Marc Faber is one of the great contrariarn investors of our times. Nicknamed Dr Doom, Mr Faber has often stood against a tide of bullish sentiment, forecasting difficult times ahead. He also has long been a champion of the potential of Asia and a critic of the structural economic problems facing the US and Europe.
A follower of long-term cycles, he believes the world is seeing such a marked seismic shift in the in the global centre of gravity eastwards that even relatively short-term investors must appreciate its import or lose out.
Through his Gloom, Boom, Doom subscriber newsletter, the Thailand-based Mr Faber also has been a long bull on gold as investment, drawing on trends stretching as far back as Napoleonic era.
Mr Faber answers questions on the outlook for financial markets, which countries he prefers for investment, the prospects for the dollar, how high gold prices will rise and whether the commodity cycle has peaked.
Does history offer any guides as to how US stocks would react to a sudden and severe drop of the US dollar? How would their prices react in real terms, given that they are denominated in dollars?
Marc Faber: I suggest you look at Latin America in the 1980s. We then saw weak currencies, rising inflation, rising equities in nominal terms and a collapse in gold and dollar terms.
You should read The Economics of Inflation by Bresciano Turroni.
If asset prices have been inflated due to lax monetary policy and debt levels have ballooned then how will this translate into goods inflation if the economy in the US slows down?
Jelena Jovetic, London
Marc Faber: Consumer spending will eventually slow down a lot in real terms, however, if there is eventually money printing, goods inflation will pick up via the weaker dollar and rising import prices and wages.
Could you share your thoughts about recent large scale IPOs of large Chinese state banks including ICBC and CCB. Do you see an investment opportunity in them for the long term investor.
Mesut Ellialtioglu, Istanbul
Marc Faber: Banking potential is huge in China, Vietnam and India. Prices are already high but banks look attractive long term.
This time last year you were recommending investors should buy Volkswagen shares and gold. What are you recommending today?
Charlie Jeffries, Paris
Marc Faber: I still like precious metals and farmland.
In your previous market commentary you mention that the most likely next bubble candidate is Asian property. Can you run through your ideas on Asian property? What is your view on rubber?
Clara Lee, US
Marc Faber: Rubber should recover. Asian asset prices, stocks and property could be the next big bubble, but in the case of property this may be years away - except property in financial centres, which are vulnerable to financial market downturns.
Will Asian governments do anything about continued environmental degradation, or is the sacrifice in terms of GDP simply unacceptable,despite the increasingly obvious longer term negative implications of ignoring the problem. Thailand is implementing new controls to try to stem the rise of the THB. This follows on almost a decade after the imposition of controls, to prevent the THB from weakening during the Asian crises. Capital controls then did not work and it seems unlikely they will work now. Can the THB and other Asian currencies return to levels last seen prior to the Asian crises?
Marc Faber: Asian currencies can rise against the dollar to pre-crisis levels if the US prints too much money and Asian central banks pursue tight money policies, which I doubt they will.
The environment has been destroyed by the US and the west - not by Asia.
With all the world’s stock markets breaking out to new highs, should we not be happy and confident that the good times are going to continue?
John Little, Pembroke Pines, FL USA
Marc Faber: Not necessarily - remember 1929. Also, in gold terms most markets are way below previous peaks.
Going forward, do you expect that agricultural commodities may be the only asset class that are not positively correlated with the financial markets? What weighting of agricultural are you recommending?
Theo Zhang, Sydney
Marc Faber: Everything is now correlated, but agricultural land is less so than other assets. Weighting really depends on an individual’s financial position.
After the coup in Thailand, you were still lukewarm about the performance of stock market. How do you foresee the SET performance in 2007. I would also appreciate your views on Taiwan if the US economy slumps.
Lionel Desjardins, Canada
Marc Faber: I think Thailand offers some value but it isn’t an outstanding investment opportunity. Taiwan should for now perform. Further into the future I am less sure about it.
With the probability of recession in US increasing, how do you think it will pan out for indian equity markets? Also, where do you see Indian markets heading three to five years down the line?
