Great Investment Articles

Date : May 7, 2006

Reporter: Alan Kohler



ALAN KOHLER: Well, the death of the Greenback, gold at $US6,000 an ounce with commodity and energy prices rising vertically, spurred on by growing international tensions and war - no, that's not the background to the latest sci-fi pot boiler, but the tentative vision of one of the world's most respected contrarian economic forecasters, Marc Faber. Dr Faber must be taken seriously though because of his record in predicting, among other things, the global stock market crash of 87, Japan's collapse in 1990 and the Asian meltdown of 1997 - forecasts that earned him the moniker Dr Doom. He's also the editor and publisher of the influential The Gloom, Boom and Doom Report. And, as you'll hear, he has some very interesting views on the relative merits of the Australian and US central banks. I spoke to Marc Faber from New York this week.

Marc Faber, just to put this week's interest rate increase in Australia into a global perspective, do you think the developed world in general is in a process of increasing interest rates and reducing liquidity that has a way to run yet?

MARC FABER, 'THE GLOOM, BOOM AND DOOM REPORT': Yes, I think so because we have a global boom and interest rate increases have been very slow. In other words, in the US, we went from 1 per cent on the Fed fund rate in June 2004 to 4.75 per cent, but I think that inflation is higher than 4.75 per cent. And if you look at long growth in the US and credit market growth, then we haven't had tight money yet because if money was tight, then asset markets wouldn't rally as they do at the present time.

ALAN KOHLER: There is a lot of debate in the financial markets about whether the US will have a pause in its interest rate tightening cycle. What do you think?

MARC FABER: Well, I basically think that Mr Bernanke is a money printer and it's interesting to see that since he was appointed Fed chairman, the price of gold has risen by 42 per cent so the market is not very happy with his bias towards money printing.

ALAN KOHLER: Do you think that Mr Bernanke is losing control of the situation, in fact? I mean, I notice the markets are testing him now.

MARC FABER: I think that on his recent comments that the Fed might pause, immediately the US dollar became very weak, the bond market sold off and gold prices shot up another $20, $30, so that is a lesson for him that the market begins to see through his inflationary monetary policies.

ALAN KOHLER: What do you think of the Australian central bank and its decision this week to increase interest rates?

MARC FABER: I think actually that the Australian central bank is probably relatively better than others in the sense that they have further tightened monetary policies and so we have in Australia an interesting situation. The economy is kind of weakening, but there are some inflationary pressures and the Australian Reserve Bank has increased interest rates so I find it is actually quite courageous.

ALAN KOHLER: What do you think it means for the Australian dollar?

MARC FABER: Actually what has happened, the Australian dollar along with the New Zealand dollar was weakening recently but in the last, say, two weeks the Australian dollar has again strengthened from 70 cents to 76 cents, so I would say the Australian dollar is supported by relatively high interest rates.

ALAN KOHLER: What do you think about the length of the current commodities boom? You've written recently about firstly how the long wave of commodities could last for another 15 to 20 years and you've also talked about the impact of India on commodities, so where do you see prices of commodities going from here?

MARC FABER: Basically we had a bear market in commodities between 1980 and 2001, or 1998 and 2001, so we had more than 20 years bear market in commodities. By the late 1990s in real terms, in other words inflation-adjusted, commodity prices were at the lowest level in the history of capitalism in the last 200 years and now they have risen substantially - the price of copper from around 60 cents to over $3 a pound, the price of gold has more than doubled. But in real terms, commodities are still relatively low compared to equities and therefore, also given the length of the cycle - the cycle for commodities lasts usually 45 to 60 years peak to peak or trough to trough - in other words the upward wave in commodities lasts around 22 to 30 years and we are now in year 2006. The bull market started in 2001 so we are five years into the bull market. I do concede that the markets are overbought and there is a lot of speculation and I expect a correction but I think longer term from here onwards commodities will outperform the Dow Jones and financial assets.

ALAN KOHLER: You've been reported as predicting that the price of gold will rise to $US6,000 per ounce. Is that correct - is that what you said?

