or turns negative - at that point you have a period of dollar strength.
And so combined with extremely negative sentiment we had about the U.S. dollar just two, three weeks ago with many leading media publications, like the Economist and the Eagle in Germany. Headlines and front page cover of negative views about the dollar, I think that we may have for the next three months at least a rebound in the U.S. dollar.
RESOURCE INVESTOR: Well you say precious metals, and especially gold, are likely to out perform financial assets for years to come. Now that doesn’t sound very contrarian because a lot of economists are calling for a rally in gold.
MARC FABER: Well, basically right now given the relative international tightening of liquidity and given my relative positive view for the next three months about the U.S. dollar and don’t make the mistake to think I’m foolish about the dollar long-term. I think long-term the dollar is a doomed currency because you have a money printer at the Fed and you have basically Hank Paulson at the Treasury who comes straight out of Wall Street and who has more interest in stabilizing the price of Goldman-Sachs stock than of having a strong dollar.
So, given these things I think long-term I’m negative about the dollar, but short-term bullish about the dollar. That leads to corrections in commodity markets. In particular, in industrial commodities also given my view that the global economy will slow down very considerably over the next six to 12 months.
So I’m not very bullish about commodities right now. I think the price of gold will also come under some pressure. Indeed the timing of tightening of liquidity.
But long-term I think that having Mr. Bernanke at the Fed, you have essentially a friend of gold at the Federal Reserve because he will print money. That will be very supportive of gold prices, whether you have one day inflation or whether you have deflation. In both cases it will be gold supported. So in any weakness I would buy gold.
Then I would like to add to your comments that so many people are bullish about gold.
When people talk and when they act is sometimes two different things. I go to a lot of investment conferences, and when I ask the attendants, “How many of you have more than 5% of your assets in gold or gold shares?” Normally it’s about 3 to 5% of the audience; several hundred people frequently have more than 5%. That’s the maximum.
So people have actually very little gold in their portfolio. You go to the Asian central banks, they have 2% of their reserves in gold maximum. You go to the Sovereign Wealth Fund, they have practically no gold exposure.
So I would say if people say that people are bullish about gold, yeah, the gold bugs are bullish about gold, but the other 95% of the world, they have no gold exposure at all.
RESOURCE INVESTOR: All right, well that’s a very good point. Thank you, Marc. We appreciate your time. Again, you can find Marc Faber’s “The Gloom, Boom and Doom Report” at www.gloomboomdoom.com.