Ajay Mattoo, Bangalore, India
Marc Faber: India is closely correlated to international financial markets. When markets peak out, the Indian market will be very vulnerable. In three to five, who knows?
Do you believe in technical analysis for stocks?
Lise Anderson, Stockholm
Marc Faber: It is a tool, which I use, but it has little forecasting ability.
How low will oil prices go during the coming recession?
Don Martin, California
Marc Faber: If Mr Bernanke prints money - and he will - then energy prices may not decline but rise. But they could rise less than say precious metals. It would be wrong to assume that a weak economy implies automatically lower inflation - see Latin America in the 1980s.
What is your outlook for the UK and US housing sector? What forces besides interest rates drove the overheating of these markets - how might they play out from here? Also, will the utility sector retrace its gains? Will the US economy go into a slump?
Alex Limion, Toronto, Ontario
Marc Faber: In real terms, housing prices will decline. Most likely also in nominal terms for a while until money printing starts in earnest.
Utilities will correct, but with rate increases they should be OK. The US economy and global economy will eventually slump but amidst money printing markets they may still rise - even in a slump.
Do you believe the yen carry trade is a big deal? Might a strengthening yen become self-propelled as shorts get squeezed out like dominoes? What assets might be affected? Could we see a perverse market action like a declining dollar, but longs in silver and gold being squeezed out by the yen movement? Or is the current run-up, especially in silver, perhaps on better foundations on this go-around?
Marc Faber: I suppose that the yen carry trade will unwind one day when global liquidity becomes tight. Since all asset prices rose between 2002 and the present day, all asset prices will then suffer. Then money printing by the Fed comes in and leads to high inflation and a weak global economy. Precious metals will then perform “relatively” well.
Even if inflation does not pick up, does not the continued proliferation of excess currency reserves (and the accompanying unwillingness of most countries to let their currencies appreciate) imply that precious metals will continue to be a ‘safe’ haven against all this excess world-wide liquidity?
Don Benson, Johannesburg, South Africa
Marc Faber: Correct. The only “currency with integrity” are precious metals.
I am looking to make a major commitment towards the raw material sector, both career-wise as well as an investor. Would you be kind enough to share your view on the raw material cycle in general and the cycles of the sub-sectors being energy, industrial and precious metals and finally soft commodities.
Ralph E. Guyot, Zurich
Marc Faber: Energy is likely to continue to rise for a long time, especially with the US or Israel likely to bomb Iran in the future and rising geopolitical tensions.
I also like precious metals as the US has no other option but to print money.
I suppose that commodities have an inverse correlation with the intelligence of US presidents - this will assure a very LT bull market!
What are your predictions for the dollar/euro exchange rate and the dollar/gold price by the year end 2007?
Peter Seilern, London
Marc Faber: I am not so sure dollar will collapse against Euro. However, I suppose dollar is in a well entrenched bear market against gold that will last a long time under Mr. Bernanke!
I have been an IFA in Latin America and my girlfriend now a currency and commodity broker here. What do you think she should advise her clients as far as weightings between foreign currency and commodities and share trading? Should I advise my clients to look seriously at the shorter term market opportunities or go long haul in gold and Asia. My instinct tells me renewable energies look a good bet. Do you agree?
Chris Green, Cyprus
Marc Faber: This all depends on client’s objectives and their personal financial position, risk appetite and so on. I suggest she focuses on Asia and on precious metals. All energy related investments look attractive again right now.
How do think the potential gains for gold compare with the potential gains for silver for US investors?
Wayne Holloway, Lenoir City, TN
Marc Faber: Silver is likely to out-perform gold both up and down. It is easier to store a ton of gold than a ton of silver.
What do you think is behind the current re-acceleration of the major falls (more than 50 per cent) in most Middle Eastern stock markets this year, and what are their wider implications?
Paul Hodges, London
Marc Faber: It shows that markets can decline even amidst excessive liquidity.
