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Marc Faber, Editor, The Gloom, Boom & Doom Report
Bio/Archive | The Gloom, Boom & Doom Report
JIM: Will the dollar go up or will it go down? Are commodities in a bubble, are monetary markets tight or loose? Joining me right now is one of our keynote speakers this year – Dr. Marc Faber. Marc, good to see you.
DR. MARC FABER: Nice to see you. Thank you for having me.
JIM: Let’s talk about a couple of issues that are being bandied about in the market right now. There are two I want to address. One is tight liquidity – I don’t see it when the spigots are running full blast at all the central banks around the world. Yes, some are raising interest rates, but in terms of money and credit it’s plentiful.
MARC: Yes, I think you’re absolutely right. The absolute level of interest rates will never tell you whether the monetary policies are expansionary or tight. In Zimbabwe you have interest rates at 600%, and monetary policy is expansionary because inflation is at 1200%. So what has happened is since June 2004, the Fed has increased the Fed Funds rate in baby steps from 1% to now 5 ¼% - but the point is tight money should be reflected in a slowdown of credit growth – a meaningful slowdown. And the fact is, that since the June quarter of 2004 when they started increasing interest rates, at that time the credit growth in the US was running annually at 7%, and now it’s running at annually 11%. So actually, you had an expansionary monetary policy, and it doesn’t take a rocket scientist to see that if money was tight the Dow wouldn’t make a new high, and the dollar wouldn’t be weak. If money is tight, the dollar would be strong and asset prices would go down substantially. [4:42]
JIM: That’s one thing we’ve seen in this monetary tightening cycle which reflects that, because we’ve seen long term interest rates as reflected by the 10 year Treasury note not move very much in the last couple of years; we’ve seen a rising stock market almost every single year; and you contrast that to the last time the Fed was on a rate raising cycle in 99 to 2000 and we had a stock market correction - this has played out differently this time hasn’t it?
MARC: Precisely, because monetary policies are still expansionary. And I wouldn’t say that monetary policies were tight in 1990-2000. The last time US monetary policies were really tight was actually in 79-1980 when Volcker pushed up interest rates, and that led to a meaningful slowdown in the rate of inflation and credit growth, and the 81-82 recession. But since then we’ve had actually expansionary monetary policies that led to the very strong debt growth whereby total credit market debt as a percentage of the economy has increased from 130% in 1980, to now 330%. And if you look at last year, total credit market debt increased by $3.3 trillion and nominal GDP by $751 billion – again then, you have much higher debt growth than GDP, and that doesn’t indicate that money is tight. And also, if you look at international liquidity, you have to beware that as a result of the loss of competitiveness of the US – the growing trade and current account deficit – we have these reserve accumulations in the hands of Asian central banks that are then lent back to the US; and we call these reserves (if they’re dollar reserves) ‘foreign official dollar reserves’ – and if they’re international reserves that would include other reserves – and these reserves are growing at a very rapid pace: dollar reserves at 15% per annum; and international reserves at 18% per annum. No sign whatsoever of any tightening there. [6:53]
JIM: And not surprising as a result we’re seeing new records here in the United States in the Dow and the markets – even the S&P looks like it’s making a run towards its former high.
MARC: Yes, but we have to qualify this statement. If you look at say this year’s performance, which is a continuation of the performance since 2002 when we embarked really on this easy monetary policy, then what we have are rising US asset prices – the stock market going up and until recently the housing market going up – but in euro terms, actually the stock market hasn’t done well. This year the S&P is up more than 12%, but in euro terms (if you measure it in euros) then it is up just 1 ½%. The bond market in euro terms is down, and in gold terms since Mr. Bernanke was appointed in November 2005 we have had the Dow up something like 15%; in euro terms it’s up 3%. And over the same period of time, gold, which has not performed as well as other commodities, is up 36%. So against gold, the dollar has been weak and the Dow has been weak – has declined. And I can tell you how weak the US dollar is, that is evident against the price of lead, the dollar is falling. So it’s very, very heavy on the downside. [8:25]
JIM: So what you’re saying is that you’re seeing nominal increases in the value of the indexes, but in real terms if you’re looking at another currency or another ultimate commodity like gold we’re seeing a declining trend.
