Speaking on the current trends in economies across the world, Faber said that there is overall expansion globally. On the US economy, he said that credit is expanding at about four times the normal GDP growth in the US and that it is not sustainable in the long run.
As concerns of an economic slowdown loom large in the US, Faber feels that growth potential in Asia is very high, especially India and China.
Gold prices have fallen below the $600 mark. Faber feels that gold prices may go down to about $500- 550.
Excerpts from CNBC's exclusive interview with Marc Faber:
The IMF is talking positive, sounding optimistic this time around. What do you make of it all?
To be optimistic is correct for the present; the question is about the future because if you look at the global economy at present, we are in midst of a boom. You have the US expanding, the US economy expanding.
If expansion is defined as consuming, and that builds this growing trade in current account deficits, that then has oiled the Asian exporting nations, which have had very strong industrial production growth, particularly in China. Their demand for growth has been met by the Middle East, Latin America, Africa, Russia and so we can say that basically the whole world is expanding at present.
But this virtual cycle that you are trying to describe, there are growing risks to that, over USA. We are hearing there could be a recession; there is the whole problem, not a lot of clarity there because forecasts of what's expected to happen going forward are all over the place. What do you think is likely to happen, we are talking of recession in the US driven by the housing market?
This is a good question; of course the US will again have recession. The question is will it happen now or at a later date and it is conceivable because although interest rates have risen from 1 per cent on the Fed fund rate to 5.25 per cent, there hasn't been a tightening of monetary conditions because credit expansion has actually accelerated.
So it is entirely conceivable that actually the economy is quite resilient and continues to expand and that the recession only happens in the second half of 2007 or 2008.
But one thing is very clear, we have a global boom that is characterised by huge imbalances, the imbalances arising from very rapid debt growth in the US leading to essentially excessive consumption, leading to rising trade in current account deficits that are then offset by the surpluses here in Asia.
So it sounds as though you are describing a bubble that could be set to pop in '07, possibly even in '08? So you are talking about a recession, which is going to happen, it's just that it will happen a little later than what most people think or worry about?
Well, every bubble eventually bursts and the bubble we have today is a credit bubble, mostly in the Anglo-Saxon countries. Of course, because the US economy is the largest, we have a huge credit bubble there, where essentially credit is expanding at about 4 times nominal GDP growth. This is simply not sustainable in the very long run. But it's difficult to tell if it's going to happen tomorrow. The Asian crisis also took many years to come about, but when it happened, as you know, it was quite severe.
Your views on what sort of discussion we will see here with the IMF and the World Bank Summit. There is a lot of talk about US Treasury's Henry Paulson raising the case for China's currency reforms once again. You mentioned there is a record July US trade deficit. Do you think we are going to see some discussion on the China currency reform issue here at the IMF?
You can be sure that at an IMF meeting, there will be lot of discussion, the question is how useful they are and how many decisions will be taken. I always take a slightly critical view of the World Bank and the IMF and don't think that their decisions will be very meaningful.
Of course, the Americans will continue to put pressure on China to revalue its currency, arguing that China has an undervalued currency. But that is a very difficult fact to establish. China has a large trade surplus with the United States, they also have a large trade deficit with other countries and over the last 25 years, exports and the imports into China have grown at about the same rate.
So I think that the Chinese, a year ago decided to let their currency float upwards and I suppose that this trend will continue. Whether it will help the US trade deficit with China is very debatable because if you look at Japan, the Yen was pegged to the US dollar at 350 until 1971.
Obviously, the Yen appreciated and wages went up in Japan and Japan still has a trade and current account surplus with the United States. So to strengthen the Chinese Renminbi may actually not be the most desirable medicine.
The USA, the Bush administration treasury, is especially sort of spearheading this broader effort not so much to get China to loosen up on the Renminbi and later appreciate; but more distinctly the domestic demand in China. The broader question for me going forward is China slowdown in '07 or very sharp slowdown.
What do you think is going to happen?
I really don't understand that someone can argue that Asia needs to stimulate domestic consumption because we have very strong consumption throughout Asia. You look at car and electronic sales in China and see how much they have grown. Nobody can tell me that they haven't consumed anything.
Do you think then they are talking more about, we want Chinese consumers to consume US financial services?
Well, in a perfect world, the US would like the whole world to buy US products. But as it happens, Asians consume a lot but they don't buy a lot of US products because they are not comparative from a quality point of view. Asians buy all the luxury goods from largely Western European manufacturers, they buy a lot of electronics largely from Japan and they also developed their own brands.
You started getting bearish on commodities last year, I guess you called the correction that we are starting to see right now. We have an e-mail from a viewer named Bob C from Chicago, he wants to know where you see gold going forward?
We had a very strong bull market in precious metals and an even stronger one in industrial commodities, gold went from $255 to $730. Now we are at $587, I think we may go down to between $500-550 and at that stage, I would again be a long-term investor in gold.
