Dr Doom expects trouble between US and China

Swiss-born Hong Kong-based economics expert Dr Marc Faber says that the US and Chinese may yet end up at war over dwindling oil reserves. Dr Faber is author of the Gloom, Doom and Boom Report – and author of bestselling book Tomorrow’s Gold. Classic Business Day speaks to Dr Doom, in South Africa to address an investors’ conference

LINDSAY WILLIAMS: I was lucky enough to MC a conference in Cape Town yesterday at which Dr Marc Faber was the keynote speaker – forthright views were forthcoming on a variety of subjects ranging from commodity prices to George W Bush and Russia! Marc, I enjoyed your 35-minute address yesterday – we’ve only got 10-minutes today. Can we start with commodities – are we still in the midst of a bull market in commodities?

MARC FABER: Basically commodity cycles last a long time – 45 to 60 years. They are price cycles, and not business cycles – if we take the last peak in commodity prices as 1980, then we had a bear market in commodities that ended in 1999 to 2001 when commodity prices adjusted for inflation, or commodity price in real terms were at the lowest level in the history of capitalism. Oil touched $12 a barrel, and gold was selling for around $250 an ounce – since then we had a big move in commodity prices, and I think we have probably in terms of industrial commodities such as oil, copper and so forth – we are in the process of completing the first leg of this bull market that can be followed by a meaningful correction. I wouldn’t be surprised to see oil down to $40 to $45 dollars, and copper down 30%. That wouldn’t change the long-term favourable outlook for commodities, and I think that investors have to be positioned with the view that commodity prices will rise over the next 10 to 20-years, which will have indications on the other investment markets as well such as bonds and equities.

LINDSAY WILLIAMS: If I can just stay with commodities for a while, you talk about industrial commodities being very close to completing the first leg of the boom – what about other commodities, for example precious metals and agriculturals?

MARC FABER: Basically precious metals like gold, silver and platinum are in many cases not really just precious metals, but also currencies. I would say in the world today we have a few large currencies – the US dollar, the euro, the yen and the Chinese yuan – and these are paper currencies where incompetent central bankers can increase the supply limitlessly. On the other hand gold has a very definite and finite supply – of around 2,500 tons per annum – and therefore per ounce of gold there has always been more and more paper money created. I think that the gold price increase since 2001 is reflecting the reality that central bankers are printing money – and I would imagine that gold prices in your and my lifetimes, since we’re so young, will be much higher than what it is now, expressed in US dollar terms. Agricultural commodities are interesting in the sense that all commodity prices went up in 2004 – but the agricultural commodities, and also cotton went down by approximately 20% to 30% – therefore corn, wheat, soybeans are extremely inexpensive compared to say oil, or compared to other industrial commodities. In fact grains are at a 200-year low vis-a-vis oil – so as a long-term investor I would also consider buying some agricultural commodities.

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LINDSAY WILLIAMS: Moving on to the bond and stock markets – the Dow Jones and the S&P have essentially gone sideways for many years now. What is the prospect for them?

MARC FABER: Basically we had this huge bull market in financial assets – 1982 when the Dow Jones was selling at around 800 and yielding 6% with a PE of seven times depressed earnings, and when the Dow Jones was no higher than it had been in 1964 – and adjusted for inflation, or in real terms it had declined by 70%. Since 1982 we had this huge increase in equity prices – whereby the Dow is now around 10,000 and the S&P around 1,215 and bond yields fell from 15.84% in September 1981 to as low as presently around 4.5%. I think this bull market in financial assets is pretty much over – the most favourable environment for financial assets are declining commodity prices as happened for instance between 1921 and 1929, in the previous century after 1864 we had a huge bull market to 1873. If we assume that commodity prices are now in a secular, or long-term upward move then obviously bonds are unattractive and equities largely unattractive also – because commodity prices go up they lift up interest rates, inflation accelerates and so the PEs (the valuations of equities) shrink.

LINDSAY WILLIAMS: I was reading your latest newsletter – where you talk about a trip that you’ve just completed in Israel and Iran – leading on from that what about political instability worldwide? At the conference yesterday you were talking in fairly forthright terms about the possibility of there being a major conflict quite soon – maybe you could expand on that for us?

MARC FABER: Basically the US has the naive belief that they won the cold war, but if you look at what happened after the cold war – the breakdown of communism, socialism, and the end of policies of isolation in India – you have over 3-billion people joining the world’s market economy, the capitalistic system, and it is remarkable how in China and also India and Russia per capita incomes have expanded since then. In China per capita incomes in real terms are doubling every ten years – and so these economies, in particular the Chinese economy has become huge. There are many markets in China – such as steel, cement, mobile phones, tobacco, beer – that are far larger than in the United States. So you have this rising China which then leads to a tremendous appetite for raw materials – and the rising commodity prices reflect the incremental demand for commodities coming from Asia, notably China, and so China’s top priority is to acquire resources. One of the reasons the Chinese are very interested in the African continent – it’s a very symbiotic relationship between Africa and China – they also obviously need oil, and oil comes from the Middle East to China. That leads to tensions with the United States because the US wants to largely control the supply of oil. The shipping lines go essentially through the Strait of Malacca – this is a strait that is only 1.5-miles wide where an American aircraft carrier could essentially block all oil shipments to China. Then it goes south to the Island of Taiwan – which leads the very important strategic position of Taiwan for the Chinese, incidentally also for the Japanese. So the US now has this strategic alliance with Japan – whereby they said they would defend Taiwan in any circumstances. The Chinese have become very close to the Russians – they had joint military exercises in July. The Chinese – having a border with Central Asia are of course very interested in Uzbekistan, Iran, Kazakhstan, Tajikistan, and Kurdistan. At the present time we have the American bases there – obviously the Chinese as well as the Russians are very eager to get the Americans out of that region. So I think that in the context of rising commodity prices, and in the context that show there is tightness in the market, and in the context of the hegemonic power of the US being challenged increasingly by the rising Chinese economy that has a much faster growth rate – that international conflicts will be inevitable in the long run. I’m not saying that World War Three will break out tomorrow – but I think that eventually we will have involvement of the Chinese and the Russians in the Middle East as well as the Americans – and this involvement will not be a joint exercise, but will be against each other.

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LINDSAY WILLIAMS: You said a few things about George W Bush yesterday – your opinion of him as a US president?

MARC FABER: My opinion of him as a president is that he makes everybody else in the world look like a genius!

Business Day

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