MARC: This is correct. And I’d like to add to this one point – we have basically in the United States a conspiracy between the money shufflers (the well-to-do people, the 400 people that are on the Forbes’ list of the richest Americans) and the government, against the middle class of America. Because if you print money what you get is this asset inflation. That shifts wealth from the middle classes to the typical household to Wall Street. This year the 5 major brokerage firms on Wall Street – Goldman Sachs, Merrill, Morgan Stanley, Lehman, and Bear Stearns – will pay out $36 billion in bonuses, including the compensation for this year. These 5 brokerage firms’ 173,000 people will earn more than the entire GDP of Vietnam with 84 million people. Something doesn’t add up in the long run. But this money supply bulge and this money printing shifts wealth from typical households to the elite. And this is of course [in the] long term very unhealthy. [9:50]
JIM: That’s one thing I think most voters don’t see, which is the taxing effects of inflation. If you’re John Q. Public and you’re working at a company and you’ve seen your gasoline costs go up, your food costs go up, your service costs are going up – you can’t walk into your boss and say, “I need a 12% raise to have 8% after tax to keep up with these costs.” But on the other hand, if you have a large amount of wealth, if you have assets which you can invest, you can profit from this inflation.
MARC: Yes, of course, that’s why we have this proliferation of rising wealth and income inequity in the United States. The economy of the super rich that shops in luxury stores, that stays at Four Seasons hotels, that goes to luxury resorts – is doing very well; but the economy of the typical household is not doing well, because their cost of living increases has been much higher than income gains. And I mean it’s obvious Mr. Bernanke doesn’t understand anything about economics when he looks at core inflation: no household in the whole United States lives by core inflation – you have to drive around, you pay insurance premiums, you have energy costs, transportation costs and so forth. I’d just like to mention that in the US, health care costs are 21% of personal disposable income; and since 2001, health care insurance premiums, that reflect essentially the increase in health care, have increased by 68%. So the typical household is actually suffering and the rich people in their world of luxury, super rich ghettoes they are thriving. And I’m not saying that out of bitterness because I’m also in the financial field – I have also benefited from this nonsense – but of course, for a society it is very unhealthy, and it leads to a country becoming a banana republic. [11:52]
JIM: I want to move on to another topic that you hear debated on Wall Street – a commodity bubble, an energy bubble. And there are some that believe that we have reached bubble type prices – oil has gone from 20 to 80 and back down to 60; you’ve seen copper prices go from 60 cents to over $3. But Marc, in my opinion there are two things that are lacking here. One, where are the large stockpiles you normally see when you have the big bubble – the large stockpiles of energy, lead, zinc, copper? And secondly, we’re at a gold show here and most of the gold investors here are gold bugs or familiar with it, but where is the public in on this? I just don’t see John Q. trading sugar futures or buying lead and zinc or things like that. I’d like to get your thoughts on this.
MARC: Basically, it is true we have a bubble. The bubble is a money supply bubble leading to a huge credit bubble, and this credit bubble leads then to at the present time asset bubbles, and at other times excessive money supply growth which in the 60s led to rapidly rising wages, in the 70s to commodity price increases, and now lately in the last 5 or 6 years everything has been going on – stocks up in developed countries, in emerging markets, real estate, commodities, art prices, and also of course equities in emerging markets and of course raw materials (commodities). Now, everything is inflated, the question of course is what is relatively less inflated than other things. In the case of commodities, there are two factors that are in favor of commodities. First of all, the Chinese economy today is much larger than is generally perceived, and increasingly India is becoming a very large economy, and the emerging economies are growing very rapidly. For the first time in history, emerging economies have a higher oil consumption than the G7 countries, which shows that emerging economies are no longer your poor little cousins, they are economically very important.
