Faber excerpt from Barron's 2003 Rountable
Q: [Loaded with apologies and luggage, Marc Faber arrived about 30 minutes after the discussion began. Herewith, his views on global economies and markets.]Well, Marc, we're awfully glad you're here. Would you like to weigh in on the possible implications of a war with Iraq?
Faber: Getting Saddam Hussein out is probably the easiest part. My concern is that the war eventually will spread to Saudi Arabia, which is like France under Louis XVI a few days before the French Revolution. The problem is to find a solution to the Middle East.
Q: You're talking about the Palestinians and Israel?
Faber: Partly. But I was recently in the Middle East, and the feeling of many Arabs, and many other people, is that Americans want to control the oil in the region. This is a very, very touchy issue. Russia and China don't want the U.S. to control oil prices in the long run. China's most important source of energy is Middle Eastern and Central Asian oil. Eventually, you create a gigantic geopolitical problem involving the world's three largest economic and military blocs. So I'm rather negative in the long run.
Q: And in the short run?
Faber: It's difficult to measure because we don't know how quickly Iraq's oil supplies will be put to use. The oil price might drop relatively quickly, which would be beneficial. Or prices could continue to rise gently. In the third scenario, prices could rise two, three times from the present level.
Q: You are talking about $60 to $90 oil?
Faber: Easily. In the long run that will happen anyway, because demand in Asia will rise substantially in the next 10 to 15 years. You should overweight energy.
My major theme, however, is not about being bullish or bearish. This post-bubble environment is the most exciting environment of the past 20 years. All the world's capital flowed into the bubble sector. Once the bubble bursts, there is a change in leadership. After the oil and gold and silver bubble burst in 1980, the new leader was the Japanese stock market, which rose essentially seven times between 1980 and 1990. Once that bubble burst, the leadership changed to the American markets, specifically Nasdaq. This created undervaluation in commodities and hard assets, including real estate. This is why we have had three years of declining equity prices, and in England home prices have almost doubled. In California, the median home price is up 20% in the past 12 months. We are now at the juncture of a change in leadership. When people tell me the past 12 months have been bad for investors, that's nonsense. If you held cash in euros, you made 16%. If you held deutsche mark bonds you had a return of about 25%.
The function of recessions is to clean out the excesses of the previous boom. The excesses are eliminated and overcapacity is killed through bankruptcies. But the Fed policy of credit expansion has allowed capacity to grow -- not in the U.S., but in China. Each time they inject money into the U.S. economy, consumption grows. And industrial production grows in China, which is wonderful for Asia, but not the U.S.
Q: So we still have a day of reckoning here?
Faber: You've had excessive credit growth and what some Austrian economists call a qualitative misallocation of credit. About 88% of credit growth was in mortgage debt in the third quarter. Corporate debt is no longer growing. In the third quarter of 2002 mortgage debt was growing at the annual rate in excess of $900 billion, on a $10.5 trillion economy. This is then feeding consumption, which is feeding production in China and the procurement of services in India and health care in Thailand, where they specialize in sex transplants.
Gabelli: This is where the rubber meets the road.
Faber: So far, this process has succeeded because the foreigners were willing to acquire U.S. financial assets. But we may be at a turning point, because private money flows into bonds and equities and direct investments from foreign countries have been declining.
Biggs: Where is the new leadership?
Faber: Since bond prices bottomed on Sept. 21, 1981, we have been in a secular bull market for bonds, which means declining rates. Refinancing and declining interest rates go hand and hand. We have been in a bear market for commodities, which from the end of 2001 until February 2002 fell to their lowest levels ever in the history of capitalism, relative to the consumer price index and financial assets. I'm talking about gold, silver, coffee, rubber, sugar and the grains, of course.
Q: Last year commodities did well.
Faber: This is precisely the point. Courtesy of the potential future Fed chairman, Mr. Bernanke [Federal Reserve Gov. Ben S. Bernanke], we are at the beginning of a new inflationary cycle for commodities.
Q: What will happen to housing now?