Of course Middle Eastern markets were hugely over-valued a year ago. They may bottom out soon, but new highs are out of the question.
If the US goes into recession and both the dollar and base metals go down, will base metals drag gold down with them or will gold go up because of the weak dollar?
Marc Faber: I suppose that when the recession is underway, there will be massive interest rate cuts and that inflation will actually accelerate. Weak dollar, recession but rising gold prices.
The US government is running an annual budget deficit of approximately $700bn. At what point would investors look as the accumulation of debt and demand additional yield?
Jack Brown, UK
Marc Faber: The budget deficit is less the issue than the weak dollar. It is difficult for me to see a weak dollar and still declining yields! I think one of these days interest rates in the US will start to rise and then continue to rise massively over time. The US government is a threat to world peace and to the world’s economy.
With the vast amounts of capital sloshing around in the market place and how quickly it (and information) can move around global markets, have some of the traditional cyclical rules of thumb changed? For instance, do commodity bull markets still last for 20 year periods? Or are the boom-bust cycles more susceptible to shorter time periods?
Marty Sartin, Nottingham, NH
Marc Faber: Good question. I suppose that with excess liquidity and money printing by central banks, everything needs to be measured in “real terms” or gold terms. As such the LT cycles may still be in place but they are obscured by money printing in nominal terms.
You have said that an investor have to read newspapers for four hours a day. Do you have other good investment advice?
Janne Karlsen, Copenhagen
Marc Faber: It is important to know one’s limitations and decide on a strategy. For example, I prefer to buy depressed value stocks rather than chase every story that is the flavour of the month. However, I concede that by following a strict strategy some opportunities are lost.
Which market in the world do you think is the most unstable and overpriced currently? What is your view on the impact of a rapidly falling dollar on the world stock market? Lastly, your view on the world economy and stock market in 2007?
Siong Ket, Malaysia
Marc Faber: Real estate in financial centres and art seems to be very over-priced.
Dollar declines - US assets rise. European stocks will become pricey as a result of the strong euro.
In a world where we do not know how much money central banks, especially the Fed, will print it, is impossible to make predictions. Expect stock markets to peak out soon, then decline, with aggressive interest cuts in the US to follow.
This will lead to a weaker dollar but possibly a strong stock market recovery. Eventually the money printing game will no longer work, but when?
How long will it take the real estate bubble (residential) in the US to deflate? In addition, will the commercial real estate sector suffer as well?
Patricio Morat, Charlotte, NC
Marc Faber: In real terms it may take several years. Commercial will also be affected
The minutes of the Bank of England monthly meetings and quarterly inflation reports consistently refer to the growth in the money supply in abstract terms - in a way that implies that it is not under their control. I am sure that my economics A-level course taught that central banks explicitly control the money supply. Which is correct? Are the BoE simply implying that the rampant money supply growth of recent years is not their doing?
Stephen Peacock, St Neots, UK
Marc Faber: I am not sure central bankers know any longer what “money” is. However, they should be able to define tight and easy money. Tight money is when credit growth begins to decelerate meaningfully. And this has not yet happened.
You say Asia is good for investment . As a potential investor in property -apart from doing due diligence on what marketers of new developments enthuse about - do you have any preferences on overall country opportunities between say Philippines, Thailand, Vietnam and Cambodia? I have been reading up a little on the WTO and Cambodia, imagine it is similar in the other places and would appreciate any insights you have in general.
Ian MacDonald, London
Marc Faber: I like Vietnam the best, but I am sure there are also excellent opportunities in the other countries you mentioned.
“I go to lots of conferences where I still hear how we Americans and Europeans will do the smart jobs and the Chinese will assemble Nike shoes and the Indians will do call centres,” Mr Faber told the FT earlier this year.
The Swiss-German Mr Faber, who runs the eponymous fund management firm, believes this is misreading of history and the extreme complacency of Western elites astounds him.
“I can’t understand why so many investors are still grossly underweight in Asia. You can have a rich family with a billion dollar portfolio and they might have nothing in India,” he said.