And secondly, the increase demand from these emerging economies because of the very low per capita consumption for raw materials in China, and even more so in India – in, say China, you have a per capita consumption annually of oil of 1.7 barrels, compared to the US of 27 barrels, and Mexico of 7 barrels, and in India you have just 0.8 barrels of consumption. So this demand will not go away. It may not increase in one or other years, but it is not going to disappear overnight. So essentially, China and other emerging economies – notably increasingly India – they have shifted the demand curve for commodities to the right, leading to a higher equilibrium price.
And then you have another factor and this is a gift of God to hard asset investors: they sent the messiah – Ben Bernanke. Mr. Ben Bernanke will make sure that he prints money like there is no tomorrow, because if you look at his monetary philosophy it is the following: you target inflation. For Mr. Bernanke who lives on government compensation and drives around in limousines and so forth, for him core inflation is inflation; but that is not the inflation of the ordinary man in the United States or anywhere in the world. So he targets core inflation, and he disregards basically so-called asset bubbles. But he stated that publicly – when you have asset prices going up you don’t do anything about it; but should asset prices one day decline – the real estate market, or the stock market go down – then it is the duty of the central bank to intervene with extraordinary measures to support asset prices so as to avoid a deflationary depression as we had in 29-32. This is important to understand: Mr. Bernanke was invited to the birthday of the just deceased Milton Friedman last June, and he made a speech and he said, “yes, we the Fed, we caused the depression of 29-32. We are sorry. But thanks to you, Milton Friedman, and Ana Friedman, we won’t make the same mistake again.” In other words, Milton Friedman in his history of the monetary history of the US he blamed the Fed for having caused the Depression, for having been too tight. Mr. Bernanke says now clearly, if ever asset prices go down, like there was the threat after 2000 when the NASDAQ broke down, “then we would come in and provide every kind of liquidity.” That is a very highly inflationary monetary policy. That’s why I’m reluctant to be short the S&P, because if the S&P drops 10% you can be sure that Mr. Bernanke will cut interest rates – not in baby steps but 1% at a time. You flood the system with liquidity and then what you get is a rising S&P, rising stock prices in the US but a collapse in the dollar. If you look at the pattern – recently stocks have been going up and the dollar has been going down. The only way you will get the dollar to strengthen is to tighten money and then the dollar will strengthen but stocks will go down. But that is not a policy the US will pursue. Mr. Paulson, Secretary of the Treasury, and Mr. Ben Bernanke, do you think they will defend the interest of the ordinary worker in the United States, or that of their buddies on Wall Street? [17:48]
JIM: It’s going to be Wall Street – the financial markets.
MARC: For sure. Plus the Bush family and all these gangs that benefit from easy money.
JIM: Marc, let’s talk about something that was written in your newsletter, a piece by a gentleman by the name of Fred Sheehan [ph.], and he talked about if you were looking at a long term theme to invest in over the next decade, he really hammered home the idea of infrastructure from ports to bridges. And infrastructure is something that we have not invested in. The civil engineers did a rating on America’s infrastructure and they gave us D+, because we’ve ignored it.
MARC: Well, you don’t have to tell me. I travel a lot in the US, and the airport infrastructure, the aircraft infrastructure is a catastrophe – nothing works. Every flight I’ve been on in the US in the last two years has been delayed between 4 hours and 12 hours – every one. And infrastructure is a theme, but you have to also understand what the consequences are of infrastructure investments. As you know, a lot of States are now selling there bridges, their toll roads, their airports and so forth to leverage buyout firms and to infrastructure companies. All these companies that acquire these assets, the first thing that they will do is to increase prices. The increased prices of airports, toll roads and so forth – what does it do? It increases the rate of inflation – so more money printing will be required. And so I think that infrastructure expenditure, yes, but I wouldn’t do them in the US, I’d do them in Asia where actually you have in Asia two factors working for strong economic growth. You have a) the urbanization, with people moving from the countryside to the cities – in India urbanization is just 30%, 700 million Indians live in the countryside. So when they move to the cities they need infrastructure, and so the infrastructure in Asia will grow dramatically. In Asia, we will also have very strong growth in travel – in tourism – as a result especially now of low cost budget airlines – and so the infrastructure in Asia will do very, very well. In the US, I see rather darkly for infrastructure simply because the money is not there, and if the money should be coming it will be because you have an increase in rates for infrastructure that will be inflationary, leading to higher interest rates and will dampen the returns. [20:33]
JIM: When you look out, let’s say this is January, you’re in New York for the Barron’s roundtable, if you were looking out for a theme for 2007 what theme comes to mind?