Faber: The refinancing boom is coming to an end because interest rates no longer are going down. Rising rates will kill the U.S. consumer. They will bury him. Housing isn't going to collapse like the Nasdaq, by 70%-80%, because the Fed can print money like there's no tomorrow. Still, a drop of 10% or 20% will be dramatic, because I have read that 40% of U.S. homeowners have less than 10% equity in their homes. Still, you can have domestic inflation. Where the deflation will kick in is through the depreciation of the dollar.
Samberg: What's the new, new thing?
Faber: Be long commodities, stocks that relate to commodities and countries that relate to commodities.
Q: But you are bearish on the economy, right?
Faber: You would have to be crazy to be bullish on the U.S. economy.
Gabelli: Would you repeat that? You're not being clear.
Faber: You would have to be Fed chairman to be bullish on the U.S. economy! The central bankers of the world had the opportunity to sell their gold positions in 1980 for over $800 an ounce. They could have put that money into the Dow Jones at 800 or bonds yielding 15%. These idiots waited more than 20 years to sell gold below $300 and buy bonds below 5% and the Dow around 12,000. But this is the mentality of central bankers.
Neff: Central bankers don't buy the Dow Jones.
Faber: They forced the government to buy stocks for social security -- not here, but in Europe.
Biggs: Marc, didn't you just write a book about Southeast Asia and how good it is going to be?
Faber: I just finished my book ["Tomorrow's Gold"], but CLSA, my publisher, didn't want too many personal comments in a book about economics.
Neff: Can we wait for the movie?
Faber: Tomorrow commodities will not explode on the upside, although they could. Rather, the bullish trends in the stock market, and especially the bond market, are reversing. If I am right, you must be in emerging markets, especially those that are resource-rich.
MacAllaster: When does oil hit $90?
Faber: As a certain Barron's columnist has said: If you make a prediction about price, don't give a date. The world will be in turmoil for the next 10 years. Oil prices will be higher. Coffee will be higher. Gold will be higher. Asia, with 3.5 billion people, or 56% of the global population, consumes less oil than the U.S., with 285 million people. Per capita consumption in Asia will not rise to the U.S. level, but it can easily double. If Asians consume 19 million barrels of oil per day, that can easily rise to 35-45 million barrels.
Q: The situations in Venezuela and Iraq drove oil up from $19 a barrel at this time last year. Consumption surely isn't going to make much difference in the next year or two.
Faber: In the next two years, no. But if you're all so bullish about the U.S., you have to be bullish about industrial production in Asia. The U.S. dollar would have to drop 80% to make this country's manufacturing competitive with Asia. The dollar will depreciate 80% against gold, but not against the euro or yen. Over the long run, it might depreciate 80% against the Chinese renminbi.
Witmer: Will China's lack of respect for property rights stem the flow of industries to the mainland?
Faber: Chinese property rights are very solid. Everything belongs to the government.
Witmer: I'm talking more about trademarks, like the number of personal computers in China that supposedly are operated with pirated Windows systems.
Faber: That's the deflationary boom. It's not unlike the effect, at the end of the 19th century, of the American continent's entry into agricultural markets. Between 1864 and 1900, prices fell 50% and bankrupted European agriculture. In fact, what has happened to China in the past 10 years was only possible in the absence of property rights. Anyway, I wouldn't buy American multinationals. I would buy local companies that are developing brands in emerging markets.
second excerpt:
Q: How much upside is there?
Black: If earnings progress, and the economy is as buoyant as Mario suggests, the stock will double.
Q: Art, any thoughts here?
Samberg: It's got a diversified bunch of customers. It's in the right areas. It's got decent technology. It's the kind of stuff you buy at this point in the cycle, but it's really impossible to predict.
Faber: I agree with you entirely that the stock can easily double...before it goes to zero. Let me give you some figures about the production of electronics in China. The output of microprocessors in November was up 95% vis-à-vis a year ago. Mobile phones were up 9 66%. By the time the tech sector really comes back worldwide, the competition from China on the manufacturing end will kick in, and that's why pricing will remain weak. As a trade, I would buy all these garbage tech stocks because they can all double -- before they go to zero.
Black: Corrigan told me he would never build another fab. When demand comes back, they're going to Taiwan. Anyway, if you have a recovery in the U.S. economy, this is a legitimate company with a leadership position and a strong balance sheet for which we are not overpaying, based on earnings one year out.
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