MARC FABER: What I said is that if Mr Bernanke prints money, it is entirely conceivable that the Dow Jones goes to 33,000 or 40,000 or 100,000 or 1 million. All I am saying is if the Dow Jones here goes up three times because of money printing by Mr Bernanke and we have examples in financial history where a central bank printed money and everything went up, but in this instance I think that gold would significantly outperform the Dow Jones. So if someone says to me the Dow will go to 33,000, I say yes, it's possible but it will decline against the price of gold which will go up to $US5,000, $US6,000 an ounce.

ALAN KOHLER: Did you notice that Steven Roach, the chief economist of Morgan Stanley, who has been a bear for a very long time, seems to have changed his tune now, saying he's feeling better about the world than for a long time. Do you think that the fact that Steve Roach has kind of thrown in the towel is a sell signal or do you think he's onto something?

MARC FABER: Well, Steve is a good friend of mine and he gave already a sell signal two years ago. He suddenly turned bullish about bonds and since then the bond market has been weak. And I agree with him that we are in a global boom but it doesn't change the fact that it is an imbalanced boom and it's driven largely by credit creation in the US, leading to overconsumption, leading to a growing trade deficit, current account deficit, the accumulation of reserves in Asia and a global boom. But it is nevertheless an imbalanced boom and one day there will be a problem, certainly with the US dollar. The US dollar is a doomed currency. Doomed? Doomed. Will be worthless. Actually each one of your listeners should buy one US Treasury bond and frame it - put it on the wall so they can show their grandchildren how the US dollar and how US dollar bonds became worthless as a result of monetary inflation.

ALAN KOHLER: You made at least three great calls - you warned of the 87 crash just before it happened, you warned investors to get out of Japan in 1990 and out of Asia in general in 1997. So what specifically is your call right now?

MARC FABER: I think we are in a bear market for financial assets. There's a bear market where the Dow Jones, say, would go from here - 11,000 to 33,000. It would go up in dollar terms but the dollar would collapse against, say gold or foreign currencies. That's what I think will happen with Mr Bernanke at the Fed because he has written papers and he has pronounced speeches in which he clearly says that the danger for the economy would be to have not deflation in the price of a fax machine or PC, but deflation in asset prices. And so I believe that he is a money printer. If I had been a university professor, I would not have let him pass his exams to become an economist. I would have said, "Learn an apprenticeship as a money printer."

ALAN KOHLER: (Laughs) So, a big mistake putting him in charge of the Fed then?

MARC FABER: I think it's very dangerous, very dangerous.

ALAN KOHLER: You've talked in the past about the links between the commodity price cycles and political tensions in the world and you've pointed out that when the Soviet Union collapsed, commodity prices were weak and you've said that rising commodity prices leads to the conditions for war. Now that we're in a commodities boom - which you now say is going to go for a long time - do you think that we're in for a period of rising political tension as well?

MARC FABER: Basically the way we economists have business cycles theories, the historians have war cycles theories and I don't want to go into all of them, but when commodity prices decline, countries are not concerned about getting supplies of vital commodities, whereas when commodity prices go up, it's a symptom of shortages. America needs oil for consumption and China and increasingly India need oil for their economic growth. If you are growing your industries at a production of 15 per cent per annum, as China, you need increasing quantities of oil and China was self-sufficient until 1994 and today they are the largest consumer of oil and import most of it from the Middle East. So the tensions of course arise and I can see that some people have become very powerful whereas the balance of power in the 80s and 90s shifted to the industrialised countries of the West that consume a lot of oil, now the balance of power has shifted to people like Evo Morales, Hugo Chavez in Venezuela, Mr Putin - Mr Putin is the most powerful man in the world, it's not Mr Bush because Mr Putin controls a production of oil of 10 million barrels, plus he controls all the pipelines going to Europe. And it has also shifted to Mr Ahmadinejad. Mr Ahmadinejad of Iran would be very quiet, as well as Mr Chavez, if oil prices were at $12. But at $70 they have a lot of leverage and so the tensions have also increased. It doesn't mean that it comes to war but the conditions for war have improved and I think that eventually this commodity cycle will last so long until there is a major war and during war times, the best hedge is to be low in commodities, then commodities really go up vertically.

ALAN KOHLER: Bit of a grim way to make money, I suppose?

MARC FABER: Hedge funds make money anyway. It doesn't - morals are not the most important issue.

ALAN KOHLER: Well, on that note we'll have to leave it there. Thanks very much, Marc Faber.

MARC FABER: It is my pleasure.


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