MARC: Well, very difficult to tell. I mean I think as a contrarian we are now in a euphoria – the markets are going up, commodities are going up, stocks are going up, even bond prices have rallied. The dollar has been weak. I would say, looking at the economy you would say the Wal-Marts of this world won’t do well because the Wal-Marts of this world depend on the Middle Class, and the Tiffanys and Nordstroms of this world will do better. But I think something will happen and hit the Wall Street crowd quite badly – in other words, something will give and that asset prices could for a change decline in concert. They all went up at the same time and so they could all go down at the same time. All markets are very stretched. And whereas I think you should invest for the next 10 years more in commodities and more in emerging economies than in the US, near term – maybe starting January or so – you could have quite a big correction in markets. And so as a contrarian, maybe today is not a bad time to actually sell stocks and sell assets. [21:56]
JIM: So maybe build some cash and just watch how it unfolds?
MARC: Yes. Of course, the dollar is a very vulnerable currency, but maybe not so against the euro because in the eurozone money supply is also increasing rapidly. So it doesn’t mean that the dollar will collapse against the euro, the price level in the eurozone is about the same or sometimes higher than in the United States. So, there, I’m not so convinced that the dollar will collapse against the euro. But I think in the last two or three months we have had an important development – I mean we’ve had several important developments. One of them was that the appreciation of the Chinese currency accelerated, and this I think will lead to stronger Asian currencies against the US dollar. Secondly, I think that as has been the case since 2001, the US dollar will weaken against gold and silver. And the third important development has been that over the last 3 months grain prices have been very strong. According to the Federal Reserve Bank of St. Louis, grain prices are one of the most reliable indicators of future inflation. So if grain prices have been strong – and they could explode on the upside if you hit a bad crop (if you have a freeze or a drought, and so forth). If they are a leading indicator and we get into higher inflation rates then the theme would definitely be to avoid long term US government bonds. And I think that is the major theme I would do – at all costs, avoid long term US government bonds. [23:37]
JIM: This is surprising, I’m glad to hear you say that, because one of the assumptions that is being made right now is the US economy is weakening, therefore if the US economy is weakening, the Fed is going to be cutting interest rates. But if you had a situation where the dollar was falling wouldn’t that not be difficult for the Fed to cut, and what would happen to long term interest rates if the dollar had a precipitous decline?
MARC: Well, I think that Mr. Bernanke and Mr. Paulson will not care much for the US dollar decline, initially. And so they will look at the stock market, they will look at the property market and if the property market and real estate market and stocks go down, they’ll cut interest rates very aggressively and disregard the position of the US dollar. It is only in a second instance, when the dollar is very weak and you get rising import prices that put pressure on inflation and you may get as a result of the dollar weakness also weakening bond prices – it’s only at that stage that the Fed will kind of become concerned about the value of the dollar. But since the Fed has been introduced since 1913, the Fed has never been concerned about the purchasing power of the dollar – it’s already depreciated by 92%. So I think, looking at the shape of things, it is most unlikely that the Fed will suddenly become very concerned about the value of the dollar vis a vis foreign currencies – especially given the rhetoric they have been using, namely saying all the time that the Asian currencies (notably the Chinese currency) are undervalued vis a vis the US dollar. They actually want a weak dollar. [25:28]
JIM: You spend a good part of your year traveling – you go around the globe. What is the perception that you’re hearing from people that you talk to about the dollar. We hear more and more in the press about this central bank, or that central bank, is going to start reducing its dollar reserves. I would have thought the dollar would have been much lower by now, and I’ve been surprised it’s remained as strong as it has, given the intention of so many central banks.