The second e-mail is from Charn from Bangkok. He asks, how will a US recession in the second half of '07 or '08 affect South East Asian economies as a whole?
I think we have to distinguish between a recession that would involve a very sharp decline in equity prices in the United States. Let's assume the S&P drops 10 per cent for sure, 99 per cent of other stock markets in the world will also go down. The same way if the S&P goes up, the other stock markets are also lifted.
On the economy, there is a wide-ranging debate to what extent a recession in the US would impact the Asian countries. My view is that Asia has become less dependent on the US than it used to be in terms of its exports. And secondly, I could make the case that if there was a recession in the United States, the drive towards outsourcing and cost cutting could actually be increased.
In other words, let's say consumption in the US would no longer grow or even decline by 3-5 per cent, I am not sure that the exports from Asia to the US will totally collapse, maybe they wouldn't decline at all and maybe they would even increase. So tendency wise, the decline in equity prices or rise in interest rates in the United States, for sure has a financial impact on Asia. But whether the impact on the economy is as strong as some people believe, that I am more doubtful about.
China is the factory of the world, the rest of Asia or much of Asia has become part of the supply chain for China, they will ultimately feed big markets like the US. What's happening in China, domestic wise, consumption wise, even if the US slows down, China is still going to continue roaring ahead. Is it not?
Roaring ahead, of course China will also have from time-to-time setbacks in the economy. We have a very high investment ratio in China, we have very strong capital spending and if over capacity is developing in some industries and capital spending slows down, then that could also lead to a slowdown in the Chinese economy.
But in general, whenever I travel, I always hear how the US consumer is driving the global economy. We have in Asia 3.6 billion people, we have many more consumers here in Asia than in the United States and in particular, we have favourable demographics and we have a low level of urbanisation and a low level of market penetration.
In China 84 per cent of car buyers, are first time car buyers, in America it's only 1 per cent, that buy a car for the first time. So the market potential in Asia in terms of consumption growth is still very high, not only in China, but increasingly in India. Over time, may be over the next 10-15 years, Asia will become very independent from the United States.
Let's get back to commodities. You were just talking about gold there. Would it be fair to say that right now, in the correction, we should be looking more to source the agros, is there more potential there?
We had this huge run up in some commodities. Since May this year we have been in correction time. All industrial commodities are down, between 8-24 per cent since May.
Commodities don't move all at the same time, and also what is important to understand is that we have different sectors in the commodity markets, the same way we have different sectors in a stock market. In a stock market, you can have one group like technology moving up into 2000, then technology going down and housing stocks coming up. In commodities, we can have the same.
So my feeling is that some industrial commodity prices may actually already have peaked out for the longer term. Then we have agricultural, that is still relatively inexpensive, whereby the agricultural commodities are all not that easy to buy, simply because you pay a high premium. If they don't move, you don't make any money.
Precious metals, I think are still inexpensive but they are also driven by momentums, when the momentum turns down there is a lot of selling, a lot of short selling and so forth. I would look at gold to be in a buying range, say between now and $500.
You are sketching out a very bearish scenario, recession in US at end of '07 or maybe '08, and opportunities in bad times, you said that for certain commodities watch them to fall further and that could be a good buying opportunity including gold. What about cash?
First of all, I have been quite keen on two year treasury notes for a while now, the yields have come down now from 520 to 480. May be it is time you should not do very much and you get a reasonable yield on the short-term treasury paper in the United States.
Having said that, I also think that in an environment where commodity prices come down, it can lift the US dollar for a while and also US stocks and in particular, the perception in the market place that maybe the consumer will remain resilient because he pays less for energy.
And hence consumer stocks could have a bounce and technology stocks could have a bounce. I have been quite keen on pharmaceutical companies; I think they are still not terribly expensive.
I would essentially stay away from basic industries now, the resource stocks, the drillers that were the favourite stocks of the last three years during the time when energy prices went up a lot.
What about frontier markets, say Vietnam, Pakistan? Is it too early or would it be the time to start positioning?
I think some of these markets had huge moves and I would be somewhat careful to invest in emerging markets right now. Also for the reason that emerging markets have a close correlation to commodity prices. So when commodity prices go down, it rather favours markets of the developed countries. Whereas I am certainly not positive about the US stock market for the long run, I think we could climb to a higher diving board.
We had the dot.com boom 10-15 years ago and now we have seen a sort of resurgence in interest in technology, people are actually making money with the net business proposition, do you think it is here to stay?
Yes, I think so but I have to point out that I am not positive about technology from a fundamental or long-term point of view. I think what we have in the market is a strong group rotation at present and we have a lot of momentum playing.
The most attractive sector of the market right now, technically speaking, is the Nasdaq 100, which looks like it will break out on the upside and it is also the Index that has performed the poorest so far this year. So I would look at that as a trading opportunity. But as I said, I wouldn't now have a very high level of confidence in anything and that's why I am kind of standing on the sidelines for now.
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