Mumbai: Investment adviser and fund manager Marc Faber, who also publishes a widely read monthly investment newsletter titled The Gloom Boom and Doom Report, which highlights unusual investment opportunities, spoke in an interview about the global economy, India and the markets. Edited excerpts:
What’s your take on the recent flip-flops in the emerging and US markets?
Basically, we have the private sector contracting around the world and then we have these huge stimulus packages that boost economic activity and we have quantitative easing; in other words, money printing around the world in concert by all central banks. So I think we have stabilized but basically considering the size of the stimulus packages and the monetary printing, the economy hasn’t responded well. What have responded well are asset markets. The US Federal Reserve is basically keen to lift asset markets again. Unfortunately, it backfired on them, to the extent that oil and other commodity prices have risen sharply. So the benefit of quantitative easing has essentially flowed into Wall Street, into investment banks, into the banking sector, but it hasn’t flowed into the typical household in the US.
Economic concerns: Investment adviser Marc Faber says crude oil is not facing huge downside risk. Scott Eells / Bloomberg
So we have a very strange economy. We have booming financial markets. The stock market in India is up more than 100% from the lows in March, and in the US, we are up 60%. But at the same time the average household—the man on the street—is suffering.
Do you think the big dollar carry trade would present any threats to emerging markets?
I am not so sure there’s a huge dollar carry trade. What happens is that worldwide because interest rates are at zero percent—institutions as well as individuals borrow money and they go and speculate. There are too many dollars floating around from the American current account deficit that reached $800 billion (Rs36.9 trillion) annually and total international reserves in the hands of central banks now are $7.7 trillion. That is the dollar overhang and, to some extent, some people want to hedge their dollar exposure and then they sell dollars and buy foreign currencies, and also precious metals including gold, silver, platinum, palladium.
What then is the central risk for equity markets?
There is a risk that at some stage in 2010, the government bond markets (would) weaken considerably because I don’t understand why anyone who would now buy a 10-year US treasury at a yield of less than 3.5%. It’s a losing proposition. I also don’t understand why anyone could buy a 30-year US treasury at a yield of 4.4%. So I think that eventually yields will go up and this could disturb the stock market. In addition, we have very high valuations because corporate profits have held up better than expected, in the sense that corporations have cut expenditures substantially, notably in the workforce. So, maybe in 2010, we will see again more weakness in corporate profits and that the expectations are disappointed and that we go down again.
Where does all this leave commodities, which you track closely?
I don’t think that crude oil has a huge downside risk.
What about gold?
I don’t think that you’ll see gold below $1,000 per ounce probably ever again. So I’m quite positive.
Maybe, gold at this level is a better buy than it was at $300 per ounce in 2001.