MARC: Yes, but we have to see very clearly it is unlikely that the Asian central banks will really sell dollars and buy euros. What they will do is deaccumulate reserves going forward; they will diversify more and more in other currencies. But if you have a current account deficit, the way the US has it, someone will always finance it – that you have to see. Now, it may be financed at a lower dollar level but someone will always come in and buy your assets - in the last few years: funds. So I think that, yes, the dollar will be weak and it may surprise you that the dollar didn’t weaken more against other currencies, but because the price level in Europe is not that much higher, and frequently is the same as in the US, there is no reason for the US dollar to collapse against the euro. But what has happened is the US dollar has collapsed – and this you have to acknowledge – against hard assets: gold, silver, all the industrial commodities, a total collapse against the price of oil. And as was the case in the Mississippi scheme of Mr. John Law, they printed money and eventually this paper money totally collapsed against commodities and real estate. [27:17]
JIM: You wrote a piece two or three years ago, and it was about long term investing. And it was about if you could catch a trend and rise that trend at its inception throughout its rise, an investor could make very few decisions in their lifetime. For example, US stocks in the '50s to the mid-'60s; commodities; then Japan in the '80s; and then technology and US stocks in the '90s. Do you think that still holds true in this kind of environment today, and are commodities – given the global liquidity glut that we’re having – do you think that is a long term trend that investors could ride?
MARC: Yes, I think you have some factors that will work in favor of commodities. First of all, we economists have business-cycle theories and historians have war-cycle theories. I believe that tensions in the world are increasing, and that as a result of that eventually war will break out somewhere in the world – and during wartime, commodity prices go ballistic. We also have to acknowledge the fact that in the 80s and 1990s, the balance of power shifted to the industrialized countries because the poor countries that produced commodities had lower and lower commodity prices and lost all their power. And the Soviet Union collapsed essentially after the oil price collapsed between '85 and '86. But now, in the environment of rising commodity prices, the balance of power has shifted to people like Mr. Putin and Mr. Ahmadinejad, and Mr. Evo Morales and Mr. Hugo Chavez – they have become very powerful people. And maybe Mr. Bush thinks he is the most powerful man in the world, but the fact is Mr. Putin is the most powerful man because he controls 10 million barrels of oil production a day and he can afford to cut it in half any day – he doesn’t need 10 million barrels of oil. If he was actually a hedge fund manager, he could cut production of all commodities by 50%, he’d still have the commodities in the ground, and prices would go up by between 30 and 100% – so it would be a very good trade. And so these tensions are increasing in the world and I think eventually you’ll get war.
Now, the question is as an investor what do you do? Do you own the mines or do you own the physical? In the case of the mines, say Freeport McMoran – there’s a strike at Grassburg – what happens? The stock goes down and copper price goes up. Or you have flooding at Cameco? The stock goes down, uranium prices go up. I have a preference for the physical but I think that investors gradually have to consider that diversification is not just having assets in real estate stocks and bonds and commodities. Diversification is also having your assets held by different custodians in different sovereign states. I think it would be a grave mistake to hold all your assets in the US, because if one day the US dollar becomes very weak, and if things go wrong in this country you can be sure that one day they will introduce foreign exchange controls – of course, after all the rich Wall Street guys and money-shufflers and people on the list of the 400 richest Americans have their assets overseas; that they’ll make sure they have first. [30:48]
JIM: That comes in first. It would be hard for a lot of Americans when you hear stories recently about Argentina to understand that could happen here. But when you look at a country that is now working its way to a trillion dollar trade deficit, we have budget deficits that are much bigger than what is widely reported – eventually you can’t have that amount of money and paper without something happening to the currency.
