In this exclusive interview with Marcopolis.net Marc Faber covers it all: from commodities and China to the outlook on inflation, the Euro and gold. According to him the global economy is not healing. To the contrary, we might find ourselves back into recession within six months or a year. In that case he expects more money printing by central banks, which eventually could lead to high inflation rates and renewed strength in commodity prices. On the bright side, he sees great economic potential in Vietnam. Also, the Iraqi stock market has good potential now that a deal with Iran has been reached. While mining stocks are extremely depressed we might see defaults before any meaningful recovery.
What was still in place until recently is this long term down trend in interest rates.
Marc Faber : Yes, sure. You see, traditionally the Kondratieff is a price cycle
and interest rates follow the Kondratieff very closely. So if you take
the last cycle, the peak 1980 for commodity prices and at the same time
you had the interest rate peak in September 1981 when long term US
treasuries were yielding over 15%.
Then we have the down trend in the Kondratieff until 1999 -2000, the
commodity prices start to go up but interest rates continue to go down.
So that would again suggest that there is a possibility that this entire
boom in commodities in 2000-2008 was actually a bull market within
still a downward wave in the Kondratieff, it is possible.
In regards to the colossal amounts of debt there are two
major schools of thought: Inflationists and Deflationists. According to
the first, all the money printing will lead to high levels of inflation,
devaluing the currency and with it the debt will be inflated away.
Deflationists would hold against, that, even if central banks wanted to,
they ultimately cannot stop deflation. Where do you stand in that
Marc Faber : Well you know it is like in a bubble. The bears are right and the
bulls are right but at different times. Every bubble will go up and then
eventually the bubble will burst and then you know prices collapse. So
during the bubble stage the bullish people are right and during the
collapse the bears are right, but at different times. This is the same
with deflation and inflation; I think both will be right, but at
different times. I believe that most people have a misconception of what
inflation is. In other words most people, they think of inflation as an
increase in price of goods they go and buy in the shop over there and
over there, at the butcher and at the baker and in the grocery store and
so forth when in fact this is just one of the symptoms of inflation.
You can have inflation that manifests itself in sharply rising wages,
this hasn’t taken place but if you look globally, say in China, wages
have gone up substantially or you take Thailand, wages have gone up
substantially. Or it can manifest itself in rising commodity prices.
Well I mean commodity prices have been weak lately but the oil price is
still close to 50 dollars a barrel and it was at 12 dollars a barrel in
1999 and gold is still around 1000 dollars and it was at 300 dollars and
below in the 1990s, the low was at 255 dollars. You understand? A lot
of things have been weak recently but they are still up substantially
compared to the past.
Or you take bond prices, in other words bond prices go up when
interest rates go down. Bond prices in the last hundred years have never
been this high; in other words interest rates have never been this low
on sovereign debts. Or you take equity prices, ok some markets are down,
mostly the emerging markets whether it is Russia or Brazil or the Asian
markets, they are down from the peak but they are still much higher
than say ten or fifteen years ago. Or you take property prices, it
depends which properties but most property prices, for example if you
look around here in Switzerland, the prices are much much higher than
they were fifteen, twenty years ago.
Even in some areas, they may have come down a bit but in luxury areas
there are record prices. Or you take the Hamptons, or Mayfair in
London, or Chelsea in London, Kensington and so forth, prices are very
high compared to say twenty years ago. Or you take paintings, art… I
mean when I grew up and I started to work in 1970 in New York, in New
York at that time a Rothko painting was offered to me for 30,000
dollars. I didn’t buy it because I thought why would I pay 30,000 for
something like this! Now a Roscoe is maybe ten, twenty, thirty million
dollars and I have a Warhol, it is not a big painting but nevertheless I
bought it for 300 dollars in the 1970s. You understand? Prices have
gone up dramatically, so if someone says to me, well there is deflation,
I tell him, well tell me in what? You know, Hong Kong property prices,
Singapore property prices, even Bangkok, Jakarta and so forth, all have
been grossly inflated.
Therefore I think we have to re-examine the definition of inflation
whereby maybe we have some sectors of the economy that are deflating,
like if we measure wages inflation adjusted, they are all going down in
the western world because a) the consumer price inflation that the
Federal Reserve and Europeans report has nothing to do with the cost of
living increase, the cost of living increases and we have studies about
this, in most American cities are rising at between 5 and 10% per annum
and if you include insurance premiums, health care costs, education
costs and so forth.
So these prices are going up strongly. Or taxes, indirect taxes like
tunnel fees or bridge tolls and so forth, all that is going up much more
than the CPI and this is where people have to pay for to actually go to
work and live. This is then reflected, this kind of inflation is
reflected in a diminishing purchasing power of people, that’s why retail
sales are relatively poor in the US despite of the fact that we are six
years into an economic expansion. I am always telling people, you know
when I started to work I didn’t have to be smart because if I put my
money on deposit with the banks or bought government bonds they were
Then from 1970 to 1981 interest rates continuously went up, so the
compounding impact was very high. Now if I am a young guy, say your age;
then I want to put my money on deposit, I am being F*d essentially by
the banks because they are not paying me anything. If I buy ten years US
treasury notes I am getting a yield of less than 3%; 2.3% at the
present time and it was below 2% six months ago. So how can I really
save? How can I make money? I want to buy a house ok?
Then you have to pay a huge price and the mortgage rate may still be
around 4% you understand? So it is still relatively high interest rates
on mortgages and one of the reasons that new home sales are not
particularly strong is that young people just don’t have the money to
buy it because a) they are also burdened with student debts. So I mean
these are all issues that are very complex.
My sense is that knowing the central banks, and knowing the way that
they think, what will come up when they realise that the global economy
is not healing but actually back into contraction under the influence of
the neo-Keynesians like Krugman, they will say, you know what?
We haven’t done enough, we have to do much more, and then they will
print again and that is why I think that eventually we could have high
inflation rates and a renewed increase in commodity prices.