MARC: Yes, but you have to see, the US – unlike Argentina and Indonesia and Thailand and so forth – has of course a huge advantage, which is of course also a dangerous point for the US. In the case of Argentina, Indonesia and all these countries, when they have a trade and current account deficit they usually have to finance this deficit in a foreign currency. In other words, you have the Argentine peso, you have the income in pesos – the GDP; and you have the debts in dollars or in yen or in foreign currencies. When the current account deficit balloons the currency collapses. What then happens is an automatic stabilizer – the foreign debts stay at the same level but because your currency collapses your GDP collapses, and therefore imports are cut down and eventually it frequently comes to default. The US will never default, they can just print more dollars, because the US has this great advantage so far – and they may lose it one day – that the US can borrow US dollars and they have their assets in US dollars. No matter how many dollars they own, the income is in dollars and the payments are in dollars, and Mr. Bernanke is there with the money printing press of Mr. Paulson and he can print as much money as he likes. [32:36]
JIM: In your talk that you gave here at the show you talked about 5 major currencies. I wonder if you might just go over that. Do you think it’s just going to become a multi-currency system where the dollar will still be there, but it’ll have less of a percentage ownership by other foreign entities?
MARC: What I think basically is we have lots of currencies in the world but we have 5 major currencies, one is obviously the US dollar and then we have the yen, the euro, the Chinese RMB or Chinese yuan, and then gold (and as gold I would take as a proxy for other say hard or precious metals). And the US dollar is obviously the currency where the supply is the largest in the world through the current account deficit. Through the current account deficit the world is the recipient every year of something like, as you said, close to a trillion dollars that is floating around the world. So any other currency where the supply is less than the US dollar will eventually in the long run appreciate relative to the US dollar. So all I can say is it’s very clear that the supply of gold is not close to a trillion dollars annually – the mining supply of gold in the world is worth something like 40-45 billion dollars. So you get more and more paper money on one ounce of gold, meaning the dollar will go down against the price of gold as it has already done so. People say, “well, the price of gold has gone up from $255 to $630,” but I can turn around and say, “no, no, no – the price of gold is the same. It’s the dollar that has gone down against gold.” [34:20]
JIM: Marc, if you were to give advice to investors now, if there was one thought that you have learned in your travels and working in the investment markets over the last 2 or 3 decades, what would that point be?
MARC: Politicians are inherently dishonest and they will print money. And the second point is you have to look around the world and you have to see countries that are – in terms of prestige and economic might – kind of peaking out; not that they go down, but others are coming up at a faster rate. And the fact is simply that the emerging economies have developed at a faster rate than Europe and the United States. And if you look at the US in the '50s, they were much ahead of the rest of the world, and today many countries have reached almost the level of the United States. And I think that as an investor I would be reluctant to have a significant portion of my assets in the US. I would go and look at so-called frontier markets, whether they are in Africa or in Central Asia or in Asia. For instance Vietnam is a perfect example of a country with a huge potential. You have a GDP that is only about $60 billion, and a population of 84 million people who are very determined, hardworking, disciplined. They have a very high literacy rate compared to say India; and they are a homogeneous race – they don’t have the ethnic problems that India has. I think India has a huge potential – don’t take me wrongly – but in India already the stock market is up more than 4 times since 2003, and you have a huge country with a billion people, but you also have a lot of problems. In Vietnam, you have the equal potential but with less problems. [36:23]
JIM: Marc, finally as we close, why don’t you tell people about your newsletter? I would have to say I would put it in my top 5.
MARC: Well, that’s very kind of you – that’s very complimentary. Basically, I have a website
www.gloomboomdoom.com. On the website we put up a commentary monthly, and then there’s the written material which is more for high net worth individuals and financial institutions, and that is called the Gloom, Boom & Doom Report. And both have some contrarian bias and look at unusual investment opportunities wherever they may arise around the world. [37:09]
JIM: And once again the website?
MARC:
www.gloomboomdoom.com.
JIM: Ok, thank you, Marc, for joining us.
MARC: Thank you very much for having me. [37:20]
